SHRIRAM CAPITAL PRIVATE LIMITED(FORMERLY KNOWN AS SHRIRAM FINANCIAL VENTURES(CHENNAI) PRIVATE LIMITED),CHENNAI vs. DCIT, CORPORATE CIRLCLE-3(1), CHENNAI

This appeal filed by the assessee is directed against the order passed by the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre (NFAC), Delhi, dated 26.05.2023 and pertains to assessment year 2018-19.

The assessee has raised the following grounds of appeal: “1. The order of the CIT(A) in appeal No. NFAC / 2017-18 / 10007487 dated 26.05.23 is against law and facts of the case.

The CIT(A) erred in not appreciating the fact that the total expenditure claimed by the appellant was Rs.5,74,939/- which represented filing fees Rs.12,750/Rates and Taxes Rs.5,744/-, Remuneration to Auditors Rs.4,80,380/- Bank charges Rs.44,485- Demat Charges Rs.13,800/- Other charges Rs.30/- and out of which the appellant has disallowed Rs.17,750/- u/s.14A.

The CIT(A) erred in not appreciating the fact that the Assessing Officer has failed to record having regard to the accounts of the assessee as to why he was not satisfied about the amount disallowed by the appellant u/s.14A of Rs.17,750/- , as required u/s.14A(2). In this connection the appellant relies on the following decisions: (i) CIT Vs Taikisha Engineering India Ltd ( 229 Taxman 143) Delhi HC (ii) Marg Ltd Vs CIT, Chennai (120 Taxmann.com 84)( Madras HC) (iii) In the appellant's own case, the Income Tax Appellate Tribunal, "D" Bench, Chennai, in their orders in I Chny / 2020 dated 29.07.2022 for the assessment year 2017-18 & in I.TA No. 1768 / Chny / 2019 dated 16.12.2019 for the assessment year 2016- 17 has deleted the addition made u/s.14A r.w rule 8D as the Assessing Officer has not recorded any findings as to the correctness or otherwise of the appellant's claim that :-3-: ITA. No: 813/Chny/2023 only expenditure of Rs.17,925/- & Rs.63,412 respectively was incurred to earn exempt income.

The CIT(A) erred in relying on the Supreme Court decision in the case of Distributiors ( Baroda) Pvt Ltd 155 ITR 120 SC and Maganlal chhaganlal Pvt Ltd 236 ITR 456 Bombay HC wherein the issue involved was deduction u/s.80M whereas in the appellant's case the issue involved is deduction u/s.14A r.w Rule 8D.

The CIT(A) erred in relying the ITAT Hyderabad's decision in the case of Chintalapatti Holdings Pvt Ltd 146 Taxmann.com 305 and stating that in that case it has been held "that discussion in the assessment order satisfies requirements u/s.14A(2) of recording of satisfaction of AO for invoking Rule 8D and nothing more is required."

For these and other grounds that may be adduced before or at the time of hearing, the Hon'ble ITAT may be pleased to delete the disallowance made u/s.14A of Rs.5,57,189/-“

The Ld. Counsel for the assessee, at the time of hearing submitted that the issue is covered by the decision of ITAT, Chennai Benches in assessee’s own case for assessment year 2017-18 in where under identical facts and circumstances, the Tribunal held that in absence of necessary satisfaction having regard to books of accounts of the assessee that disallowance computed by the assessee u/s. 14A of the Act is incorrect, the Assessing Officer cannot invoke Rule 8D of I.T. Rules, 1962 to compute disallowance.

The ld. Sr.AR, Shri. P. Sajit Kumar, JCIT, supporting the order of the CIT(A) submitted that the Assessing Officer has recorded satisfaction having regard to books of accounts of the :-6-: ITA. No: 813/Chny/2023 assessee, which is evident from the assessment order, where the Assessing Officer rejected disallowance computed by the assessee. Therefore, there is no merit in the arguments of the Ld. Counsel for the assessee that there is no satisfaction as required u/s. 14A of the Act.

We have heard both the parties, perused materials available on record and gone through orders of the authorities below. We find that this issue is covered in favour of the assessee by the decision of ITAT, Chennai Benches in assessee’s own case for assessment year 2017-18, where the Tribunal by following the decision of Hon’ble Jurisdictional High Court of Madras in the case of Marg Ltd vs CIT [2020] 120 taxmann.com 84 (Mad), held that in absence of necessary satisfaction as required u/s. 14A(2) of the Act, having regard to books of accounts of the assessee that sumoto disallowance computed by the assessee is incorrect, the Assessing Officer cannot invoke Rule 8D of I.T. Rules, 1962 to compute disallowance of expenses u/s. 14A of the Act. The relevant findings of the Tribunal are as under:

Now as argued by both the sides, we have gone through the provisions of Sec.14A of the Act and the relevant provisions i.e. Sec.14A (1) to (3) reads as under: (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred79a 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 :-9-: ITA. No: 813/Chny/2023 not form part of the total income under this Act in accordance with such method as may be prescribed80, 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: 14. Similarly, we have gone through the Rule 8D(1) which provides when the AO can exercise this power before invoking of formula, he has to record satisfaction as regards the correctness of claim expenditure made by the assessee. The relevant Rule 8D(1) reads as under: “…..(1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year,is not satisfied with - (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provision of sub-rule (2)….”.

