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Facts
The assessee earned dividend income and suo motu disallowed Rs. 95,584/- under Section 14A. The Assessing Officer (AO) made a further disallowance of Rs. 56,14,060/- invoking Rule 8D without recording specific satisfaction.
Held
The Tribunal held that the AO failed to record specific and cogent reasons for rejecting the assessee's suo motu disallowance and mechanically applied Rule 8D. The disallowance made by the AO was deleted.
Key Issues
Whether the Assessing Officer recorded proper satisfaction before invoking Section 14A read with Rule 8D for disallowance of expenses related to exempt income.
Sections Cited
14A, 143(3), 144B, 8D
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Income Tax Appellate Tribunal, MUMBAI “C” BENCH : MUMBAI
Before: SHRI VIKRAM SINGH YADAV & SHRI ANIKESH BANERJEE
O R D E R PER VIKRAM SINGH YADAV, A.M : This is an appeal filed by the assessee against the order of the Learned Commissioner of Income Tax (Appeals)-47, Mumbai [„Ld. CIT(A)‟], dated 15-07-2025, pertaining to Assessment Year (AY) 2018-19, wherein the assessee has taken the following grounds of appeal: “1) The learned Commissioner of Income Tax (Appeals) has erred in law and on facts in upholding the action of the learned Assessing Officer in making a further disallowance of Rs.56,14,060/- under section 14A read with Rule 8D of the Income-tax Rules, 1962, as against the Suo-moto disallowance of Rs.95,584/- already made by the Appellants in the Return of Income filed. The Appellants submit that the said disallowance is unjustified, unwarranted, and contrary to the facts and circumstances of the case, and hence deserves to be deleted in entirety. Without prejudice to the above, the Appellants submit that even otherwise, the disallowance sustained under section 14A is excessive, arbitrary, and without proper basis, and the same requires to be restricted to a reasonable figure. 2) Appellant craves leave to add, alter or delete any ground(s) either before or in the course of the hearing of the appeal.”
2. Briefly the facts of the case are that the assessment in this case was completed u/s. 143(3) r.w.s. 144B of the Income Tax Act, 1961 („the Act‟) vide order dt. 21-05-2021, wherein the AO made a disallowance u/s. 14A of the Act amounting to Rs. 56,14,060/- which, on appeal by the assessee, has been sustained by the Ld.CIT(A) and against the said order and the findings of the Ld.CIT(A), the assessee is in appeal before us.
During the course of hearing, the Ld.AR submitted that the assessee has earned dividend income of Rs. 57,09,646/- which has been claimed as exempt from tax and it was further submitted that the assessee has suo- moto disallowed a sum of Rs. 95,584/- u/s. 14A of the Act in its return of income. It was submitted that the AO without recording satisfaction, has made further disallowance of Rs. 56,14,060/- u/s. 14A r.w. Rule 8D of the Income Tax Rules, 1962 („the Rules‟). It was submitted that it is a settled legal position that the AO has to record satisfaction as to why the suo moto disallowance made by the assessee is not acceptable to him and he has to record specific and cogent reasons which he has failed to do so and in light of same, the findings of the AO whereby he has invoked Rule 8D may be set-aside. It was submitted that the Coordinate Bench in assessee‟s own case for A.Y 2014-15 vide order dated 20/05/2019 in has deleted the disallowance so made by the AO u/s 14A r/w Rule 8D on account of lack of satisfaction. It was further submitted that following the said decision, the ld CIT(A) in assessee own case for A.Y 2015-16 has deleted the disallowance so made by the AO vide order dated 10/06/2019. It was accordingly submitted that the facts and circumstances of the case are exactly identical and the decisions so rendered by the Coordinate Bench and the ld CIT(A) supports the case of the assessee.
