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Income Tax Appellate Tribunal, K BENCH, MUMBAI
order
: 07.12.2022 O R D E R
Per Rahul Chaudhary, Judicial Member:
The present appeal is directed against Assessment Order dated, 25.02.2022 passed under Section 143(3) read with Section 144C(13) read with Section 144B of the Income Tax Act, 1961 [hereinafter referred to as „the Act‟] for the Assessment Year 2017- 18, as per directions issued by CIT Dispute Resolution Panel-1, Mumbai (hereinafter referred to as „the DRP‟) under Section 144C(5) of the Act. Assessment Year: 2017-18 2. Appellant has raised following grounds of appeal: 1. “The Transfer Pricing Officer (TPO) erred in passing the order under section 92CA(3) in gross violation of the principle of natural justice.
2. The TPO erred in not confronting the Appellant with the information/material collated by him under section 133(6) of the Income-tax Act and upon which he has relied upon to make an adjustment in respect of financial guarantee commission.
3. The Assessing Officer (AO)/Transfer Pricing Officer (TPO) /Dispute Resolution Panel (DRP) erred in holding that the transaction of giving financial guarantee by the Appellant on behalf of its Associated Enterprises (AEs) was an "international transaction" under Section 92B of the Act.
4. The AO/ TPO / DRP erred in determining the Arm's Length Price of the financial guarantees given by the Appellant on behalf of its AES @ 1.25% per annum.
5. The AO/TPO/ DRP erred in making a transfer pricing adjustment of Rs.9,43,88,840/- on account of guarantee commission.
6. The AO/TPO / DRP failed to appreciate that giving of financial guarantees by the Appellant on behalf of its subsidiaries was a shareholder activity for which no charge is required.
7. The AO/TPO/ DRP erred in rejecting the internal CUP method and arm's length price of 0.35% p.a. adopted by the Appellant for benchmarking guarantee commission.
8. The Assessing Officer/TPO/DRP failed to appreciate that the internal CUP method has been consistently followed by the Appellant and accepted by the Tribunal in the past.
9. Without prejudice to Ground Nos. 1 to 7, the AO/TPO/ DRP erred in computing the arm's length price of the financial guarantees given by the Appellant on behalf of its AEs in an arbitrary manner. 2 Assessment Year: 2017-18
10. The AO/DRP erred in holding that suo moto disallowance of expenditure under Section 14A of Rs. 6,55,409 for earning exempt dividend income of Rs. 90,47,692 was incorrect and on the lower side.
11. The AO/DRP failed to appreciate that the suo moto disallowance of expenditure u/s 14A has been determined by the Appellant as per consistently followed method accepted by the AO in the past.
12. The AO/DRP erred in disallowing further expense of Rs. 10,67,983/- under Section 14A read with Rule 8D(2)(iii).
13. The AO/DRP erred in invoking Rule 8D without recording an objective satisfaction that having regard to the accounts of the Appellant, the suo-moto disallowance of expenses of Rs. 6,55,409/- by the Appellant under section 14A of the Act.” 3. Brief facts of the case are that the Appellant is a shipping company, provides offshore oilfield services. The Appellant operates a fleet of offshore support vessels and jack-up rigs for providing marine logistics and drilling services to its clients for supporting their offshore oil & gas exploration and production services.
4. The Appellant filed its return of income for the Assessment Year 2017-18 on 30.11.2017 declaring total income of INR 2,25,44,06,710/-. The case of the Appellant was selected for scrutiny. During the assessment proceedings, the Assessing Officer noted that the Appellant had entered into international transactions with Associated Enterprises (AEs) and therefore, made a reference to the Transfer Pricing Officer (TPO) for computation of Arm‟s Length Price (ALP) under Section 92CA(1) of the Act.
