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Facts
The assessee filed a return of income and made a suo moto disallowance of Rs. 72,000 under Section 14A. During reassessment, the AO determined total expenditure related to exempt income at Rs. 11,76,409 and made a disallowance. The CIT(A) partly allowed the appeal, directing to restrict the disallowance to the extent of exempt income.
Held
The Tribunal held that the Assessing Officer (AO) failed to record proper non-satisfaction regarding the assessee's suo motu disallowance before applying Rule 8D. Following jurisdictional High Court decisions, the Tribunal set aside the CIT(A)'s order.
Key Issues
Whether the Assessing Officer properly recorded non-satisfaction before invoking Section 14A read with Rule 8D for disallowance of expenditure related to exempt income?
Sections Cited
14A, 143(3), 147, 144B, 8D
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Before: MS. KAVITHA RAJAGOPAL & SMT. RENU JAUHRI
Appellant by : Shri Gunjan Kakkad Respondent by : Ms. Kavitha Kaushik (Sr. DR) Date of Hearing 18.08.2025 Date of Pronouncement 29.09.2025 आदेश / O R D E R PER RENU JAUHRI [A.M.] :-
This appeal is filed by the assessee against the order of the Learned Commissioner of Income-tax (Appeals), Mumbai/National Faceless Appeal Centre, Delhi [hereinafter referred to as “CIT(A)”] dated 10.01.2025 passed u/s. 250 of the Income-tax Act, 1961 [hereinafter referred to as “Act”] for the Assessment Year [A.Y.] 2016-17.
The grounds of appeal are as follows:
A.Y. 2016-17 “1. On the facts and in the circumstances of the case, the Hon'ble CIT(A), NFAC erred in fact and in law in confirming the re-assessment proceedings carried out by the Ld. AO.
2. On the facts and in the circumstances of the case, the Hon'ble CIT(A), NFAC erred in law and in fact in rejecting Appellant's suo moto disallowance of Rs. 72,000 u/s 14 A of the Act against Appellant's tax-free dividend income of Rs. 4,27,313.
On the facts and in the circumstances of the case the Hon'ble CIT(A), NFAC erred in fact and in law in confirming the disallowance of Rs. 4,27,313 made u/s 14A of the Act by the Ld. AO under Order u/s.147 R.W.S.144B of the Act by applying Rule 8D of the Income-tax Rules, 1962 without recording any non- satisfaction of the suo moto disallowance of Rs. 72,000 made by the Appellant and thereby confirming net disallowance of Rs. 3,55,313 u/s 14A of the Act.
Each of the above Revised Grounds of Appeal
are independent and without prejudice to each other.
5. The Appellant craves leave to reserve to themselves the rights to add, to alter or amend any of the grounds of appeal at or before the time of hearing and to produce such further evidence, documents and papers as may be necessary.”
3. At the outset, it is noticed that the appeal is time barred as there is a delay of 84 days in filing of the appeal. Ld. AR has submitted an application for condonation on the ground that Mr. Rajesh Jhunjhunwala, Senior Counsil looking after the matter was unwell for a long time and hence appeal could not be filed in time. After considering the assessee’s explanation, delay of 84 days is hereby condoned.
4. Brief facts of the case are that the assessee filed return declaring income of Rs. 5,84,32,231/- for A.Y. 2016-17 on 17.10.2016. Vide assessment order dated 19.12.2018 an amount of Rs. 4,27,313/- was disallowed u/s. 14A of the Act. The assessee had also made suo moto disallowance of Rs. 72,000/- u/s. 14A of the Act.
4.2 Subsequently, it was noticed by ld. AO that the disallowance u/s. 14A r/w Rule 8D was wrongly taken at Rs. 4,27,313/- instead of Rs. A.Y. 2016-17 52,38,597/- at the time of assessment resulting in under assessment of Rs. 48,11,284/-. Hence, notice u/s. 1478 was issued on 31.03.2021 and the assessee furnished return in response to this notice on 28.05.2021 declaring income of Rs. 5,84,32,231/-.
During the reassessment proceedings, after considering the assessee’s objection total expenditure related to exempt income was worked out at Rs. 11,76,409/-.