In this regard, further reliance was placed on the written submissions filed before the Ld.CIT(A) and the contents thereof were reiterated which read as under:
“At the outset it is submitted that the Assessing officer has nowhere in the Assessment order given any specific reason that why the disallowance made by the appellants is not acceptable and the disallowance u/s. 14A ought to be made by applying Rule 8D in the appellants case. The Assessing officer has simply copy pasted the reasons for making disallowance u/s. 14A as per Rule 8D without even noticing that the said reasons are not at all applicable in case of the appellants. The above claim of the appellants that "the Assessing officer has simply copy pasted the reasons given in the Assessment order for making disallowance u/s. 14A which are not applicable to the case of the appellants" can be proved by the submissions given in the below paragraphs. ➤The appellants have disallowed Rs. 95,584/- u/s. 14A. The appellants have explained how they have worked out disallowance u/s 14A. The appellants have also given explanation for why the amount of Rs. 95,584/- disallowed by them is sufficient. It is submitted that the appellants have duly discharged its duty of explaining their working of disallowance u/s 14A during the assessment proceedings. ➤The appellants have during the assessment proceedings submitted a Note on Disallowance u/s. 14A on 12/03/2020 vide Ack no. 12032013249476 and again on 08/01/2021 vide Ack no. 08012113756179 (Refer Annexure 4 and 5) along with without prejudice working of disallowance u/s. 14A r.w.r. 8D through Income Tax E-filing portal. ➤Later, the Assessing officer has during the assessment proceedings given draft assessment order dated 15/02/2021 proposing to make adjustment on account of Disallowance u/s. 14A r.w.r. 8D. Accordingly, the appellants have submitted its reply on 18/02/2021 through Income Tax E-filing portal vide Ack. no. 18022114203409 (Refer Annexure 6). It is submitted that the appellants had categorically brought out the case and explained to the point in its submission that why no further disallowance u/s. 14A is called for. The Assessing officer in the show cause notice had given certain reason for proposing to make disallowance u/s. 14A. The appellants in its reply to the said notice specifically addressed to the reason given by the Assessing officer and explained that how the arguments put forth by the Assessing officer are not applicable in case of the appellants. ➤The Learned Assessing officer has taken the same on records but not given any specific reason for why the explanation and justification given by the appellants that "no further disallowance u/s 14A is called for" is not acceptable to him. ➤The Assessing officer is required to record his reason/ satisfaction for not accepting the contention of the appellant before applying Rule 8D which he has failed to do so in case of your appellants. ➤The Assessing officer in the Assessment order u/s. 143(3) has stated that "The investments cannot be managed without inherent expenses since no investments can be made without market analysis and expertise. The assessee could not have got the market expertise and the necessary staff for free and has to necessarily incur expenditure. It is not possible without sufficient expertise as to selection of securities and timely swaps. With increase in technicalities involved in market operations the assessee is bound to have expert advice and would be in receipt of various daily reports, fortnightly reports and monthly reports at deployment/redemption of their investments in various schemes. These inputs have costs in terms of substantial time as well as cost on account of conveyance, travelling, telephone / mobile bills, stationery, etc. It is difficult to ascertain such costs in quantitative terms. As per the financial statements of the assessee for the F.Y. 2017-18, it is observed that it had mixed investments which could yield exempt income and could give taxable income. The apportionment of expenses which are common such as salary to employees, travelling and conveyance expense, electricity charges etc., have to be made as per the provisions of the Rule. Hence I am satisfied that the disallowance w/s. 144 as per Rule 8D has to be made." ➤It is submitted that the Assessing officer has not brought on record any facts or material to show that any expenditure is incurred on the activities which would have resulted into a non-taxable income. ➤The Assessing officer has simply stated that the investments cannot be managed without inherent expenses. This statement of Assessing officer can be correct in cases where there the assessee has invested in various scripts and where there are frequent purchases and redemptions during the year which is not the case of the appellants. ➤The appellants have two types of investments which are capable of earning exempt income -Equity shares (Quoted Eq. Shares of only 1 Company and Unquoted Eq. Shares of only 1 Sister concern) and Other Fund (ie India Business Excellence Fund).