3 Assessment Year: 2017-18 5. The TPO noted that during the Assessment Year 2017-18, the Appellant had provided financial guarantee to DnB Nor Bank ASA, Singapore, and Bank of Nova Scotia Asia Ltd. on behalf of Ms/ Greatship Global Offshore Services Pte. Ltd., Singapore (GGOS) and Greatship Global Energy Services Pte. Ltd., Singapore (GGES) in respect of loans availed by the AEs from the said bank. Though the Appellant had charged 0.3% per annum as Guarantee Commission from his AEs, in the return of income the Appellant had computed ALP at 0.35% per annum following internal CUP being average rate of guarantee commission paid by the Appellant to the banks, i.e. ICICI Bank, Kotak Mahindra Bank, & Yes Bank, for giving guarantee to third parties (such as ONGC, BG Exploration, Gujarat State Petroleum Corporation Ltd., Reliance Industries, & Schlumberger Asia Services Ltd. etc.) on behalf of the Appellant. Thus, making suo-moto transfer pricing adjustment of INR 41,55,262/- on account of Guarantee Commission. However, the TPO, taking note of the fact that in the transfer pricing orders for earlier assessment years external CUP was used for determining the ALP, adopted a rate of 1.25% per annum as ALP for guarantee commission, and proposed upwards transfer pricing adjustment of INR 9,43,88,840/- vide order dated 28.01.2021 was passed by the TPO under Section 92CA(3) of the Act.
On 19.04.2021, the Assessing Officer passed Draft Assessment Order under Section 143(3) read with Section 144C(1) of the Act proposing aforesaid transfer pricing adjustment of INR 9,43,88,840/- Further, the Assessing Officer also proposed a disallowance of INR 10,67,893/- under Section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 in addition to the suo motu disallowance of INR 6,55,409/- made by the Appellant in the return of income.
4 Assessment Year: 2017-18 7. The Appellant filed objections before Dispute Resolution Panel-1, (WZ) [hereinafter referred to as „the DRP‟] against the Draft Assessment Order, dated 19.04.2021. No relief was granted by the DRP as all the objections raised by the Appellant were dismissed. The DRP issued directions under Section 144C(5) of the Act vide order, dated 24.01.2022, and on the basis of the same final assessment order was passed by the Assessing Officer on 25.02.2022 under Section 143(3) read with Section 144C(13) of the Act determining total income of the Appellant at INR 225,44,06,710/- after making (a) transfer pricing addition of INR 9,43,88,840/- under Section 92CA(3) of the Act and (b) a disallowance of INR 10,67,893/- under Section 14A read with Rule 8D of the Income Tax Rules, 1962.
Being aggrieved, the Appellant has filed the present appeal raising 13 grounds of appeals.
Ground No. 1 to 9 9. Ground No. 1 to 9 are directed against determination of ALP of the financial guarantee commissioner given by the Appellant to its AEs @ 1.25% per annum by the DRP.
10. The Ld. Authorised Representative for the Appellant, at the outset submitted, made a statement under instruction that he would not be pressing Ground No. 3 whereby it was contended that providing guarantee to AE does not constitute an international transaction. Accordingly, Ground No. 3 is disposed off as being not pressed.
The Learned Authorised Representative of the Appellant further submitted that issue related to transfer pricing addition in relation to guarantee commission stands decided in favour of the Appellant by the Tribunal in appeals preferred by the Appellant for the 5 Assessment Year: 2017-18 Assessment Years 2010-11 to 2015-16. He placed on record paper- book containing a copy of the aforesaid decision of the Tribunal and submitted that there is no change in the facts and circumstances of the case during the Assessment Year 2017-18.
On the other hand, the Ld. Departmental Representative defended the impugned order on the issues raised by the Appellant in the appeal and prayed for upholding the findings of Assessing Officer/TPO/DRP.