Taking into account, the suo moto disallowance and the disallowance made by AO vide original assessment order, the disallowance u/s. 14A was restricted to Rs. 677096/- [11,76,409-4,27,313- 72,000] and accordingly, order u/s. 143(3) r.w.s 147 was passed at an income of Rs. 5,95,36,636/-.
4.3 Aggrieved, the assessee preferred an appeal before ld. CIT(A). Vide order dated 10.01.2025, ld. CIT(A) partly allowed the assessee’s appeal after observing as under:
“3(a). I have considered the facts and circumstances of the case. From the facts, it is seen that the AO made further adjustment of Rs. 6,77,096/- in addition to his regular adjustments made in 143(3) assessment order of Rs. 4,27,313/-. From the facts of the case, it is seen that the assessee derived dividend income which is exempt of Rs. 4,27,313/-. Thus, the excess disallowance of expenditure over and above exempt income earned is not correct. In this regard, hon'ble High Court in the case of Reliance Ports and Terminals Ltd. (114 Taxmann.com 529) held that disallowance u/s. 14A cannot be more than exempted income itself. By respectfully following the above judgement, the AO is hereby directed to restrict the disallowance u/s. 14A to the extent of exempt income claimed. Accordingly, the grounds raised by the appellant are hereby partly allowed.” Aggrieved, the assessee has filed an appeal before the Tribunal.
At the outset ld. AR has submitted that the issue is covered by the order of the co-ordinate Bench in his own case for A.Y. 2017-18 in Hon'ble co-ordinate Bench has allowed assessee’s appeal after observing that the AO had not recorded any non-satisfaction in respect of the suo moto disallowance made by the assessee. Accordingly, relief was allowed in view of the decision of the Hon'ble jurisdictional High Court in the case of PCIT Vs. Bombay Stock Exchange Ltd. [2020] 113 taxmann.com 303(Bombay) on the same issue.
On the other hand, ld. DR has strongly relied on the orders of the lower authorities.
We have heard the rival submissions and perused the material placed on record. After careful consideration of facts and circumstances, we note that the ld. AO has not recorded any non-satisfaction in respect of suo moto disallowance of Rs. 72,000/- made by the assessee.
6.2 Thus, the facts in this year are similar to A.Y. 2017-18, for which the issue stands decided in favour of the assessee by the decision of the co-ordinate Bench wherein it has been held as under:
“8. A perusal of the assessment order shows that nowhere the AO has recorded any non-satisfaction insofar as the suo moto disallowance of Rs. 1,08,000/- computed by the assessee as mentioned hereinabove. The decision of the Hon'ble Bombay High Court in the case of PCIT us. Bombay Stock Exchange Ltd. [2020] 113 taxmann.com 303 (Bombay) squarely applies on the facts of the case. The Hon'ble High Court held as under:-
A.Y. 2016-17 "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 8D of the said Rules. It is only in view of the disallowances not being worked out as per Rule SD 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 14A(2) of the Act. It only on being dissatisfied with the above, does Rule SD 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 SD. 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 203/328 ITR 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 basis of those accounts and after considering all the relevant facts and circumstances. The application of the prescribed method arises in a situation where the claim made by the assessee in respect of expenditure which is relatable to the earning of income which does not form part of the total income under the Act is found to be incorrect In such a situation a method had to be devised for apportioning the expenditure mcurred by the assessee between what is incurred in relation to the earning of taxable income and that which is incurred in relation to the earning of non-taxable income. As a matter of fact, the memorandum explaining the provisions of the Finance Bill 2006 and the CBDT circular dated 28 December 2006 state that since the existing provisions of Section 14A did not provide a method of computing the expenditure incurred in relation to income which did not form part of the total income, there was a considerable dispute between tax payers and the department on the method of determining such expenditure. It was in this background that Sub- section (2) was inserted so as to provide a uniform method applicable where the Assessing Officer is not satisfied with the correctness of the claim of the assessee. Sub-section (3) clarifies that the application of the method would be attracted even to a situation