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Facts
The assessee, engaged in manufacturing and trading of industrial gases, invested in mutual funds and equity shares, earning exempt dividend income. The assessee suo motu disallowed a portion of expenses under Section 14A, which the Assessing Officer (AO) found unreasonable and computed a higher disallowance under Rule 8D. The AO also made an adjustment to book profit under Section 115JB.
Held
The Tribunal held that the AO failed to record the necessary satisfaction to invoke Rule 8D for disallowance under Section 14A. The Tribunal noted that the assessee's suo motu disallowance was based on a scientific approach. For computing book profit under Section 115JB, disallowance under Section 14A is not to be superimposed.
Key Issues
1. Whether the Assessing Officer properly invoked Rule 8D for disallowance under Section 14A without recording the requisite satisfaction. 2. Whether disallowance under Section 14A should be adjusted while computing book profit under Section 115JB.
Sections Cited
14A, 143(3), 144B, 115JB, 10(34)
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Income Tax Appellate Tribunal, “B” BENCH MUMBAI
Before: SHRI SAKTIJIT DEY, HON’BLE & SHRI GIRISH AGRAWAL
PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:
This appeal filed by the assessee is against the order of Ld. CIT(A), National Faceless Appeal Centre (NFAC), vide order no. ITBA/NFAC/S/250/2023-24/1063470469(1), dated 27.03.2024 passed against the assessment order by National Faceless Assessment Centre, Delhi, u/s. 143(3) r.w.s. 144B of the Income-tax Act (hereinafter referred to as the “Act”), dated 14.09.2021 for Assessment Year 2018-19.
Bombay Oxygen Investments Ltd., AY 2018-19 2. Grounds taken by the assessee are reproduced as under: “1. On the facts and circumstances of the case and in law the Learned Commissioner of Income Tax (Appeals) through National Faceless Appeal Centre, ["the CIT(A)"] erred in partly upholding action of AO of making disallowance u/s.14A of the Income Tax Act 1961 ("the Act"). The Appellant prays that the disallowance u/s.14A made by AU be restricted to suo moto disallowance made by the Appellant.
On the facts and in law, the CIT(A) erred in upholding disallowance made by AO u/s.14A while computing book profit u/s.115JB of the Act. The Appellant prays that it be held that while computing book profits u/s.115JB, only actual expenditure, if any for earning exempt income be added back and Rule 8D cannot apply.”
There is a delay of 93 days noted by Registry in filing the present appeal before the Tribunal for which petition for condonation of delay along with affidavit is placed on record. Perusal of the same states that delay is attributable to change in the management staff of the assessee. We have considered the petition for condonation of the said delay along with an affidavit. Upon perusal of the same and hearing both sides, we deem it fit to condone the delay on the ground that there was sufficient cause for the said delay. Accordingly, we condone the delay to take up the matter for adjudication.
Twin issues involved in respect of disallowance made under section 14A are towards disallowance made while computing assessed income under the normal provisions of the Act as well as adjustment made while computing book profit under section 115JB of the Act.
Brief facts of the case are that assessee is engaged in manufacturing and trading of industrial gases such as oxygen, nitrogen and argon. Assessee also invested substantial amount in mutual funds and equity shares of different companies. Assessee filed its return of income on 31.10.2018, reporting total income at ₹5,15,00,586/- under normal provisions and ₹7,83,67,104/- under Bombay Oxygen Investments Ltd., AY 2018-19 115JB of the Act. During the year, assessee had earned dividend income of ₹72,84,630/- from certain investments in equity shares which was claimed exempt under section 10(34). Assessee computed suo moto disallowance of ₹17,21,138/- under section 14A as proportion of salary and administrative expenses charged to its profit and loss account. During the assessment proceedings, assessee submitted the working of suo moto disallowance made by it along with explanation on the same. The said working forming part of the paper book at page 23 is extracted below for ready reference.