➤The appellants have invested in Equity Shares of DB Realty Ltd. in the year 2010 and 2011. There is no movement in the said investment nor any purchase or sale during the year. The Investment in Equity shares is carried forward from last year. The change in amount of Investments in Equity Shares is due to change in amount of Provision for diminution in value of investments. ➤The appellants have during the year made investment in equity shares of sister concern. This is the only transaction of purchase in equity shares (unquoted). The said investment is made out of the redemption of mutual funds. Thus no borrowed funds are utilized in making this investment. Also as the investment is made in sister concern no expertise or market research or any other analysis is required before making investment in these shares. The only cost incurred in respect of valuation of Shares of Sister concern of Rs. 2,14,442/- was disallowed by the appellants themselves while computing the Total Income (Refer Computation of Total Income given in Annexure1) ➤The appellants have invested in India Business Excellence Fund which is a venture capital fund (VC Fund). The appellants are required to make payment for the call money as per the agreed terms. The appellants have made a capital commitment of Rs. 5 crores. During the year the appellants have paid to Fund certain amount as per the call money. Apart from this the appellants are not required to do anything with this Investment. The VC Fund will further invest on its own and shall distribute the share of profit to the unit holders at the end of the year. The appellants are provided with Form 64 (Refer Annexure 3) showing their share of income along with the nature of income earned. The appellants have no say on which script to invest, when to purchase or sell. Thus once the investment is made in this kind of Fund, the unit holders shall at the end of the year gets their share of profit/loss. ➤Thus as there is only one purchase (that too in Sister concern) and no Redemptions at all in the investments capable of earning exempt income, it can be said that the appellants had not invested any time in managing the Investments capable of earning exempt income. Further the direct expenditure incurred of Rs. 5,584/- are disallowed by the appellants themselves. Also the appellants have disallowed Rs. 90,000/- as indirect expense which may have incurred for earning tax free income which in real terms are not even incurred by the assessee for earning exempt income. The appellants had estimated the same. ➤All this facts were brought before the Assessing officer during the Assessment proceedings. The appellants have submitted the Note on Disallowance u/s. 14A during the Assessment proceedings on 12/03/2020 vide Ack no. 12032013249476, on 08/01/2021 vide Ack no. 08012113756179 and on 18/02/2021 vide Ack no. 18022114203409 through Income Tax Efiling portal (Refer Annexure 4, 5 & 6). ➤Thus the Assessing officer is incorrect in stating the appellants would have required necessary staff and expert advice in managing the investments and also various cost such as travelling, telephone, stationery etc would have incurred. The Assessing officer has mentioned that it is not possible without sufficient expertise as to selection of securities and timely swaps. Also the Assessing officer is incorrect in stating that the appellants would be in receipt of various daily reports, fortnightly reports and monthly reports at deployment/redemption of their investments in various schemes. ➤We fail to understand that on what basis the Assessing officer has made these statements after knowing the facts that there is only one purchase and no redemptions at all in respect of Investments capable of earning exempt income. Where does the question of expert advice or fortnightly etc reports come when the appellants have one old investment in Equity shares which is still continued in the year under consideration, one purchase of Equity shares of Sister concern and other investment is in VC Fund where the appellants have no involvement in the investment activities carried out by the Fund. ➤Apart from Investment in Equity shares (Quoted and Unquoted) and India Business Excellence Fund rest all investments are those which are capable of earning taxable income. Further the appellants do not incur any cost for making investments in Mutual Funds as the broker through whom the investment is made gets paid by the Mutual Fund House. The appellants do not have to pay anything to the broker. ➤The Assessing officer has also stated the appellant has paid salary to staff. We would like to inform you that the appellants have employed people for running the business. Irrespective of whether or not the appellants make any investments which are capable of earning exempt income and earn any exempt income from these investments, the appellants will incur the salary cost for these employees. Thus earning of exempt income is an incidental income. The appellants have not incurred any specific cost for earning the exempt income. However still the appellants have themselves disallowed Rs. 90,000/- as indirect expense. ➤The appellants have brought out a case where categorically and on facts, no expenditure has been incurred for earning the exempt income. The appellants have in the submissions made during assessment proceedings clearly brought out that no expenses claimed in the Profit and Loss A/c can be considered for earning exempt income. ➤The appellants have themselves disallowed direct expenses of Rs. 5,584/- and Rs. 90,000/- out of indirect expenses assuming that even if some minor expense is incurred, the same is disallowed. ➤After giving a detailed submission on the basis of facts that why no further disallowance u/s. 14A is called for, it is the duty of the Assessing officer to record his satisfaction that how the submissions of the appellants are not acceptable. The reasons given by the Assessing officer in the para no. 5.3 at page no. 3 of the Assessment order is not at all relevant to the appellant's case for the explanation provided by the appellants in the above paragraphs.