where the assessee A.Y. 2016-17 has claimed that no expenditure at all was incurred in relation to the earning of non-taxable income 58. Parliament has provided an adequate safeguard to the invocation of the power to determine the expenditure incurred in relation to the earning of non-taxable income by adoption of the prescribed method. The invocation of the power is made conditional on the objective satisfaction of the Assessing Officer in regard to the correctness of the claim of the assessee, having regard to the accounts of the assessee. When a statute postulates the satisfaction of the Assessing Officer "Courts will not readily defer to the conclusiveness of an executive authority's opinion as to the existence of a matter of law or fact upon which the validity of the exercise of the power is predicated".- M.A. Rasheed v. The State of Kerala AIR 1974 SC 2249 (at para 7 page 2252). A decision by the Assessing Officer has to be arrived at in good faith on relevant considerations. The Assessing Officer must furnish to the assessee a reasonable opportunity to show cause on the correctness of the claim made by him. In the event that the Assessing Officer is not satisfied with the correctness of the claim made by the assessee, he must record reasons for his conclusion. These safeguards which are implicit in the requirements of fairness and fair procedure under Article 14 must be observed by the Assessing Officer when he arrives at his satisfaction under Sub-section (2) of Section 14A. As we shall note shortly hereafter, Sub-rule (1) of Rule 8D has also incorporated the essential requirements of Sub-section (2) of Section 14A before the Assessing Officer proceeds to apply the method prescribed under Sub- rule (2)." (emphasis supplied) 11. Non-satisfaction with the disallowance offered by the assessee has to be arrived at on the basis of the accounts submitted by the assessee. In this case, the Assessing Officer had not carried out the aforesaid exercise but rejected the disallowance claimed by the assessee only on the ground that it was not in accordance with Rule SD of the Rules. The application of Rule 8D of the Rules would only arise once the Assessing Officer is not satisfied on an objective criteria in the context of its accounts, that suo motu disallowance claimed by the assessee is not proper.
In fact, the Supreme Court in the case of Maxopp Investment Ltd. v. CIT [2018] 91 taxmann.com 154/254 Тахтан 325/402 ITR 640 while upholding the view of the Delhi High Court has held that the Assessing Officer needs to record his non-satisfaction having regard to the sou motu disallowances claimed by the assessee in the context of its accounts. It is only thereafter, the occasion to apply rule 8D of the Rules for apportionment of expenses can arise.
In the present facts, the Tribunal has correctly come to the conclusion that non-satisfaction as recorded by the Assessing Officer for rejecting the sou motu disallowances claimed by the assessee is not done as required under section 14A (2) of the Act. On facts, the view taken by the Tribunal is a possible view and calls for no interference."
A.Y. 2016-17 9. Similarly, the Hon'ble High Court of Bombay in the case of PCIT vs. Godrej & Boyce Mfg. Co. Ltd. [2023] 149 taxmann.com 222 [Bombay], has held as under:- "11. In the present case, the assessee had earned an exempt income of Rs. 84,30,37,423/- from shares and mutual funds and submitted a computation of inadmissible expenditure u/s 14A amounting to Rs. 13,66,635/-. The assessee claimed that the disallowance made u/s14A 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 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 8D is not only against the statutory mandate but contrary to the legal principles laid down In our view too, the CIT (A) has rightly deleted the addition made on account of interest expenditure as the assessee had sufficient interest free surplus fund to make the investment and the ITAT has rightly deleted the disallowance made by the AO u/s 14A r.w Rule 8D. Consequently we hold that, the interest expenditure cannot be disallowed u/s 14A r.w. Rule 8D(2) (ii) under any circumstances."
Considering the facts of the case as discussed hereinabove in the light of the decisions of the Hon'ble Bombay High Court (supra), we set-aside the findings of the ld. CIT(A) and direct the AO to delete the impugned addition.” 6.3 Respectfully following the decision of the co-ordinate Bench, we set aside the order of Ld. CIT(A) and direct the ld. AO to delete the addition made u/s. 14A r/w Rule 8D of the Act.
In the result, appeal of the assessee is allowed.
Order Pronounced in Open Court on 29.09.2025