5.1. Ld. Assessing Officer observed that considering the amount of dividend income received and the nature of business of the assessee, disallowance offered by the assessee under section 14A was found not to be reasonable. According to him, suo moto offering of disallowance under section 14A suggests that the provisions of section 14A are applicable in the case and that the disallowance offered by the Bombay Oxygen Investments Ltd., AY 2018-19 assessee is computed without any logic and reasoning. After discussing the provisions of section 14A, he decided that provisions of section 14A are once applicable, disallowance should be worked out as per Rule 8D which prescribes the method for computation of amount to be disallowed. Thus, by taking note of amendment to Rule 8D by the Income Tax (Fourteenth Amendment) Rules, 2016 applicable with effect from 02.06.2016, the disallowance was worked out by taking amount of expenditure directly relating to income which does not form part of total income and amount equal to 1% of the annual average of the monthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of the total income.
5.2. He considered the suo moto disallowance made by assessee as the direct expenses under Rule 8D and computed further disallowance of ₹88,37,134/- by taking 1% of yearly average of monthly average of investments. In the course of assessment proceedings, assessee vide its submission dated 24.12.2020 stated that unless a satisfaction is recorded that the working provided by it is wrong/incorrect, Rule 8D cannot be applied. It placed reliance on several decisions to buttress its contention. Ld. Assessing Officer took note of objection raised by the assessee on the requirement of satisfaction to be recorded which according to him was recorded, there being insufficiency of computation by the assessee for disallowance made under section 14A. He thus computed disallowance at ₹88,37,134/-, calculated as per Rule 8D and restricted it to the amount of total exempt income earned by the assessee in the year at ₹72,84,630/- which was added to the total income assessed under normal provisions of the Act. Ld. Assessing Officer also made adjustment to book profit reported by the assessee under section 115JB by making an addition of ₹55,63,492/-
Before the Ld. CIT(A), assessee reiterated its submissions and strongly contested that merely stating in the order that the assessee’s submissions have been duly considered but the same is not acceptable, the Assessing Officer could not be said to have fulfilled the conditions precedent for invoking section 14A(2) read with Rule 8D. It was submitted that, application of Rule 8D is not automatic. To invoke Rule 8D, Assessing Officer should, after considering the accounts of the assessee, give a finding that he 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 the Act and such satisfaction must be an objective satisfaction. According to the assessee, when it has made suo moto disallowance under section 14A, Assessing Officer cannot proceed to make a disallowance under Rule 8D until he records an objective satisfaction based on the accounts of the assessee for rejecting the suo moto disallowance so made. No specific expense, whatsoever, has been pointed out by the ld. Assessing Officer which has been incurred by the assessee in relation to earning the exempt income and in absence of recording of reasons for his dissatisfaction on the suo moto disallowance having regard to the accounts of the assessee, computation made by ld. Assessing Officer by applying Rule 8D is not in accordance with the requirements of section 14A and hence, the impugned disallowance is not tenable.
6.1. In respect of adjustment made to the book profit in respect of disallowance computed by ld. Assessing Officer under section 115JB by applying Rule 8D, assessee submitted that there are only limited Bombay Oxygen Investments Ltd., AY 2018-19 items covered under Explanation to section 115JB(2) for adjustment to be made to the net profit reported under the Companies Act, 2013.
6.2. Ld. CIT(A) after taking into consideration the submissions made by the assessee, gave partial relief by restricting the disallowance made by ld. Assessing Officer to the extent of exempt income earned during the year though holding that once disallowance under section 14A is called for, the Assessing Officer has no option but to follow the mechanism provided under Rule 8D. Aggrieved, assessee is in appeal before the Tribunal.