➤The Assessing officer has nowhere in the order given any specific reasons for making further disallowance u/s 14A r.w.r 8D. The Assessing officer has failed to bring out why after looking at the facts of the appellant's case, still further disallowance u/s 14A is called for. ➤Rule 8D is not automatic and Assessing Officer can visit to method of Rule 8D only if he is not satisfied with correctness of claim of expenditure made by the assessee. ➤In absence of any findings and the fact that the appellants has incurred any expenses which can be attributed directly or indirectly towards exempt income, the provisions of section 14A read with Rule 8D cannot be invoked in the case of the appellants. ➤The attention is invited to Section 14A(2) of the Income Tax Act, 1961 which reads as under: 14A(2)- "The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, 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." ➤As per the understanding of the above mentioned section, the Assessing officer can make disallowance u/s 14A if he believes that the assessee claim is incorrect, and further the Assessing Officer has to demonstrate with reasons why the working made by the assessee is not correct. The Assessing Officer in your appellants' case has failed in his duty and has merely rejected the appellant's contention and mechanically applied rule 8D. ➤Sec.14A(2) empowers the Assessing Officer to determine the amount of expenditure incurred in relation to tax-free income if, "having regard to the accounts of the assessee, he is not satisfied with the correctness of the claim of the assessee". The satisfaction of the Assessing Officer as to the incorrect claim made by the assessee is sine qua non for invoking the applicability of Rule 8D. The satisfaction can be reached only when the claim of the assessee is verified. ➤In the appellants' case the Assessing officer has not given specific reason as to why further disallowance u/s 14A is called for when there is only one purchase in Eq. Shares of Sister concern and no redemptions at all in investments capable of earning exempt income during the year. ➤It is submitted that the Assessing officer has clearly not appreciated the facts of the case. The appellants, in return of income filed and in the tax audit report, shown how the disallowance u/s. 14A is worked out. Also the appellants have explained (3 times during the assessment proceedings) in the note on disallowance u/s 14A, that why no further disallowance is called for. ➤The Assessing officer has failed to appreciate this fact and applied Rule 8D.
