NATIONAL SECURITIES DEPOSITARY LTD,MUMBAI vs. ASST COMM OF INCOME TAX-7(2)(2), MUMBAI

The assessee by filing the present appeal, sought to set aside the impugned order dated 02.12.2022 passed by the National Faceless Appeal Centre(NFAC) [Commissioner of Income Tax (Appeals), Delhi] (hereinafter referred to as CIT(A)] qua the assessment year 2017-18 on the grounds inter-alia that :- “General in nature 1.1. On the facts and circumstances of the case and in law, the Learned CIT (A) has erred in upholding the addition made by the learned ACIT 2 M/s. National Securities Depository Ltd.

The assessee carried the matter before the Ld. CIT(A) by way of filing appeal who has confirmed the addition by partly allowing the appeal. Feeling aggrieved with the impugned order passed by the Ld. CIT(A) the assessee has come up before the Tribunal by way of filing present appeal.

We have heard the Ld. Authorised Representatives of the parties to the appeal, perused the orders passed by the Ld. Lower Revenue Authorities and documents available on record in the light of the facts and circumstances of the case and law applicable thereto.

Undisputedly during the year under consideration the assessee company has earned exempt income of Rs.20,94,70,146/-. It is also not in dispute that the assessee has suo-moto disallowed an amount of Rs.27,10,703/- being the expenses directly related to earn exempt income under section 14A of the Income Tax Act, 1961 (for short ‘the Act’). It is also not in dispute that the assessee has earned the exempt income by making investments in debentures or bonds, mutual funds and also earned exempt income on account of interest on tax fee bond to the tune of Rs.17,47,21,997/-, interest on zero coupon bonds of Rs.54,20,166/- and dividend income of Rs.2,93,27,983/-. It is also not in dispute that the assessee has not incurred any interest expenses during the year under consideration to earn the exempt dividend income.

In the backdrop of the aforesaid facts and circumstances of the case the Ld. A.R. for the assessee contended that the AO has proceeded to make the disallowance on the basis of conjecture and surmises without examining the working given by the assessee for 5 M/s. National Securities Depository Ltd.

However, on the other hand, the Ld. D.R. for the Revenue in order to repel the argument addressed by the Ld. A.R. for the assessee relied upon para 4.2 of the assessment order wherein the AO stated to have recorded his satisfaction and para 5.7 of the impugned order passed by the Ld. CIT(A).

In the backdrop of the aforesaid undisputed facts we have examined para 4.2 of the assessment order vide which the AO has not accepted the suo-moto disallowance made by the assessee but proceed to compute his own disallowance under section 14A. For ready perusal para 4.2 of the assessment order is extracted as under: “4.2 The submission of the assessee is perused and the contention of the assessee company has been carefully examined, however, the same cannot be acceptable for the following reasons:- i. Rule 8D envisages a situation where the assessee claims that he has not made any expense with relation to an exempt income or the assessing officer is not satisfied with this claim. A fair and reasonable method of calculating the disallowance is therefore charted out by the Rules. ii. It is well known that capital has cost and that element of cost is represented by interest. It is therefore not correct to say that dividend income can be earned by incurring no or nominal expenditure. The assessee company is paying substantial amounts as interest expenditure. It is using these interest bearing funds for investments yielding exempt income iii. The term expenditure occurring in section 14A would take in its sweep not only direct expenditure but also all forms of expenditure regardless of whether they are fixed, variable, direct, indirect, administrative. managerial or financial. The Phraseology used in section 14A prohibiting the deduction in respect of expenditure incurred by the assessee in relation to exempt income is thus wide enough to cover all forms of expenses provided they have some connection with the exempt income. This is based on the principle that expenses must be allocated to that income to which they are connected to avoid distortions in the computation of both taxable as well as exempt income.” 7 M/s. National Securities Depository Ltd.

