ITAT (DELHI BENCH ‘G’ DELHI) Determination of amount of expenditure incurred in relation to income which is not includible in total income

Determination of amount of expenditure incurred in relation to income which is not includible in total income



Once the AO, at the very inception is not satisfied with the correctness of the claim of the assessee in respect of the expenditure incurred in relation to income not forming part of the total income under the Income-tax Act, there is no amount of expenditure to be determined and so, the “method prescribed” by rule 8D of the Income-tax Rules does not call for invocation.



ITAT (DELHI BENCH ‘G’ DELHI)

PTC India Ltd.

v.

DCIT

ITA No. 580 & 581(Del) 2009

June 30, 2009

RELEVANT EXTRACTS:

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8. We have heard the parties and have perused the material on record. As per Section 14A of the Act, no deduction shall be allowed in respect of expenditure incurred in relation to income not includible in the total income. At the outset, it would be apt to reproduce here-under, the section per se:-

"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 AO 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 AO 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. "

9. A perusal of section 14A (2)(supra), evinces that the amount of expenditure incurred in relation to income not includible in the total income shall be determined by the AO if the AO is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income not includible in the total income. This satisfaction is to be arrived at by the AO having regard to the accounts of the assessee. It is note-worthy that the determination of the amount of expenditure incurred in relation to the income which is not includible in the total income of the assessee is to be done in accordance with the method prescribed, i.e. Rule 8D of the IX Rules. Pertinently, such determination , as per section 14A(2) of the Act, is to be done only if the AO is not satisfied with the correctness of the claim of the assessee regarding expenditure in relation to income not includible in the assessed total income under the Act. The syntex used in Section6sh0ws ample and clear light on the mechanics of section inasmuch as, therein, the portion with regard to the determination of the amount of expenditure incurred in relation to the income not includible in the assessee, total income under the Act is over-ridden with the portion concerning the satisfaction of the AO as to the correctness of the claim of the assessee regarding the expenditure concerned. It is only if the AO is not satisfied in this regard that the amount of expenditure incurred in relation to the income not includible in the total income of the assessee under the Act; is to be determined, and not otherwise. The use of the word “if” in the section makes it clear that the determination is subject to the AO, satisfaction, as above The satisfaction of the AO with regard to the correctness of the claim of the assessee regarding the expenditure incurred by the assessee in relation to income which does not form part of the total income of the assessee under the I.T. Act is, therefore, the sine qua non for determination of the amount of expenditure so incurred. It is only when the AO is satisfied about the claim of the assessee of having incurred such expenditure, that the question of determining such expenditure would arise, and not otherwise. If, at the outset, the AO is not satisfied about such claim of the assessee, there would be no expenditure incurred in relation thereto income not forming part of the assessee's total income under the Act, the amount whereof would be required to be determined.

10. Now Rule 8D is the "method prescribed", in pursuance of section 14A(2) of the Act, in accordance with which the AO shall determine the amount of expenditure incurred in relation to income for forming part of the total income of the assessee under the Act. Once the AO, at the very inception is not satisfied with the correctness of the claim of the assessee in respect of the expenditure incurred in relation to income not forming part of the total income under the Act, there is no amount of expenditure to be determined and so, the “method prescribed” i.e., rule 8 D, does not call for invocation.

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