➤It is therefore submitted that it is the clear case of non application of mind by the Assessing officer and has merely worked out the disallowance u/s. 14A on mechanical basis. ➤The Hon'ble Supreme Court in case of Maxopp Investment Ltd. v. CIT (402 ITR 640) (SC) (Civil Appeal nos. 104-109 of 2015) has held that "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 144 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." ➤Thus it is a well settled law that the Assessing officer should first record his satisfaction for not accepting the assessees' contention and then apply Rule 8D. ➤The Hon'ble Supreme Court judgment squarely applies to your appellants case. The appellants have explained in detail that how they have worked out disallowance u/s 14A. The appellants have also made submissions to justify that the disallowance worked out by them is reasonable and no further disallowance is called for. On the other hand the Assessing officer has nowhere in the order given his reason for not accepting the appellants contention that only Rs. 95.584/- should be disallowed u/s 14A. It is therefore submitted that the action of the Assessing officer of making disallowance u/s 14A r.w.r. 8D is illegal and bad in law ab initio and be deleted ➤Further reliance is placed on following case laws: ➤HIGH COURT OF BOMBAY in case of Pr. CIT vs. Tata Capital Ltd. [2024] 161 taxmann.com 557 (Bombay) dated 03/04/2024 has held that "The finding of the Commissioner (Appeals) and the Tribunal are agreeable that though the Assessing Officer has stated that assessee's explanation is not acceptable, he has not given reasons why it was not acceptable to him. Sub-section (2) of section 14A and rule 8D provides that if the Assessing Officer is not satisfied with the correctness of the claim in respect of expenditure made by assessee in relation to income which does not form part of the total income under the Act, he shall determine the amount of expenditure in relation to such income in accordance with the provisions prescribed. The most fundamental requirement, therefore, is the Assessing Officer should record his dissatisfaction with the correctness of the claim of assessee in respect of the expenditure and to arrive at such dissatisfaction, he should give cogent reasons, [Para 7]." ➤Thus it is very clear from the above mentioned decision that the Assessing officer should give cogent reason (and not general statements) that why the claim of the appellants is not acceptable to him having regards to the books of accounts of the appellants. We would once again like to mention that the Assessing officer has given general reasons which are in fact not at all relevant to the appellant's case. The same has been brought out clearly by the appellants in the above submissions. ➤HIGH COURT OF BOMBAY in case of Pr. CIT vs. Godrej & Bovce Mfg. Co. Ltd. INCOME TAX APPEAL NO.1029 OF 2018) has held that "The assessee claimed that the disallowance made w/s144 was as per the books of account attributable to earning of exempt income. On a perusal of the assessment order we find that there is no discussion by the AO with regard to the computation of inadmissible expenditure made by the assessee forming part of the return of income. Further, the AO has not recorded any satisfaction that the working of inadmissible expenditure u/s14A is incorrect with regard to the books of account of the assessee. The provision u/s 14(2) does not empower the AO to apply Rule 8D straightaway without considering the correctness of the assessee's claim in respect of expenditure incurred in relation to the exempt income. We agree with the view of the ITAT that in the present case the AO has neither examined the claim in respect of expenditure incurred in relation to exempt income of the assessee nor has recorded any satisfaction with regard to the correctness of assessee's claim with reference to the books of account. Consequently, the disallowance made by applying the Rule &D is not only against the statutory mandate but contrary to the legal principles laid down." ➤Thus it is very clear from the above that the Learned Assessing officer should first give specific reasons for not accepting the appellants' contention, which the Assessing officer has failed to do to. The Assessing officer should establish that how it is justified to work out disallowance u/s, 14A t.w.r. 8D. The Assessing officer cannot just give some vague reasons for application of Rule 8D which are not at all relevant to the appellants case. The Assessing officer should bring out a case that why the explanation provided by the appellants is not acceptable. ➤It is therefore submitted that the disallowance u/s 14A made by the Assessing officer is incorrect and should be deleted.”
Per contra, the Ld. DR is heard, who has taken us through the order of the AO and in particular reference was drawn to para 5.3 of the assessment order and it was submitted that the AO has recorded specific satisfaction as to why the suo moto disallowance made by the assessee was not found acceptable and basis that he has proceeded and made disallowance, invoking Rule 8D and the relevant findings of the AO, reads as under: “5.3 Assessee had earned dividend income during the year and the working of disallowance of expense related to earning such income made by the assessee in the computation of income was not computed as per Rule 8D. As per the provisions of Section 14A r/w Rule 8D disallowances of expenditure in earning exempt income has to be made if the AO is satisfied that such expenditure was incurred but not disallowed by the assessee. The disallowance is to be made even if the assessee contends that no expenditure has been incurred in earning exempt income The investments cannot be managed without inherent expenses since no investments can be made without market analysis and expertise. The assessee could not have got the market expertise and the necessary staff for free and has to necessarily incur expenditure. It is not possible without sufficient expertise as to selection of securities and timely swaps. With increase in technicalities involved in market operations the assessee is bound to have expert advice and would be in receipt of various daily reports, fortnightly reports and monthly reports at deployment/redemption of their investments in various schemes. These inputs have costs in terms of substantial time as well as cost on account of conveyance, travelling. telephone/mobile bills, stationery, etc. It is difficult to ascertain such costs in quantitative terms. As per the financial statements of the assessee for the F.Y. 2017-18, it is observed that it had mixed investments which could yield exempt income and could give taxable income. The apportionment of expenses which are common such as salary to employees, travelling and conveyance expense, electricity charges etc. have to be made as per the provisions of the Rule. Hence I am satisfied that the disallowance u/s. 14A as per Rule 8D has to be made.”