We note that, in appeal filed by the Appellant against the order of DRP for Assessment Year 2012-13 (ITA No. 1287/Mum/2017) & 2014-15 (ITA No. 6083/Mum/2018), the Tribunal accepted the ALP for corporate guarantee determined by the Appellant and deleted the transfer pricing addition. The relevant extract of the decision of the Tribunal for read as under:
“9. We have heard.....................................................In fact, involving identical facts the Tribunal in the assessee‟s own case for A.Y 2008- 09, and A.Y 2009-10, vide a consolidated order dated 21.06.2019 had approved the determination of ALP of corporate guarantee provided by the assessee to a foreign bank for facilitating raising of loans by its foreign AE on the basis of the Internal CUP i.e guarantee commission that was paid by the assessee to a bank for standing guarantee on its behalf for a third party. Further, the Tribunal after drawing support from the order of the Hon‟ble High Court of Bombay in the case of CIT Vs. Everest Kanto Cylinders Ltd. (2015) 378 ITR 57 (Bom), had approved the determination of ALP of the corporate guarantee given by the assessee to the bank in order to facilitate raising of loan by its AE i.e on the basis of the aforesaid Internal CUP applied by the assessee. In its aforesaid order the Tribunal had observed as under:
6 Assessment Year: 2017-18 “17. We have carefully considered the rival submissions. In the present case, the assessee has made a suo-motto transfer pricing adjustment on Corporate Guarantee fee @0.55% from its AE, and such transaction has been considered as an „‟international transaction‟ within the meaning of Sec. 92B of the Act. Accordingly, the arm‟s length price of such transaction has been determined by the TPO at 3.00% which has resulted in enhancement of assessee‟s income, and the same was restricted by the DRP at 1.50%. The issue before us is restricted to whether the arm‟s length rate of the Corporate Guarantee is to be taken at 0.55%, which has been suo-motto taken as transfer pricing adjustment by the assessee, or the rate of 1.50% determined by the income-tax authorities. Notably, the TPO has benchmarked the instant transaction of provision of Corporate Guarantee on the basis of respective abilities of the assessee and AE to raise Bonds in the Indian domestic market. The TPO asserted that based on the debt- equity ratio, the credit rating of the assessee company was higher in comparison to that of the AE and, therefore, the rate of interest payable by the AE to raise bonds in the Indian market would be higher than the rate payable by the assessee-company. Such differential has been used to determine the Corporate Guarantee fee that should have been charged by the assessee company from its AE so as to determine the arm‟s length price of the instant transaction. In our considered opinion, the aforesaid approach of the TPO is clearly inconsistent with the ratio laid down by the Hon‟ble Bombay High Court in the case of Everest Kanto Cylinder Ltd. (supra). Notably, in the case of Everest Kanto Cylinder Ltd. (supra), the dispute was relating to the adjustment made by the TPO in the matter of Guarantee commission earned for providing a Corporate Guarantee to the Bank in connection with the borrowings made by the AE of the assessee therein. The TPO determined the arm‟s length price of such transaction based on the instance of commercial banks providing Guarantee on behalf of their clients. The Hon‟ble High Court held that the considerations which apply for issuance of Corporate Guarantee were distinct and separate from that of Guarantee provided by the banks and, therefore, the two transactions were incomparable. In our considered opinion, similar parity of reasoning is applicable in the present case too because the considerations which weigh for raising of bonds, that too in Indian market, are quite distinct and incomparable with the instance of providing of Corporate Guarantee to a bank abroad in connection with raising of loan from such bank by the AE of assessee outside India. Therefore, in our considered opinion, the exercise carried out by the TPO to arrive at the impugned arm‟s length rate suffers from an inherent misconception as the benchmarking has 7 Assessment Year: 2017-18 been done between two incomparable situations. Therefore, we are unable to uphold the stand of the income-tax authorities.