On perusal of the provisions of Sec.14A of the Act, more specifically sub-section 2 & 3 makes it clear that if the AO is not satisfied with the correctness of the claim of the assessee, then the AO shall determine the amount of expenditure incurred in relation to such income, which does not form part of total income under this Act. We noted that for the purpose of computation of disallowance a formal method is prescribed u/r.8D(2)(i) the direct expenses, (ii) the interest disallowance and (iii) the administrative expenses i.e.0.5% of average value of investments. The provisions of Sec.14A(3) specifies the applicability of the provisions of Sec.14A(2) of the Act, where the assessee makes a claim that there is no expenditure incurred, but the provisions of Sec.14A(2) makes it clear that where the assessee makes disallowance u/s.14A of the Act, in its computation of total income while filing return of income, then after satisfying the conditions mentioned the AO should be satisfied having regard to the Accounts of the assessee with :-10-: ITA. No: 813/Chny/2023 the correctness of the claim of the assessee in respect of such expenditure in relation to income, which does not form part of total income under this Act.In this situation, the AO can make disallowance u/s.14A of the Actr.w.rule 8D of the Rules. Thus, according to the above provisions of Sec.14A where the assessee makes a claim that there is expenditure relatable to exempt income and he makes disallowance i.e. suo moto disallowance u/s.14A of the Act, if the AO proposed to invoke Sec.14A, he has to record satisfaction.That this satisfaction cannot be plain or simple satisfaction or simply invoking the formula prescribed u/r.8D(2), but it is to be done with regard to the analysis carried out on the accounts of the assessee.

The Hon’ble Supreme Court in the case of Maxopp Investment Ltd. (supra) has considered this issue and finally at Para No.41, held as under: 41) Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO.

We also gone through the case law cited by the ld.CIT- DR, Dr.S.Palani Kumar, of Hon’ble Delhi High Court in the case of India Bulls Finance Ltd. (supra), wherein the Hon’ble High Court has discussed in Para No.8 that AO has carried out elaborate analysis in regard to the expenditure incurred by the assessee in relation to exempt income and the Hon’ble High Court has recorded this finding in Para No.8 as under: “….8. In this instance the elaborate analysis carried out by the AO - as indeed the three important steps indicated by him in the order, shows that all these elements were present in his mind, that he did not expressly record his dissatisfaction in these circumstances, would not per se justify this Court in concluding that he was not satisfied or did not record cogent reasons for his dissatisfaction to reject the AO's conclusion. To insist that the AO should pay such lip service regardless of the substantial compliance with the provisions would, in fact, destroy the mandate of Section 14A….”.

The circumstances in which the provisions of sub sections (2) and (3) were introduced by an amendment have been adverted to in a circular of the CBDT dated 28 December 2006.11 The circular notes that in the existing provisions of Section 14A no method for computing the expenditure incurred in relation to income which does not form part of the total income had been provided. As a result, there was a considerable dispute between tax payers and the Revenue on the method of determining such expenditure. In this background, sub section (2) was inserted so as to make it mandatory for the Assessing Officer to determine the amount of expenditure incurred in relation to income which does not form part of the total income in accordance with the method that may be prescribed. The circular, however, reiterates that the Assessing Officer has to follow the prescribed method if he is not satisfied with the correctness of the claim of the assessee having regard to the accounts of the assessee…”.

Even, the Hon’ble jurisdictional High Court in the case of Marg Ltd. v. CIT reported in [2020] 120 taxmann.com 84 (Madras), had considered the issue on satisfaction and held that the disallowance u/r.8D of the Rules r.w.s.14A of the Act, can be computed only after recording satisfaction by the AO in terms of provisions of Sec.14A r.w.r.8D of the Rules. The Hon’ble jurisdictional High Court held in Para Nos.21 & 22 are as under: 21. We cannot approve even the larger disallowance proposed by the Assessee himself in the computation of disallowance under Rule 8D made by him. These facts are akin to the case of Pragati Krishna Gramin Bank (supra) decided by Karnataka High Court. The legal position, as interpreted above by various judgments and, again reiterated by us in this judgment, remains that the disallowance of expenditure incurred to earn exempted income cannot exceed exempted income itself and neither the Assessee nor the Revenue are entitled to take a deviated view of the matter. Because as already noted by us, the negative figure of disallowance cannot amount to hypothetical taxable income in the hands of the Assessee. The disallowance of expenditure incurred to earn exempted income has to be a smaller part of such income and should have a reasonable proportion to the exempted income earned by the Assessee in that year, which can be computed as per :-13-: ITA. No: 813/Chny/2023 Rule 8D only after recording the satisfaction by the Assessing Authority that the apportionment of suchdisallowable expenditure under section 14A made by the Assessee or his claim that no expenditure was incurred is validly rejected by the Assessing Authority by recording reasonable and cogent reasons conveyed to Assessee and after giving opportunity of hearing to the Assessee in this regard.

As in the present case before us, we noted from the assessment order and the order of the CIT(A) that there is no discussion about any expenditure which is relatable to exempt income and how the AO recorded the satisfaction and in our considered view, the AO has not carried out any analysis of the accounts or he has not gone into the accounts despite complete books of accounts were produced before him and has not rejected the disallowance suo moto offered by the assessee. Hence, according to us, the mandate given by the provisions of Sec.14A(2) and Rule 8D(2) of the Rules, as regards to recording of satisfaction by the AO qua correctness of the accounts of the assessee for the expenditure claimed qua exempt income is absent and hence, on this very issue, we reverse the order of the lower authorities and allow this jurisdictional issue in favour of the assessee.

The assessee has raised alternative ground in merits also. Since, we have adjudicated the issue on jurisdiction i.e. recording of satisfaction by the AO and allow the assessee’s ground on jurisdiction, we need not go into the merits of the case.

In the result, the appeal filed by the assessee is allowed partly.”