NUCLEUS SOFTWARE EXPORTS LTD,NEW DELHI vs. ACIT CIRCLE-18(2), NEW DELHI

This appeal is filed by the assessee against the order of the ld. Commissioner of Income Tax (Appeals)-37, New Delhi [CIT (Appeals)] dated 27.02.2019 for the assessment year 2015-16

The only issue in the appeal of the assessee is in respect of disallowance of Rs.31,14,912/- made under section 14A of the Income Tax Act, 1961 (the Act) read with Rule 8D while computing the income under the normal provisions of the act as well as book profits under section 115JB of the Act.

The ld. Counsel for the assessee submits that assessee during the assessment year under consideration received dividend income and claimed as exempt. Assessee also made suo moto disallowance of Rs.35,99,786/- under section 14A read with Rule 8D of the Act. The ld. Counsel submits that the suo moto disallowance of Rs.35,99,786/- made by the assessee consists of direct expenses of Rs.6,27,144/- under Rule 8D(2)(i) and Rs.29,72,642/- under Rule 8D(2)(iii) being expenses other than interest on borrowing reasonably regarded as expenses incurred in relation to investments made by the assessee. The ld. Counsel for the assessee submits that the Assessing Officer, however, though accepted the direct expenses of Rs.6,27,144/- under Rule 8D(2)(i), computed the disallowance under Rule 8D(2)(iii) at Rs.60,87,554/- and since the assessee has already made suo moto disallowance of Rs.35,99,786/- he restricted the disallowance to Rs.31,14,912/-.

The ld. Counsel for the assessee submits that there is no objective satisfaction recorded by the Assessing Officer in not accepting the suo moto disallowance made by the assessee. The ld. Counsel for the assessee further referring to page 10 of the Paper Book submits that the assessee has obtained accountant‘s report on expenses relating to exempt income wherein a detailed working was made by the accountant on the involvement of the employees of the assessee organization in decision making and implementation in respect of investments made by 2 the assessee. Referring to page No. 16 para 6.3 of the report of the accountant, the ld. Counsel for the assessee submits that the assessee has identified the expenses that are directly incurred in relation to investments by way of cost on the personnel of FEAD of the assessee, who are engaged in the day-to-day activity of cash management and investments. The ld. Counsel submits that for this purpose the assessee identified the employees and senior management of the company, who are involved in the decision making of the investments and to whom these employees to report. The ld. Counsel submits that the management of such staff on cost to company basis as also the portion thereof reasonably attributable to the activity of investment was annexed to the report which is at page No. 24 and the expenditure attributable to investment activity was arrived at Rs.22,80,293/-. The ld. Counsel for the assessee further submits that apart from the emoluments that are incurred for such personnel other expenses that can be directly or indirectly attributable to such personnel are also identified. Based on the overall expenses of the company which are duly allocated to such personnel based on well accepted principles of cost allocation and the total of such expenses was arrived at Rs.6,92,349/- which is placed at page No. 25 as Annexure 6 to the report.

The ld. Counsel referring to para 5.2.1 of the order of the ld. CIT (Appeals) submits that the finding of the ld. CIT (Appeals) that the assessee has worked out disallowance under Rule 8D(2)(iii) by taking certain percentage from employees and management cost of some of the employees and the working is general and not specified any name of the employees involving in this activity. The ld. Counsel submits that CIT (Appeals) sustained the action of the Assessing Officer for computing the disallowance at 0.5% of the average investments observing that if time and energy of employees including middle and top management invested is not ascertainable other than the only method left before the Assessing Officer to compute the disallowance is under Rule 8D(2)(iii).

On the other hand, the ld. DR strongly placed reliance on the order of the ld. CIT (Appeals).

Heard rival submissions perused the orders of the authorities below and the record placed before us. The Assessing Officer while completing the assessment invoking the provisions of Rule 8D computed the disallowance under section 14A of the Act at Rs.67,14,698/- comprising of direct expenses of Rs.6,27,144/- under Rule 8D(2)(i) and Rs.60,87,554/- under Rule 8D(2)(iii) being 0.5% of the average investments. However, since the assessee made suo moto disallowance of Rs.35,99,786/- the Assessing Officer restricted the disallowance to Rs.31,14,912/- under Rule 8D(2)(iii) of I. T. Rules. The assessee contends that there is no objective satisfaction recorded by the Assessing Officer on the suo moto disallowance made by the assessee before invoking Rule 8D. We observe that the dispute is only with regard to the managerial expenses disallowable under Rule 8D(2)(iii). We observe that the assessee made suo moto disallowance allocating the expenses based on designation and the emoluments of employees on a cost to company basis as well as portion thereof reasonably attributable to the investment activity as under:-

Further assessee also allocated indirect expenses other than interest and emoluments attributable for earning exempt income as under:-

On perusal of the assessment order we find that the Assessing Officer did not accept indirect expenses allocated by the assessee stating that he is not satisfaction with the part expenses and also observed 5 that the investment activities require involvement of assessee’s employees and use of assessee’s official machinery the Assessing Officer has not pointed out why the suo moto disallowance made by the assessee is inadequate to cover the expenses attributable for earning exempt income. We observe that the ld. CIT (Appeals) holds that the working submitted by the assessee is general and not specified any name of the employees involving in this activity. It is the observation of the ld. CIT (Appeals) when exact time and energy of employees including middle and top management invested is not ascertainable then the only method left before the Assessing Officer to compute disallowance is under Rule 8D(2)(iii). Here we observe that provisions of section 14A of the Act contemplates recording of satisfaction by the Assessing Officer having regard to the accounts of the assessee if he is not satisfied with the claim of the assessee in respect of expenditure in relation to income which does not form part of total income. On reading of the assessment order, we find that the Assessing Officer having regard to the suo moto disallowance made by the assessee has not recorded any objective satisfaction as to why the allocation of indirect expenses made by the assessee is not sufficient to meet the expenses attributable for earning exempt dividend income.

In the case of Maxopp Investment Ltd. Vs. CIT [2018 402 ITR 640 the Hon’ble Supreme Court held as under:-

Ratio of the decision is applicable to the facts of the case. Following the said decision, we hold that the Assessing Officer has not recorded any objective satisfaction in not accepting suo moto disallowance made by the assessee. Thus, we direct the Assessing Officer to accept the suo moto disallowance made by the Assessing Officer in respect of disallowance under Rule 8D(2)(iii) read with section 14A of the Act.

Coming to ground No. 3 of grounds of appeal regarding disallowance under section 14A while computing book profits under section 115JB of the Act we observe that the issue in appeal is decided by the Special Bench of the Delhi Tribunal in the case of ACIT Vas. Vireet Investment (P.) Ltd. (165 I.T.D. 27) wherein the Special Bench held that the computation under clause (f) of Explanation (1) to Section 115JB(2) is to be made without resorting to the computation as contemplated under section 14A read with Rule 8D of Income Tax Rules, 1962. Thus respectfully following the said decision, we direct the Assessing Officer to decide the issue in the light of the decision of the Hon’ble Special Bench of the Delhi Tribunal (supra). Ground No. 3 is allowed for statistical purposes.

In the result, the appeal of the assessee is partly allowed, as indicated above.