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Facts
The assessee earned exempt income from mutual funds and suo moto disallowed Rs. 75,000/- as expenses under Section 14A. The Assessing Officer (AO) ignored the assessee's claim of no expenses incurred and applied Rule 8D(2) to compute a disallowance of Rs. 31,31,561/-. The National Faceless Appeal Centre (NFAC) upheld the disallowance principle but computed it on dividend yielding investments.
Held
The Tribunal held that the AO failed to record objective satisfaction with cogent reasons to dispute the assessee's suo moto disallowance. The AO did not identify any specific expenditure incurred by the assessee for earning exempt income. Reliance was placed on Supreme Court decisions mandating such satisfaction.
Key Issues
Whether the Assessing Officer properly recorded objective satisfaction before making a disallowance under Section 14A, and whether the assessee incurred any expenditure for earning exempt income.
Sections Cited
14A, 143(3), 144B, 8D(2), 8D(1)
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Income Tax Appellate Tribunal, DELHI BENCH “B”: NEW DELHI
Before: SHRI M. BALAGANESH & SHRI YOGESH KUMAR U.S.
O R D E R PER M. BALAGANESH, A. M.: 1. These appeals in & 2475/Del/2024 for AYs 2018-19 and 2020-21, arise out of the order of the National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘ld. NFAC’, in short] dated 31.03.2024 for AYs 2018-19 and 2020-21 against the order of assessment passed u/s 143(3) r.w.s. 144B of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 28.04.2021 and 20.09.2022 by the Assessing Officer, NeAC, Delhi (hereinafter referred to as ‘ld. AO’). Identical issues are involved in these appeals and hence they are taken up together and disposed of by this common order for the sake of convenience.
The only identical issue to be decided in these appeals is regarding the disallowance made under section 14A of the Act read with Rule 8D(2) of the Income Tax Rules (hereinafter referred to as the ‘Rules’).
We have heard the rival submissions and perused the materials available on record. Both the parties mutually consented that the facts of Assessment Year 2018-19 may be taken up for adjudication and the decision rendered thereon shall apply mutatis mutandis for Assessment Year 2020-21 also in view of identical facts.
The Assessee Company is engaged in the business of Fabric Care Products, Home Care Products and Personal Care Products.The return of income for the Assessment Year 2018-19 was electronically filed by the Assessee Company on 29-11-2018 declaring total income of Rs. 28,38,61,160/-. The assessee earned exempt income in Assessment Year 2018-19 from mutual funds in the sum of Rs 1,21,78,132/-. The assessee had made suo moto disallowance of expenses under section 14A of the Act in the sum of Rs 75,000/- on an adhoc basis in the return of income. Before the Learned AO in the assessment proceedings, the assessee claimed that no expenses per se were incurred by it for the purpose of earning exempt income. The Learned AO however ignored the contentions of the assessee and directly proceeded to apply the computation mechanism provided in Rule 8D(2) of the Rules and computed the disallowance of expenses under section 14A of the Act at 1% of average value of investments in the sum of Rs 31,31,561/-. The Assessee contended that it had not incurred any expenses per se for the purpose of earning dividend income from mutual funds which is claimed as exempt. It was submitted that they had engaged a fund manager for taking care of the investments in mutual funds. Since the value of investments being handled by the fund manager on behalf of the Assessee was substantial, the fund manager was paid management fees / brokerage from the fund itself and that no expenditure was sought to be incurred by the Assessee to the fund manager. Further, it was submitted that on perusal of the audited financial statements of the Assessee Company, it could be seen that there were no payments made to the fund manager either in the form of brokerage, management fee, or any form of remuneration, etc. However, this explanation was not accepted by the lower authorities and eventually, the disallowance under section 14A of the Act was sought to be made by applying the computation mechanism provided in Rule 8D(2) of the Rules. The Learned AO applied 1% of average value of all investments and computed the disallowance whereas the Learned NFAC computed only those investments which had actually yielded exempt income to the Assessee and retained the computation of 1% of average value of dividend yielding investments in principle.
On perusal of the orders of the lower authorities, we find that the Learned AO had not recorded his objective satisfaction with cogent reasons as to why the adhoc disallowance of expenses made by the Assessee Suo moto in the return of income in the sum of Rs 75,000/- is incorrect. This recording of objective satisfaction is indeed mandated in terms of Section 14A(3) of the Act read with Rule 8D(1) of the Rules and this satisfaction as per the statute is mandated to be recorded by the Learned AO having regard to the accounts of the Assessee. The entire audited financial statements of the Assessee company were before the Learned AO. The Learned AO could not identify any expenditure from the books of accounts from the audited financial statements of the Assessee to prove that a particular payment has indeed been made to the fund manager who had managed the investments on behalf of the Assessee. Further, the fact of fund manager managing the investments on behalf of the Assessee company has not been disputed by the revenue in the instant case. The Assessee had explained that since the value of investments is much more, the fund manager was not receiving any brokerage from the Assessee and that the same was received by the fund manager directly from the mutual fund house itself. This is only an internal understanding between the fund manager and the mutual fund house on which the Assessee has got no control. Unless there is an expenditure that has been incurred by the Assessee for the purpose of earning exempt income, no disallowance of expenses under section 14A of the Act could come into operation. The explanation of the Assessee and the learned AR before us is found to be correct and deserves to be accepted in the instant case. The learned DR before us vehemently relied on the decision of Special Bench of Delhi Tribunal in the case of Chem Invest Ltd vs ITO reported in 121 ITD 318 which held that disallowance of expenses under section 14A of the Act could be made even when no exempt income has been earned or received by the Assessee. This decision has been subsequently reversed by the Hon’ble Delhi High Court in the very same case reported in 378 ITR 33(Del). Either way, this principle is not at all applicable here as exempt income had been received by the assessee in the instant case. The Assessee’s explanation right from the beginning was that it had not incurred any expenditure for the purpose of earning such income. This explanation need to be proved as incorrect by the Learned AO by recording objective satisfaction with cogent reasons having regard to the accounts of the Assessee by identifying specific item of expenditure which is incurred for the purpose of earning exempt income. This is the mandate provided in section 14A(3) of the Act read with Rule 8D(1) of the Rules, which, in our considered opinion, the Learned AO had completely missed out in the instant case. Further the recording of objective satisfaction with cogent reasons had been mandated by the Hon’ble Supreme Court in the case of Godrej and Boyce Manufacturing Company Limited reported in 394 ITR 449(SC). This was also endorsed in the subsequent decision of Hon’ble Supreme Court in the case of Maxopp Investments reported in 402 ITR 640 (SC). Hence, we have no hesitation to delete the disallowance of expenses made under section 14A of the Act by the Learned AO in the instant case for both the years.
The Ground No.2 raised by the assessee was stated to be not pressed by the Learned AR at the time of hearing. Hence dismissed as not pressed.
In the result, both the appeals of the Assessee are partly allowed.
Order pronounced in the open court on 11/06/2025.