18. Insofar as the adequacy of 0.55% rate charged by the assessee is concerned, we find enough reasonableness in the same. In this context, the learned representative for the assessee referred to various decisions of the Tribunal, viz. Hindalco Industries Ltd. (supra), Thomas Cook (India) Ltd. (supra) and Godrej Consumer Products Ltd. (supra), wherein the arm‟ length rate of 0.5% has been approved in the matter of benchmarking Guarantee commission fee chargeable from AE. Thus, considering the entirety of the facts and circumstances of the case, in our view, Corporate Guarantee fee charged by the assessee @0.55% is well-founded and does not require any Transfer Pricing Adjustment. Thus, we setaside the order of the CIT(A) and direct the Assessing Officer to delete the addition of Rs.42,97,821/-. Thus, Ground of appeal nos. 6 to 9 are allowed.” As the Tribunal in its aforesaid order passed in the assessee‟s own case for the preceding years had approved the determining of ALP of corporate guarantee provided by the assessee to a foreign bank for facilitating raising of loan by its AE by applying of Internal CUP by the assessee i.e the guarantee commission paid by the assessee to a bank for guarantee stood by it on behalf of the assessee for a third party thus, we respectfully follow the view therein taken. Accordingly, we find no infirmity in the adoption of internal CUP i.e the average guarantee fees that was paid by the assessee to, viz. RBS (formerly known as ABN Amro Bank); Kotak Mahindra Bank and Yes Bank, for standing guarantee on its behalf of the assessee in case of third parties, viz. ONGC, BG Exploration etc.
Insofar the adequacy of the ALP of the corporate guarantee fees determined by the assessee at 0.43% of the amount of loan is concerned, the same, as observed by us hereinabove is the average of the guarantee fees that was paid by the assessee to various banks for standing guarantees on its behalf for certain third parties. As observed by the Hon‟ble High Court in the case of Everest Kento Cylinders Ltd. (supra), higher commission is to be paid for obtaining bank guarantee, as they are easily encashable in the event of default as in comparison to corporate guarantee provided by an assessee company to a bank for facilitating raising of loan by its AE. Accordingly, we are of the 8 Assessment Year: 2017-18 considered view that insofar the adequacy of the ALP of the corporate guarantee fees determined by the assessee at 0.43% is concerned, the same in the backdrop of the aforesaid facts cannot be called in question. Apart from that, we find that it was also the claim of the assessee before the lower authorities that Kotak Mahindra Bank (as per its sanction letter) had expressed its willingness to give guarantee on behalf of the AEs at a commission rate of 0.40% p.a/0.50% p.a. In the backdrop of the aforesaid fact, we find substantial force in the claim of the ld. A.R that the aforesaid credit sanction letter too would constitute a CUP for benchmarking the transaction of providing of corporate guarantee by the assessee to the banks for facilitating raising of loans by its AEs. Be that as it may, the adequacy of the ALP of corporate guarantee fee at 0.43% can also safely be gathered by drawing support from the following judicial pronouncements as had been relied upon by the assessee before the lower authorities as well as before us :
Particulars Guarantee Commission rate 1 Everest Kento Cylinder Ltd. Vs. ACIT (2012) 34 0.5 CCH 0528 (Mum) [Note : Order of Tribunal upheld by the Hon‟ble High Court of Bombay : CIT Vs. Everest Kento Cylinder Ltd. Vs. CIT (2015) 378 ITR 57 (Bom). 2 Reliance Industries Ltd. Vs. Addl. CIT (ITA No. 0.38% 4475/Mum/2007) 0.38% 0.38% 3 Asian Paints Ltd. Vs. Addl. CIT (2014) 149 ITD .20% 511 (Mumbai) 0.20% 4 Aditya Birla Minacs Worldwide Ltd. Vs. JCIT .5% (2016) 47 CCH 760 (Mum) 5 Godrej Household Products Ltd. Vs. Addl. CIT 41 .5% taxmann.com 386 (Mum) 6 Nimbus Communications Limited Vs. Addl. CIT .5% (2014) 149 ITD 0508 (Mumbai) 7 Hindalco Industries Ltd. Vs. Addl. CIT (62 .5% taxmann.com 181)(Mum) 8 Manugraph India Ltd. Vs. DCIT (2015) 43 CCH .5% 348 (Mum) 9 Prolific Corporation Ltd. Vs. DCIT (55 .5% taxmann.com)(Hyd) 10 Glenmark Pharmaceuticals Ltd. Vs. Addl. CIT .5% Addl. CIT Vs. Glenmark Pharmaceuticals Ltd. (43 taxmann.com 191)(Mum) 11 Thomas Cook (India) Limited (2016) 47 CCH .5% 0162 (Mum)