Further, our reference was drawn to the findings of the Ld.CIT(A), which are contained at para 6.4.3 to 6.4.6 of the impugned order and the contents thereof read as under: “6.4.3 I have considered the facts of the case, assessment order and submissions made before me. The undisputed facts of the case are, the assessee having earned exempt income of Rs. 57,09,646/-, offered suo motu disallowance u/s 14A of the Act of Rs. 95,584/- comprising of direct expenses of Rs. 5,584/- and indirect expense of Rs. 90,000/-. The appellant has made investments in exempt instruments such as equity shares (unquoted) to the extent of Rs. 87,49,99,875/- in a sister concern. Further, incremental investment of Rs. 52,50,000/- is made in venture capital fund. The other
investment of Rs. 7,96.539/- is a carried forward investment of quoted shares from the previous year. 6.4.4 On perusal of a P&L account, it is seen that the appellant has declared revenue. from operations of Rs. 431.49 crore and Profit Before Tax (PBT) is Rs. 317.86 crore. Out of the total expenses claimed of Rs. 136.76 crore, employee benefit expenses are Rs. 29.98 crore and other expense of Rs. 5.90 crore. The quantum of non- current investments as on 31st March, 2018, is Rs. 114.04 crore as against Rs. 17.35 crore as on 31st March, 2017. Out of the total non- current investments, investment in exempt instruments is to the extent of Rs. 92.57 crore out of which Rs. 92.49 crore is invested during the relevant financial year. Considering the claim of exempt income and quantum of investment in exempt instruments, the AO felt that disallowance offered by the appellant is not justified. Therefore, explanation was called for from the assessee regarding the working adopted for disallowance. Considering the explanation of the appellant, the AO was convinced that the apportionment of expenses towards earning of exempt income offered by the appellant was not correct. The AO noticed that the appellant had to incur substantial cost in the form of administrative expenses such as salary to employees, conveyance, electricity charges etc which were attributable to earning of exempt income. The appellant had adopted an ad-hoc figure of Rs. 90,000/- without any rationale as administrative cost in relation to earning of exempt income. Therefore, the AO has recorded his satisfaction that, having regard to the records of the assessee, the claim of expenses in relation to exempt income is not correct. The excerpt from the assessment order regarding satisfaction recorded by the AO is quoted below. "As per the financial statements of the assessee for FY 2017-18, it is observed that it had mixed investment which could yield exempt income and could give taxable income. The apportionment of expenses which are common such as salary to employees, travelling and conveyance, electricity charges etc. have to be made as per the provisions of the Rule. Hence, I am satisfied that the disallowance u/s 14A as per Rule 8D has to be made." 6.4.5 It is a fact that the appellant had mixed investments during the relevant Financial Year. The appellant had investments in units of mutual fund of Rs. 13.03 crore and exempt yielding investments of Rs. 92.57 crore. The same manpower who have attended to investment activities in investments yielding taxable income are also involved in investments yielding exempt income. The total employee cost debited to profit and loss account is Rs. 29.98 crore out of which managerial remuneration is Rs. 28.39 crore. It is to be noted that the appellant has made investments in equity shares of a sister concern to the extent of Rs. 87.49 crore and incremental investment of Rs. 52.50 lakhs in venture