We have heard both the parties and perused the material placed on record. We have given our thoughtful considerations to the submissions made before us as well as before the authorities below. Facts stated above are not in dispute. Contentions raised are already narrated above and hence not repeated for the sake of brevity and to avoid duplicity. We take note of the working of suo moto disallowance made by the assessee by taking into account salaries of concerned personnels and administrative expenses, details of which are reproduced above and reflects adoption of scientific approach. Ld. Assessing Officer has disregarded the same by merely stating that it is without any logic and reasoning. Furthermore, ld. Assessing Officer has accepted the suo moto disallowance made by the assessee as ‘direct expenses’ for the purpose of applying Rule 8D as noted in para 9 of his order.
7.1. Provisions of section 14A(2) requires the Assessing Officer to invoke Rule 8D only if he is not satisfied with the correctness of the claim of the assessee in respect of the expenditure, in relation to the exempt income having regard to the accounts of the assessee. Even Bombay Oxygen Investments Ltd., AY 2018-19 Rule 8D postulates similar condition as mentioned in section 14A(2) wherein also the satisfaction to be arrived at by the ld. Assessing Officer on the correctness of the claim of expenditure made by the assessee is “having regard to the accounts of the assessee”. There is no change in Rule 8D(1) even though method of computation of disallowance has been substituted with a different method.
7.2. We note that if the ld. Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred in relation to exempt income after “having regard to the accounts of the assessee”, he can determine the amount of such expenditure for making disallowance under section 14A. The satisfaction arrived at by ld. Assessing Officer in terms of the provisions is not just a mere disagreement with the submissions made by the assessee but has to be an objective satisfaction by taking into consideration the methodology adopted by the assessee for the claim made by it and then arriving at a satisfaction accepting or rejecting the same “having regard to the accounts of the assessee”.
7.3. In the present case before us, ld. Assessing Officer has not taken into consideration the elaborate details and scientific basis adopted while arriving at the suo moto disallowance but has proceeded merely on his own presumptions to invoke section 14A r.w.r. 8D.
Since no proper satisfaction has been recorded by the ld. Assessing Officer in terms of the provisions of section 14A(2) of the Act, “having regard to the accounts of the assessee”, about the correctness of the claim of the assessee in respect of expenditure incurred in relation to exempt income, we do not find any reason for upholding the disallowance made by the AO under section 14A read with Rule 8D. We delete the disallowance made by the ld. Assessing Officer and direct to adopt the Bombay Oxygen Investments Ltd., AY 2018-19 suo moto disallowance made by the assessee under section 14A of the Act. Accordingly, ground taken by the assessee in this respect is allowed.
7.5. The above finding arrived at by us is fortified by the decision of Hon'ble Supreme Court in the case of Maxopp Investment Ltd. vs. CIT(A) (2018) 402 ITR 640 (SC) while emphasising on aspect of recording of satisfaction by the ld. Assessing Officer for which it observed as under: "41. 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 Assessing Officer needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the Assessing Officer 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, the nature of the loan taken by the assessee for purchasing the shares/ making the investment in shares is to be examined by the Assessing Officer 7.6. Further, on the same issue, Hon'ble Supreme Court in Godrej & Boyce Manufacturing Company Ltd. v. DCIT, (2017) 394 ITR 449, observed as under: "37. We do not see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Sub-sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable." (emphasis supplied)
7.7. We also find that the Hon'ble jurisdictional High Court of Bombay in CIT v. M/s Asian Paints Ltd., in of 2016, vide order dated 06/04/2019, for the assessment year 2008-09, while Bombay Oxygen Investments Ltd., AY 2018-19 dismissing the appeal filed by the Revenue on a similar issue held that in the absence of recording of satisfaction in terms of section 14A(2) of the Act, invocation of Rule 8D is not permissible. Relevant findings of the Hon'ble Court, are reproduced as under:- "4. Regarding question no.(c) :-
(a) In its return of income, the respondent made a suo-moto disallowance of Rs.15.21 lakhs being the expenditure incurred to earn exempt income under Section 14A of the Act. The Assessing Officer disregarded the same and proceeded to disallow an amount of Rs. 1.10 crores under Section 14A of the Act read with Rule 8D of the Rules as expenditure incurred to earn exempt income. Thus, adding Rs.1.10 crores to the income of the respondent.