9 Assessment Year: 2017-18 Accordingly, in terms of our aforesaid observations we find no reason to dislodge the ALP of corporate guarantee determined by the assessee at 0.43% p.a by adopting Internal CUP method. In the backdrop of our aforesaid observations we are unable to persuade ourselves to subscribe to the determination of the ALP of the corporate guarantee at 2% p.a by the A.O/TPO. We, thus, uphold the ALP of corporate guarantee as determined by the assessee at 0.43% p.a and direct the A.O/TPO to vacate the upward transfer pricing adjustment of Rs. 28,69,70,745/- made in the hands of the assessee. The Grounds of appeal
Nos. 1 to 7 are allowed in terms of our aforesaid observations.” (Emphasis Supplied)
14. We are not persuaded to depart from a view consistently taken by the Tribunal in the case of the Appellant for preceding assessment years. Respectfully following the above said decisions of the co- ordinate benches of the Tribunal in the case of the Appellant for the Assessment Years 2011-12, 2012-13, 2013-14 and 2014-15, we hold that corporate guarantee commission determined by the Appellant at the rate of 0.35% per cent per annum is at arm‟s length not requiring any transfer pricing adjustment. Consequently, the transfer pricing additions of INR 9,43,88,840/- made by the AO and confirmed by the DRP is deleted, and Ground No. 7 of the Appeal are allowed. Ground No. 1,2,4,5,6,8 and 9 are disposed off as being infructuous.
Ground No. 10 to 13 15. Ground No. 10 to 13 pertain to disallowance of INR 10,67,893/- under Section 14A of the Act read with Rule 8D of the Rules.
The relevant facts in brief are that the Appellant earned exempt dividend income of INR 90,47.692/- from surplus funds parked in Mutual Funds. In its Return of Income, the assessee suo- moto disallowed expenses amounting to Rs.6,55,409 under Section 14A of the Act. During the assessment proceedings, the Appellant filed 10 Assessment Year: 2017-18 statement giving working of expenditure disallowed under Section 14A of the Act. It was contended by the Appellant had few dedicated employees to look after its investments. The salaries and administration overheads of these employees were identifiable. The Appellant had disallowed pro-rata expenses pertaining to these employees on the basis of taxable and exempt income earned from investments. However, the Assessing Officer discarded the computation furnished by the Appellant and proceeded to compute the disallowance under Section 14A by applying rule 8D to arrive at total disallowance under Section 14A of INR 17,23,302/-. Since the Appellant had already disallowed INR 6,55,409/- the Assessing Officer made a disallowance of balance amount of INR 10,67,893/- under Section 14A of the Act read with Rule 8D of the Rules. The objection filed by the Appellant before DRP on this issue were dismissed. Being aggrieved, the Appellant is now in appeal before us.
Ld. Authorised Representative for the Appellant appearing before us submitted that identical disallowances made by the Assessing Officer in preceding assessment years have been deleted by the Tribunal. The Ld. Authorised Representative for the Appellant relied upon the written submission filed before the DRP (placed at Page 1- 23 of the factual paper-book @ 13-14), and letter dated 13.02.2021 filed during the assessment proceedings (placed at page No. 75 to 87 of the paper-book).
Per contra, Ld. Departmental Representative submitted that since the Appellant had not made disallowance as per Rule 8D of the Income Tax Rules, 1962, the Assessing Officer was justified in making disallowance by applying the aforesaid rule. As regards, satisfaction the Ld. Authorised Representative for the Appellant 11 Assessment Year: 2017-18 submitted that proper satisfaction has been recorded by the Assessing Officer in this regard reliance was placed on paragraph 5.3.3 of the Final Assessment Order dated 25.02.2022.