Bare perusal of the para 4.2 extracted above goes to prove that the AO has recorded generic findings inter-alia that when there is a reasonable method of calculating the disallowance under rules claim of the assessee is not acceptable; that to earn an exempt income no expense has been incurred that element of cost is represented by interest and; that as the assessee company is paying substantial amount as interest expenditure and has also been using these interest bearing funds for investment yielding exempt income; and that under section 14A not only direct expenditure but also all forms of expenditure whether direct-indirect, administrative managerial, or financials are to be taken into account for making disallowance.

Aforesaid dissatisfaction recorded by the AO is not sustainable in the eyes of law because he has neither examined nor questioned the working given by the assessee in its audited financials for making suo-moto disallowance. Consequently the AO has also lost sight of the fact that the assessee has not incurred any interest bearing funds for investment to earn the exempt dividend income. Because in form No.3CD at page 89 while making suo-moto disallowance of Rs.27,10,703/- the assessee has given an auditor note that though it has not incurred any expenditure which is inadmissible under section 14A but without prejudice to the company’s claim the assessee has reported 5% of the allocable part of the salary earned by the top management amounting to Rs.1894481/- and 43% of the allocable salary is considered as administrative, operating and other charges as inadmissible to earn exempt income amounting to Rs.1,86,222/- and thereby made the total suo-moto disallowance of 8 M/s. National Securities Depository Ltd.

Hon’ble Bombay High Court in case of Bombay Stock Exchange Ltd. (supra) decided the identical issue in favour of the assessee by returning following findings: “9. We note that it is evident from the extracted part of the assessment order referred to hereinabove that the Assessing Officer has come to the conclusion that the disallowance claimed by the Respondent was not consistent with Rule &D of the said Rules. It is only in view of the disallowances not being worked out as per Rule 8D of the Rules, that the Assessing Officer is not satisfied with the disallowance offered by the Respondent. This, to our mind, is putting the cart before the horse. The Assessing Officer must first record a conclusion that having regard to the accounts of the assessee, he is not satisfied with the disallowance offered by the Respondent in terms of section 14A12) of the Act only on being dissatisfied with the abuse, does Rule 8D of the Rules can be invoked to compute the disallowance. 10. Mr. Vaidya, learned counsel appearing for the Respondent is correct in his submission that satisfaction which was to be recorded by the Assessing Officer has to be clear and on an objective basis without any reference to Rule 8D. In support of his contention, our attention is drawn to the judgment of this Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy CIT [2010] 194 Taxman 2030328 IIR 81 while dealing with constitutional validity of Rule SD of the said Rules, negatived the challenge to its validity by, inter alia, recording as under: “57. Now in dealing with the challenge it is necessary to advert to the position that Sub-section (2) of Section 14A prescribes a uniform method for determining the amount of expenditure incurred in relation to income which does not form part of the total income only in a situation where 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. It therefore merits emphasis that Sub-section (2) of Section 14A does not authorize or empower the Assessing Officer to apply the prescribed method irrespective of the nature of the claim made by the assessee. The Assessing Officer has to first consider the correctness of the claim of the assessee having regard to the accounts of the assessee. The satisfaction of the Assessing Officer has to be objectively arrived at on the 9 M/s. National Securities Depository Ltd.

So in the instant case the AO has not recorded any valid dissatisfaction with the suo-moto disallowance made by the assessee rather recorded the incorrect facts that the assessee has paid substantial amounts as interest expenditure and has also recorded generic reasons that to arrive at correct disallowance under section 14A, rule 8D provides a fair and reasonable method of calculating the disallowance. Not a word has been written as to how and under what circumstances the working given by the assessee for making suo-moto disallowance is not correct.

Hon’ble Supreme Court has also held in Maxopp Investment Ltd. vs. CIT 301 CTR 489 that only after recording satisfaction under section 14A(2) the provisions contained under rule 8D of the Rules for apportionment of expenses can be applied by returning following findings:

In view of what has been discussed above, we are of the considered view that disallowance made by the AO and confirmed by the Ld. CIT(A) under section 14A read with rule 8D apart from suo-moto disallowance made by the assessee to the tune of Rs.27,10,703/- is not sustainable in the eyes of law, hence ordered to be deleted.

Resultantly, the appeal filed by the assessee is allowed for statistical purposes.