(b) Being aggrieved, the respondent filed an appeal to the CIT(A) but without success.
(c) On further appeal, the impugned order of the Tribunal while allowing the appeal held that before invoking the provisions of Rule 8D of the Income Tax Rules, the Assessing Officer has to record his non satisfaction with the suo moto disallowance of expenditure made towards earning exempt income by the respondent. This exercise not having been carried out by the Assessing Officer before applying Rule 8D of the Income Tax Rules, the disallowance of expenditure to earn exempt income cannot be sustained.
(d) This issue is no longer res integra as the Apex Court in Gorej & Boyce Mfg. Co. Ltd. v. Dy. CIT, 394 ITR 449 decided the issue in favour of the respondent. In the above case, the Supreme Court has while considering the issue of disallowing of expenditure incurred to earn exempt income observed as under “Whether such determination is to be made on application of the formula prescribed under rule 8D or in best jusigment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not ssible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It only thereafter that the provisions of section 14A (2) and (3) read with rule 8D of the Rules or a best dgment determination, as earlier prevailing, would become applicable."
Thus, Rule 8D of the Rules cannot be invoked where the suo moto disallowance made by the respondent ssessee is not found to be satisfactory by the Assessing Officer having regard to the accounts of the assessee, In the absence of recording the aforesaid fact of non- satisfaction in terms of Section 14A(2) of The Act, invocation of Rule 8D is not permissible.
(e) Therefore, in view of the above decision of the Apex Court, this question also does not give rise to any substantial question of law. Thus, not entertained."
Bombay Oxygen Investments Ltd., AY 2018-19 7.8. On the issue relating to adjustment made in computing the book profit for the purpose of Section 115JB, we note that Section 115JB of the Act or MAT provisions levies an alternate tax on the 'book profit’ as shown in the profit and loss statement as increased/decreased by the specified adjustments in the given section. Explanation 1 to section 115JB(2) of the Act provides that the calculation of book profits shall begin with profit as per the profit and loss account which shall be in accordance with the provisions of Schedule III to the Companies Act. The provisions of section 115JB of the Act is a separate code and it does not refer to any disallowance made under section 14A of the Act r.w.r. 8D of the Rules while arriving at the book profits for the purpose of section 115JB(2) of the Act. Further, section 14A of the Act is a provision with fiction disallowing the deemed expenditure attributable to exempt income viz. incomes u/s. 10 of the Act. Section 115JB of the Act is also a provision with fiction payment of tax in respect of deemed income. Therefore, while computing the profit for the purpose of section 115JB of the Act, another provision with fiction cannot be superimposed. Hence, question of increasing book profit on account of disallowance under section 14A of the Act read with Rule 8D will not arise. Book profit has to be increased by expenses debited to Profit and Loss related to exempt income. In the present case, assessee had debited in profit and loss account, expenditure of Rs 17,21,138/- in relation to earning of exempt income which it had suo moto disallowed. The same may be added for working out book profit under section 115JB of the Act. Accordingly, ground taken by the assessee in this respect is allowed.
7.9. In this regard, reliance is placed on the decision of the Hon'ble Special Bench of ITAT in the case of Vireet Investment (P.) Ltd. (82 taxmann.com 415), wherein it is held that computation under clause (f)
Bombay Oxygen Investments Ltd., AY 2018-19 of Explanation 1 to section 115JB(2), is to be made without resorting to computation as contemplated under section 14A read with Rule 8D. Relevant extract of the said decision is reproduced hereunder: "the computation under clause (f) of Explanation 1 to section 115JB(2), is to be made without resorting to the computation as contemplated under section 14A, read with rule BD of the Income-tax Rules, 1962"
In the result, appeal of the assessee is allowed.