capital fund. These investments are purely driven by decision made by the managerial personnel assisted by the supporting employees. Further, it is also noted that other expenses of Rs. 5.90 crore has been incurred by the appellant during the relevant previous year. The appellant states that expense of Rs. 3.66 crore is commission and brokerage directly related to business of the assessee and the balance Rs. 2.24 crore is related to administrative expenses such as rent, rates and taxes, repair and maintenance, security expenses etc. In summary, though the appellant has incurred substantial employee cost and other expenses which are debited to profit and loss account the quantum of expenses considered for disallowance u/s 14 A of the ITA is Rs 90,000/- which is meagre and wholly arbitrary. The appellant has also not given any reasoning for adopting the figure of Rs. 90,000/- as indirect cost attributable to earning of exempt income. The appellant has claimed that the investment in exempt yielding instruments during the relevant previous year is out of redemption of the mutual funds but the contention regarding the source of investment is not substantiated before the AO. Therefore, it can be presumed that mixed stream of funds constituting revenue from operations and redemption of units of mutual funds have been used in investments yielding exempt income. Considering the quantum & nature of investment(both taxable and exempt investments) made by the appellant during the relevant previous year, the disallowance offered of Rs. 95,584/- is meagre and does not have any logic to co-relate. It is in these circumstances, the AO has recorded his satisfaction that having regard to the accounts of the assessee, the administrative cost involved in investment activities have not been apportioned correctly to the earning of exempt income. Hence, it cannot be said that the AO has invoked provisions of Rule 8D without application of mind and acted in a mechanical way. The AO has thoughtfully considered the quantum of investments and apportionment of expenses relating to earning of exempt income. In view of the above discussion, the assessee's contention that the AO has not recorded the mandatory satisfaction before invoking provisions of Rule 8D is not correct. The reliance placed by the appellant on various judgments do not come to its rescue because the case of the assessee is distinguishable on facts. Further, the decision of the Hon'ble ITAT in assessee's own case for AY 2014-15 as well as decision of my Ld predecessor for AY 2015-16 can be distinguished on the very same fact that the AO has clearly recorded his satisfaction for invoking Rule 8D. In both the orders, relief is allowed in favour of the appellant on the ground that the AO has not recorded the requisite satisfaction. In the instant case, the AO has distinguished the facts and reasoned that the apportionment of administrative expenses to earning of exempt income is not correct owing to nature of investment activities of the appellant. Therefore, the facts of the case can be distinguished and hence it is respectfully deviated from the judgements relied by the appellant. 6.4.6 The AO has determined disallowance u/s 14A r.w.r. 8D, being 1% of the average value of investments at Rs. 67,01,005/-. However, the disallowance is limited to the extent of exempt income in view of the settled position of law in the case of Chettinad Logistics P. Ltd. (95 taxmann.com 250) and PCIT vs. State Bank of Patiala 259 Taxman 314 (SC). Hence, disallowance of Rs. 56,14,062/- which is the net disallowance discounting disallowance offered by the appellant is upheld and the ground of appeal is dismissed.”
