N.K. Saini, Accountant Member

1. This appeal by the assessee is against the order dated 20.09.2010 of the CIT(Appeals)-I, Bangalore for the assessment year 2008-09.

2. Following grounds have been raised in this appeal:

1.1 The lower income tax authorities have erred in-

(i) making disallowance of Rs. 1,65,20,000/- under section 14A;

(ii) computing the disallowance under 14A by invoking rule 8D of the IT rules;

(iii) not appreciating that the disallowance made had no bearing or was not incurred for the earning of income not includible in total income and had no direct nexus to the same;

(iv) not appreciating that there is no proximate connection between the disallowance made and the income not includible in total income;

(v) not appreciating that difficulty in determination of the expenditure referable to earning of tax free dividends is not the reason to invoke rule 8D but it is the incorrectness of the claim, which incorrectness has not been demonstrated.

1.2 On facts and in the circumstances of the case and law applicable, disallowance made under section 14A amounting to Rs. 1,65,20,000/- should be deleted and no disallowance should be made under section 14A.

1.3 At any rate and without prejudice, the extent of disallowance is very very high.

1.4 At any rate and without prejudice, the lower income tax authorities have erred in not allowing deduction under section 80IB(10) in respect of the disallowance made under section 14A.

1.5 In view of the above and other grounds to be adduced at the time of hearing. the appellant prays that the order of the lower income tax authority, to the extent prejudicial to the appellant be quashed Or in the alternative

(i) Disallowance made under section 14A be deleted;

(ii) In any case and without prejudice, deduction under section 801B(10) be allowed in respect of amount disallowed under section 14A;

The appellant prays accordingly.

From the above grounds, it is gathered that the only grievance of the assessee relates to the disallowance of Rs. 1,65,20,000 u/s. 14 of the Income-tax Act, 1961 [hereinafter referred to as "the Act" in short"] r.w. Rule 8D of the Income-tax Rules, 1962

3. The facts of the case in brief are that the assessee is a public limited company engaged in the business of real estate and property development. The return for the year under consideration was electronically filed on 29.09.2008 declaring an income of Rs. 27,75,32,946 under normal provisions of the Act and a sum of Rs. 102,25,73,456 was claimed as deduction u/s. 80IB(10) of the Act. In the process of computing the income under normal provisions of the Act, the book profit computed u/s. 115JB of the Act amounted to Rs. 129,56,32,889. Since the income tax computed as per the provisions of section 115JB of the Act was higher than the income tax on the income determined under the normal provisions of the Act, accordingly profit u/s. 115JB was offered to tax. Later on, the case was selected for scrutiny. The AO observed that the assessee had earned an amount of Rs. 7,63,21,447 as dividend from investments and claimed the entire amount as exempt u/s. 10(34) and 10(35) of the Act. The AO was of the view that the assessee had incurred an amount of Rs. 36.70 crores towards Initial Public Offer (IPO) and thus expenses included lead management fee, advertising, printing & stationery etc. The AO invoked the provisions of section 14A of the Act r.w. Rule 8D of the Income-tax Rules and disallowed a sum of Rs. 1.652 crores.

4. The assessee carried the matter to the ld. CIT(A) and submitted that the AO had not appreciated the following facts and erred in disallowing a sum of Rs. 1.652 crores as expenses u/s. 14A invoking Rule 8D of the Income-tax Rules:-

(i) not appreciating that the disallowance made had no bearing or was not incurred for the earning of income not includible in total income and had no direct nexus to the same;

(ii) not appreciating that difficulty in determination of the expenditure referable to earning of tax free dividends is not the reason to invoke Rule 8D but it is the correctness of the claim, which incorrectness has not been demonstrated.

5. Reliance was placed on the following case laws:-

1. CIT Vs. Hero Cycles (323 ITR 158 PH)

2. CIT Vs. Walifort Shares and Stock Brokers Limited (: 310 ITR 421 Bom) - upheld by the Honorable Supreme Court on July 06, 2010, and

3. Godrej & Boyce Mfg. Co. Ltd. ITA 626 & WP 758 of 2010 dated 12th August, 2010. : [2010] 328 ITR 81.

It was further stated that since no expenditure was incurred for earning an amount of Rs. 7,63,21,447 as dividend from investments claimed as exempted income u/.s 10(34) and 10(35) of the Act, no amount need to be disallowed u/s. 14A of the Act. It was further stated that no nexus between the disallowed expenditure and the exempted income had been established.

6. The ld. CIT(Appeals) after considering the submissions of the assessee, upheld the addition made by the AO by observing in paras 12 & 13 of the impugned order as under:-

12. I have gone through the above. In the case of M/s. Jupiter Capital (P) Ltd., (A.Y. 2006-07) vide ITA. No. 154/AC-1l(5)/A-I/08-09 dated 30-08-2010. I have held that the consolidated effect of the insertion of S.14A(2) & 14A(3) by F.A. 2006 and Rule 8D to IT Rules 1962 on 24-03-2008 is to empower the A.O. to disallow a specified sum from the exempted income declared by the assessee irrespective of the fact whether such has been claimed as expenditure or not by the assessee without the burden of proving or establishing any nexus between the exempted income and the disallowed expenditure because going for such proof runs counter to the legislative presumption, inherent in these amendment, that no income can be earned without spending a sum for such earning. For better understanding the relevant portions are quoted here -

(i) Section 14A(2) and 14(3) were introduced to the Act by F.A.2006 w.e.f. 1-4-2007. Rule 8D was inserted to I.T. Rules, 1962 on 24-3-2008. These amendments are clarificatory, explanatory and curative in nature and also machinery provisions. It explained the circumstances under which sub-Section 1 of Section 14A of I.T. Act could be made applicable. It also settled the dispute regarding the quantum of disallowance. Hence, following the ratio decidendi of the case Allied Motors (P) Limited. Vs. CIT : (1997) 224 ITR 677 (S.C) the amendments, though have been given prospective dates of operation, has to be ascribed retrospective effect and hence held applicable to the A.Y.2006-07 relevant here.