We have considered the rival submissions and perused the material on record including letter dated, 13.02.2021, filed by the Appellant before during the course of assessment proceedings, and written submissions filed by the Appellant before DRP. We note that the Appellant had methodically identified actual expenses which can be reasonably treated as relatable to the exempt income and disallowed such expenses under Section 14A of the Act. The Appellant had methodically identified actual expenses which can be reasonably treated as relatable to the exempt income and disallowed such expenses. ‟Statement showing details of exempt income along with calculation of disallowance under Section 14A‟ was filed during the assessment proceeding as Annexure-5 to letter dated 13.02.2021. In the aforesaid statement it was clearly stated that no interest is being disallowed as the entire interest debited to the Profit & Loss Account pertains to loan taken from bank for acquisition of ships/vessels. It was also stated that employee cost related to cooperate employees involved in both tonnage and non- tonnage activities is apportioned in the ratio of Revenue from tonnage and non-tonnage activities (i.e. in the ratio of 27:73). Out of cost apportioned to non-tonnage activities the cost relating to treasury function have been identified and offered for disallowance under Section 14A in proportion to the estimated time spent by such employees on treasury function. The expenses allocated to treasury function on the above basis aggregate to INR.40,17,661/- whereas the Treasury Income comprises of exempt dividend income (INR 90,47,692/-), taxable interest income (INR 4,64,16,265/-) and loss on sale of mutual funds (INR 1,546/-). On 12 Assessment Year: 2017-18 the basis of the aforesaid, the percentage of exempt income to total income from investments was computed at 16.31%. Therefore, 16.31% of total expenses allocated to treasury function which came to INR 6,55,409/- [40,17,661/- x 16.31%]. Thus, the Appellant had arrived at the amount of disallowance of INR 6,55,409/- which was disallowed suo-moto by the Appellant. All relevant information and details were provided to the Assessing Officer.
However, the Assessing Officer had rejected the computation/statements furnished by the Appellant. The satisfaction recorded by the Assessing Officer in paragraph 5.3.3 of the Final Assessment Order read as under:
5.3.3 Recording of satisfaction The AO is satisfied that the assessee has incurred more expenditure on account of maintaining/acquiring/selling investments then already disallowed by assessee, due to the following reasons - It is seen that there is substantial amount of new investment in mutual funds to the tune of Rs 221 crores and ale of same to the tune of Rs 238 crores made during FY 2017-18. This investment had led company to earn exempt income of Rs 90.47.692as dividend on Mutual Funds. It follows that such huge investment and trading decisions are not taken casually in any business. It entails research, deliberations, large funds and engagement of personnel at various levels, especially at the managerial level, to make such decisions, such decisions assume significance for the business. - Assessee has simply disallowed expenses taking percentage of exempted income total income from investments and disallowed certain percentage of staff cost and other expenses without giving complete details. - Further there is huge churn in investment in Mutual Funds. The change in monthly investments is as per para 5.1.3 above. - Various expenses have been incurred by the assessee, significantly managerial remuneration, salaries bonus & allowances, Employee benefits expenses, Interest expenses, Administrative expenses, travelling and communication which 13 Assessment Year: 2017-18 also entail a portion relating to make such investments and earn income on same. Accordingly, in view of the above, the AO is satisfied that the assessee has incurred expenditure much greater than already disallowed by assessee on account of making Investments, income of which will be exempt. The proportionate expense of Rs 6,55,409 is less and not accurate as already disallowed by assessee. Assessee has disallowed such expenses which is not in order as compared to the proportion of new investments made.
5.4 Conclusion/Summary 5.4.1 Form the above discussions, it is clear that the assessee has failed to disallow expenses incurred as required for the purposes of transacting in investments, the income of which will be exempt. As the income is exempt, so also the expenses incurred for eventually earning the income will also be not allowed. For e.g., in the case of agricultural income, since the income from sale of produce is exempt, so also the expenses incurred on nurturing and maintaining the crops are not allowed irrespective of whether the sale of produce has taken place in that year or not. The same principle was kept in view by the Legislature while promulgating Section 14A.”