We have heard the rival contentions and perused the material available on record. It is a case where the assessee has suo-moto disallowed a sum of Rs. 95,584/- u/s. 14A of the Act in its return of income. Besides that, there is suo-moto disallowance of Rs 2,14,442/- in relation to one of the investments made during the year. The AO has however made a further disallowance of Rs. 56,14,060/- u/s. 14A r.w. Rule 8D. Sub-section (2) of section 14A provides that if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim in respect of expenditure made by assessee in relation to income which does not form part of the total income under the Act, he shall determine the amount of expenditure in relation to such income in accordance with such method as may be prescribed which is as per Rule 8D. The Hon‟ble Courts have held from time to time that the foundational requirement before the AO apply the theory of apportionment and Rule 8D in particular is that he has to record his satisfaction that the suo-moto disallowance made by the assessee in its return of income is not correct and to arrive at such dissatisfaction, he should give cogent reasons taking into consideration specific facts and circumstances of each case. In the instant case, the assessee has made investments in equity shares of DB Realty Ltd and in equity shares of sister concern, Bhimshma Realty Ltd besides investment in venture capital fund namely India Business Excellence Fund. Therefore, the claim of assessee that it has incurred expenses or the expenses that can reasonably be allocated and subject to disallowance u/s 14A are in relation to these three investments are to the tune of Rs 3,10,026/-. Further, we find that the explanation of the assessee has also been sought by the AO during the assessment proceedings and which has been provided by the assessee as to basis of such suo-moto disallowance and the fact that the investments in DB Realty have been made in earlier years and carried forward during the year, the investment in equity shares of Bhimshma Realty Ltd have been made during the year out of redemption proceeds of mutual funds and certain additional investment by way of call money has been made in India Business Excellence Fund. The AO is therefore required to record his satisfaction in the context of these specific investments and the explanation so submitted as to why he is dissatisfied with the claim of the assessee regarding the quantum of suo-moto disallowance of expenses having regard to the accounts of the assessee. In the instant case, we however find that the AO has recorded a generic satisfaction stating that “the assessee had made mixed investments which could yield exempt and taxable income, the apportionment of expenses such as salary to employees, travelling and conveyance, etc have to be made as per Rule 8D” without establishing the necessary linkage between the investments – nature, quantum, time of making the investment and the expenses – nature, quantum of expenses, which have been incurred in relation to such investments or can reasonably be attributed to such investments. A generic satisfaction without bringing out specific of the present case will not satisfy the test so laid down u/s 14A(2) of the Act as the same will defeat the very purpose of providing for such satisfaction before invoking Rule 8D. The satisfaction so recorded by the AO should be self-speaking, bringing out the specific of present case and reflecting the thought process and mind of the AO as to why the suo-moto disallowance of expenses so made by the assessee is not correct and what further expenses – nature and quantum are relatable to such investment and earning of exempt income. It is for the AO to disclose and open his mind through the reasons recorded by him and he has to speak through the reasons. It is equally relevant to emphasize that the satisfaction so recorded has to be read as so recorded by the AO, the same cannot be supplemented as so done by the Ld.CIT(A) in the instant case where he has held that considering the quantum and nature of investment, the administrative cost involved in investment activities have not been apportioned correctly to the earning of exempt income.
The Co-ordinate Bench in assessee‟s own case for A.Y 2014-15 has similarly held that the provisions of Rule 8D could not be applied mechanically and straightway without considering the computations made by the assessee. It was held by the Coordinate Bench that application of Rule 8D firstly has to cross the barrier of requisite satisfaction by the AO as to how the disallowance worked out by the assessee was not correct or reasonable and has relied upon the decision of Hon‟ble Supreme Court in case of Godrej & Boyce Manufacturing Company and Maxopp Invesments.
It is relevant to note that the said decision has been rendered by the Coordinate Bench on 20/05/2019 which has subsequently been followed by the Ld.CIT(A) for A.Y 2015-16 in his order dated 10-06-2019 and the Assessing officer has passed the assessment order on 21-05-2021 for the impugned assessment year 2018-19. It is highly unlikely that the AO was not aware of or ceased of the orders so passed for the earlier years by the higher appellate authority in assessee‟s own case especially where he is making a repeat addition for the impugned assessment year. We therefore wonder and unable to comprehend as to why the legal requirement of recording appropriate satisfaction u/s.14A(2) as mandated in the statue and reiterated by the higher appellate authority has not been adhered to by the AO, which, to our mind, again reflect a mechanical approach to provisions of section 14A and Rule 8D which cannot be sustained in the eyes of law.
In light of aforesaid discussions and in the entirety of facts and circumstances of the case, we set-aside findings of the AO and that of the Ld.CIT(A) and the disallowance so made u/s 14A r/w Rule 8D amounting to Rs 56,14,060/- in absence of AO‟s satisfaction u/s 14A(2) with specific and cogent reasons is hereby deleted.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 18-11-2025.