(ii) The total effect of such amendments is that A.O. is empowered to treat a definite sum as disallowable If a portion of total income declared by the assessee includes exempted income irrespective of the fact whether such amount is claimed as expenditure or not in the accounts of the assessee. If such a claim has been made and it does not confirm to Rule 8, the A.O. has to record a satisfaction that the claim is incorrect as per the books of the assessee vide Section.14A(2) of I.T. Act. If no such expenditure has been claimed, the A.O. can apply Rule 8D straightaway vide Section 14A(3) of I.T. Act after giving a finding that books are incorrect. In other words, it is not required to show any nexus between the disallowance quantified under Rule 8D and the exempted income because that would be against the legislative presumption, of introducing these amendments, that no income can be earned without spending something for earning such income. Therefore, no burden of proof lies on revenue to establish any relationship between the disallowance made u/s.14A of I.T. Act for the exempted income claimed by the assessee. However, if no amount is claimed as exempted income by the assessee, the burden lies on the revenue that a specific amount included in the total income of the assessee does not form part of such income and disallowance can be made therefrom under Section.14A of I.T. Act r.w. Rule 8D of I.T. Rules, 1962. However, such action/presumption about exempted income is a rebuttable one and the assessee is free to argue that the income shown as taxable in the return has been held by the A.O. erroneously as exempted income or part of the income held by the A.O. as exempted income is not really exempted which is the case here.

13. Coming to the facts of this case, here the appellant has itself declared the income exempt u/s. 10(34) and 10(35) of I.T. Act while no expenditure has been claimed for earning such exempted income. So the AO has justifiedly quantified the disallowance under Rule 8D of IT Rules 1962 r.w.s. 14A(3) of I.T. Act after being satisfied that the accounts are incorrect in so far as it has not reflected any administrative cost, manpower cost etc., to raise the huge found of Rs. 36.70 crores to invest the same for earning the exempted income of Rs. 7,63,21,447/-. In view of this the addition is upheld and ground of appeal is dismissed.

7. Now the assessee is in appeal. The ld. counsel for the assessee reiterated the submissions made before the authorities below. It was further submitted that the AO had not established any nexus between the expenditure incurred and the dividend income earned by the assessee. Therefore the disallowance made u/s. 14A r.w. Rule 8D of the Income-tax Rules, 1962 was not justified. Reliance was placed upon the judgment of the Honble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. : [2010] 328 ITR 81. In her rival submissions, the ld. CIT(DR) strongly supported the impugned order passed by the ld. CIT(A).

8. We have considered the submissions of both the parties and carefully gone through the material available on record. In the present case, the AO invoked the provisions of section 14A of the Act. The said provisions read as under:

14A. (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.

(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act.

(3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act :

Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.

9. From the above provisions it would be clear that the mandate of Section 14A of the I.T. Act is to prevent claims for deduction of expenditure in relation to income which does not form part of the total income of the assessee. This Section is enacted to ensure that only expenses incurred in respect of earning taxable income are allowed. All expenditure incurred in relation to income which does not form part of the total income under the provisions of the I.T. Act has to be disallowed under section 14A. Under Sub-Section (2) of Section 14, the AO is required to determine the amount of expenditure incurred by an assessee in relation to such income which does not form part of the total income under the Act in accordance with such method as may be prescribed. In the present case, although neither the AO nor the ld. CIT(A) has established the nexus between the expenditure and the exempted income (dividend) to work out the expenditure but for making disallowance the AO invoked the provisions of Rule 8D of the Income-tax Rules, 1962 which are inserted by the Income-tax (Fifth Amendment) Rules, 2008, w.e.f. 24.3.2008. However, as per the ratio laid down by the Honble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra), the provisions of Rule 8D are applicable prospectively and not retrospectively. In the said case, Their Lordships of the Honble Bombay High Court, while interpreting the provisions of Section 14A of the Act and Rule 8D of the Income-tax Rules, 1962, held as under: (Head Note) as under :

Held, that the provisions of rule 8D of the Rules which have been notified from March 24, 2008, would apply with effect from assessment year 2008-09. Even prior to assessment year 2008-09, when rule 8D was not applicable, the Assessing Officer had to enforce the provisions of sub-section (1) of section 14A. For that purpose, Assessing Officer is duty bound to determine expenditure which has been incurred in relation to income which does not form part of total income under Act. The Assessing Officer must adopt a reasonable basis or method consistent with all relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record. The proceedings for assessment year 2002-03 would stand remanded to the Assessing Officer. The Assessing Officer should determine as to whether the assessee had incurred any expenditure (direct or indirect) in relation to dividend income/income from mutual funds which does not form part of the total income as contemplated u/s. 14A. The Assessing Officer can adopt a reasonable basis for effecting the apportionment. While making that determination, the Assessing Officer should provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case.

10. In the present case, it is noticed that the AO had not established the nexus between the expenditure incurred and income earned. He considered the entire amount of expenditure by way of interest as well as of expenses incurred towards IPO as the expenses related to the earning of dividend income. The ld. CIT(A) also confirmed the action of the AO without bringing any material on record, which could have established the nexus between the expenditure incurred and the dividend income earned by the assessee. We therefore, considering the totality of the facts, deem it appropriate to set aside the issue to the file of the Assessing Officer to be decided afresh, by keeping in view the guidelines laid down by the Honble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. : [2010] 328 ITR 81 (supra).

11. In the result, the appeal is allowed for statistical purposes.

Pronounced in the open court on this 12th day of January, 2012.