ANIRUDDHA BOSE,J. - (1.) If an assessing officer doubts the quantum of expenditure incurred towards exempted income, is it mandatory for the assessing officer to apply the formula prescribed in Rule 8D of the Income Tax Rules, 1962 or can he take a view otherwise ? This is the question which is involved in this appeal. In the assessee's case, the assessing officer took the latter course while dealing with expenditure shown by the assessee towards exempted income, being income from dividend in this case.
(2.) The assessee had sought disallowance of Rs. 26,07,177/- as expenditure incurred in connection with earning of the exempted income but the assessing officer had raised the amount to Rs. 36,09,734/-. Such disallowance shown by the assessee was under three heads and the assessing officer found the amount reflected under one head to be on the lower side. Otherwise, the clarification of the assessee in respect of such expenditure was found to be reasonable. The Commissioner in exercise of his revisional power under section 263 of the Act directed:- "I have considered the matter. In this case, the assessee had suo motu offered disallowance of Rs. 26,06,178/- on account of expenses incurred for earning exempt income. After that during the assessment the A.O. found that this was not correct and increase the disallowance to Rs. 36,09,734/-. A plain reading of Rule- 8D would show that once the A.O. was not satisfied with the correctness of the claim of expenditure in relation to exempt income then the disallowance has to be compulsorily computed as per the provisions of Rule-8D. This is mandatory. Further, the Malabar Industrial Company case (supra) of the Supreme Court will also not apply in this case as the only correct course open to the A.O. was computing disallowance as per provisions of Rule-8D which he has not done. Thus, the A.O. by not computing the expenditure as per Rule-8D made the order erroneous causing loss of revenue which caused prejudice to the interest of revenue. I, therefore, set aside the assessment to this extent and direct the A.O. to compute disallowance of expenditure relating to earnings of exempt income as per provisions of Rule-8D."
(3.) The assessee, however, was successful in its appeal before the Income Tax Appellate Tribunal. The Tribunal invalidated the Commissioner's order, inter-alia, holding:- "7. We have given a careful consideration to the rival submissions. The provisions of section 14A of the Act as originally introduced and as amended from time to time as well as the insertion of Rule 8D was subject-matter of several decisions rendered by various Benches of the ITAT as well as the Hon'ble High Courts. The Hon'ble Delhi High Court in the case of Maxopp Investments Ltd. v. Commissioner of Income Tax (2011) 203 Taxman 364(Del) and the Hon'ble Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd.328 ITR 81(Bom.) have taken a view that Rule 8D of the I.T. Rules will apply only for A.Ys.2008-09 and subsequent assessment years. It has also been laid down that the assessee has to make a claim (including a claim that no expenditure was incurred) with regard to expenditure incurred for earning income which is chargeable to tax. Such a claim has to be examined by the AO and only if on an objective satisfaction arrived at by the AO that the claim made by the assessee is correct, can the AO proceed to apply the computation mode as specified in Rule 8D(2) of the Rules. If the AO comes to the conclusion that claim made by the assessee is correct, it is only thereafter that the AO can proceed to make the disallowance in terms of Rule 8D of the Rules. Even in a case where the AO rejects the claim of the assessee that no expenses were incurred to earn the exempt income, it is mandatory for him to invoke the method of calculation prescribed by Rule 8D(2) of the Rules and is free to make the disallowance on any reasonable basis. By applying the Rule 8D of the Rules blindly sometimes absurd disallowances would result. In our view, therefore while examining the claim of the assessee regarding expenditure incurred in earning the exempt income including a claim that no expenses were incurred, the AO is bound to take note of such absurdities and refrain from invoking the method of disallowance of expenses as prescribed by Rule 8D(2) of the Rules. It is for this reason that the satisfaction of the AO regarding expenses incurred for earning exempt income is to be objective satisfaction. In other words, it is only when no reasonable and proper parameters for making disallowance can be arrived at, that resort to Rule 8D(2) can be had by the AO. Rule 8D(2) will thus be a last resort when it becomes impossible to arrive at a just conclusion on the amount of expenses that has to be disallowed as attributable or incurred in earning exempt income. It cannot therefore be said that once the AO rejects the mode of computation of disallowance under section 14A of the Act as made by the Assessee, he has no other option but to resort to Rule 8D of the Rules. 8. Besides the above, we are also of the view that the AO has adopted one of the possible course open to him in law. The CIT cannot invoke jurisdiction under section 263 of the Act just because he does agree with the view of the AO. In other words under section 263 of the Act, the CIT cannot substitute his view with that of the AO. The decision relied upon by the learned counsel for the Assessee clearly supports the stand taken by the Assessee in this regard. 9. We therefore hold that the order of the AO was neither erroneous nor prejudicial to the interest of the revenue and therefore jurisdiction under section 263 of the Act ought to have been invoked by the CIT. We therefore quash the order under section 263 of the Act and allow the appeal by the Assessee.";