A perusal of paragraph 5.3.3 of the Final Assessment Order reproduced hereinabove shows that the Assessing Officer not dealt with the computation furnished by the Appellant. The Assessing Officer has expressed his view that the expenditure incurred by the Appellant for the purpose of earning exempt income were much greater than suo-moto disallowance of INR 6,55,409/- made by the Appellant. The reason to arrive at the aforesaid conclusion were stated to be substantial amount of new investment in Mutual Fund and incurring of various expenditure (such managerial remuneration, salary bonus & allowances, employee benefit expenses, interest expenses, travelling and communication expenses) which should also have been apportioned towards earning of the exempt income. The reasoning given by the Assessing Officer is based upon presumption as the Assessing 14 Assessment Year: 2017-18 Officer has failed to point out any infirmity in the computation furnished by the Appellant. The Assessing Officer has incorrectly stated that the Appellant had disallowed certain percentage of employees cost and other expenses without giving details. We note that all the details were furnished by the Appellant vide letter dated 13.02.2021 and 10.04.2021. The letter dated 13.02.2021 was accompanied by computation calculation of disallowance, and statement of segmental Profit & Loss Account. Vide letter dated 10.04.2021 (placed at page 101 to 111 of the paper-book) the Appellant had also provided statement giving details of allocation of salary and common administration over head expenses of dedicated employees. It was explained by the Appellant that the investments were in the nature of temporary investment wherein surplus funds have been parked for short duration which did not require time an effort of the top management. All the aforesaid submissions and details were simply brushed aside by the Assessing Officer.
We note that the Tribunal had deleted similar disallowance made by the Assessing Officer under Section 14A read with Rule 8D of the Rules vide order dated 31.08.2021 passed in pertaining Assessment Year 2011-12 holding that the satisfaction recorded by the Assessing Officer in rejecting Appellant‟s computation was not in accordance with the mandate envisaged under section 14A(2) of the Act. The relevant extract of the aforesaid decision of the Tribunal read as under:
6. In ground no. 8 & 9 of appeal, assessee has assailed additional disallowance of Rs. 4,23,051/- made under section 14A read with Rule 8D. The primary contention of the assessee on this issue is that no satisfaction has been recorded by the AO before rejecting assessee‟s computation of suo-moto disallowance. The assessee during the period 15 Assessment Year: 2017-18 relevant to the AY under appeal has earned dividend income of Rs. 5,29,42,293/-, the assessee has made suomoto disallowance of Rs. 35,74,694/- under section 14A for earning exempt income. The provisions of section 14A(2) of the Act mandates that having regard to the accounts of assessee, if the AO is not satisfied with correctness of the claim of the assessee in respect of expenditure incurred in relation to earning of exempt income, the AO shall determine the expenditure to be disallowed for earning exempt income in accordance with Rule 8D. Thus, the AO is under obligation to record his dissatisfaction before rejecting assessee‟s computation of suo-moto disallowance under section 14A. Such satisfaction has to be recorded in objective manner having regard to the accounts of the assessee. A perusal of the draft assessment order reveals that the AO has rejected the computation of assessee without even examining the computation furnished by the assessee. The AO in the draft assessment order has discussed general principles for making disallowance under section 14A read with Rule 8D and has also referred to a case laws. However, there is no observation/comments whatsoever by the AO on the computation made by the AO. Thus, the satisfaction recorded by the AO in rejecting assessee‟s computation is not in accordance with the mandate envisaged under section 14A(2) of the Act.
In the present case the dissatisfaction has been recorded, however, the same is not in accordance with mandate of Section 14A(2) of the Act as the Assessing Officer has acted in a mechanical manner based upon conjecture/surmise and has recorded dissatisfaction without having regard to the accounts of the Appellant and/or the computation of suo moto disallowance made by the Appellant under Section 14A of the Act. The general hypothesis made by the Assessing Officer fails to meet the mandate of Section 14A(2) of the Act in view of the methodical computation of disallowance furnished by the Appellant taking into the account the actual expenditure incurred by the Appellant. Accordingly, we delete the addition of INR 10,67,893/- made by the Assessing Officer under Section 14A of 16 Assessment Year: 2017-18 the Act read with Rule 8D of the Rules. Thus, Ground No. 10 to 13 raised by the Appellant are allowed.
In view of the above Ground No. 10 to 13 raised by the Appellant are allowed.
In the result, appeal filed by the Appellant is allowed.