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Facts
The assessee, engaged in trading gourmet products, filed its return. During scrutiny, the AO noted non-current investments and sought an explanation for disallowance under Section 14A r.w. Rule 8D. The assessee offered a suo moto disallowance of Rs. 1,08,000/-, but the AO disregarded it and made an addition of Rs. 8,98,218/-, which was upheld by the CIT(A).
Held
The Tribunal, relying on various High Court and Supreme Court judgments, held that the AO failed to record non-satisfaction with the assessee's suo moto disallowance on objective grounds before invoking Rule 8D. The AO's action of directly applying Rule 8D without first examining the correctness of the assessee's claim was incorrect. Therefore, the addition made by the AO was deleted.
Key Issues
Whether the AO can directly apply Rule 8D for disallowance under Section 14A without first recording objective dissatisfaction with the assessee's suo moto computation.
Sections Cited
14A, 14A(2), 14A(3), 8D
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Income Tax Appellate Tribunal, “F” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY, HON’BLE & SHRI NARENDRA KUMAR BILLAIYA, HON’BLE
Assessee by : Shri Gunjan Kakkad, A/R Revenue by : Ms. Kavitha Kaushik, Sr. D/R सुनवाई की तारीख/Date of Hearing : 28/07/2025 घोषणा की तारीख /Date of Pronouncement: 31/07/2025 आदेश/O R D E R
PER NARENDRA KUMAR BILLAIYA, AM:
This appeal by the assessee is preferred against the order dated 08/03/2025 by NFAC, Delhi [hereinafter the ‘ld. CIT(A)’] pertaining to AY 2017-18.
The appeal is barred by limitation. We have carefully considered the cause for the delay and are convinced that the assessee was prevented by reasonable and sufficient cause for not filing the appeal on time. Accordingly, the delay is condoned. 3. The solitary grievance of the assessee is that the ld. CIT(A) erred in not treating the disallowance u/s 14A to Rs. 1,08,000/- being suo 2 moto disallowance made by the assessee and instead confirmed the addition of Rs. 8,98,218/- made by the AO u/s 14A r.w.r. 8D. 4. Briefly stated the facts of the case are that the assessee is engaged in trading of gourmet products specially cheese, meat, seafood etc. The return for the year was filed on 01/11/2017 declaring total income of Rs.7,92,66,430/-. The return was selected for scrutiny assessment and accordingly statutory notices were issued and served upon the assessee. 5. While scrutinizing the return of income, the AO noticed that the assessee has non-current investment of Rs. 12,24,14,783/-. The assessee was asked to explain as to why the disallowance u/s 14A r.w.r. 8D should not be made in this case. In its reply, the assessee submitted that it has offered suo moto disallowance of Rs. 1,08,000/- as expenditure disallowable u/s 14A of the Act. The assessee also furnished the computation of suo moto disallowance. However, the AO was of the firm belief that the disallowance should have been made as per Section 14A r.w.r. 8D and went on to compute the disallowance and made addition of Rs. 8,98,218/-. 5.1. The assessee agitated the matter before the ld. CIT(A) but without any success. 6. Before us, the ld. Counsel for the assessee reiterated that the suo moto disallowance should suffice any disallowance u/s 14A of the Act. The ld. D/R strongly supported the findings of the AO. 7. We have carefully perused the orders of the authorities below. The suo moto disallowance computed by the assessee is as under:-
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 vs. 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:- “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 8D 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 8D 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 8D. 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 8D 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 incurred 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 has claimed that no expenditure at all was incurred in relation to the earning of non-taxable income.
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 8D 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 Taxman 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.”
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 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.”