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Facts
The assessee, engaged in trading derivatives, reported business income, short-term capital gains, and interest income. The Assessing Officer (AO) disallowed expenses under Section 14A read with Rule 8D, calculating it as 1% of average monthly investment balance.
Held
The Tribunal held that the AO acted mechanically by not recording satisfaction before invoking Section 14A and Rule 8D, as mandated by the Supreme Court in MaxoppInvestments Ltd. The disallowance was incorrectly invoked.
Key Issues
Whether the AO correctly invoked Section 14A and Rule 8D without recording satisfaction, and whether the ITAT's decision in the assessee's own case for a prior A.Y. covers this issue.
Sections Cited
14A, 10(38), 250, 8D
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Income Tax Appellate Tribunal, “F” BENCH MUMBAI
Before: SHRI SANDEEP GOSAIN & SHRI PRABHASH SHANKAR
Assessee by Sh. Ashok Bansal, Revenue by Sh. Sunil Mathews, Sr. DR सुनवाई क" तारीख/Date of Hearing 15.01.2025 घोषणा क" तारीख/Date of Pronouncement 25.02.2025 आदेश / ORDER
PER SANDEEP GOSAIN, JM:
The present appeal has been filed by the assessee challenging the impugned order u/s 250 dated 11.11.2024, of the Income Tax Act, 1961 (‘the Act’), by the Ld. Commissioner of Income Tax (Appeal)-11, Delhi, (‘Ld. CIT(A)’), for the assessment year 2017-18. The grounds of appeal are as under:
1. The Id. CIT (A) erred in confirming the disallowance u/s 14A of the Act r.w.r. 8D of the 2 IT Rules, 1962 though restricting it to Rs, 162215/-. ii. The AO and the Id. CIT (A) erred in relying on CBDT Notification No. 43 / 2016 dt. 02.06.2016 without appreciating that the said Notification cannot be applied simpliciter and that the AO has to be first satisfied that the appellant has incurred expenses some of which relates to exempt income & the same has been claimed as deduction in the return of income filed which is not the facts of the instant case. iii. The Id. CIT (A), in doing so, erred in not following the binding decision of the Hon. ITAT in the appellant's own case allowing his appeal for A.Y. 2016-17 having exactly the identical facts.
The brief facts of the case are that the assessee is engaged in trading in equity, currency and commodity derivatives. For the year under consideration, the assessee has shown business income, short-term capital, gain, and interest income under the head, ‘income from other sources’.
2.1 However, Ld.AO noticed from the computation of total income that assessee has claimed interest income, dividend income from long-term capital gain under section 10(38) of the Act as exempt from income. Assessee had not made any 3 disallowance under section 14 A of the Act on the assertion that expenses related to investments, generating exempt income were debited to the capital account, with no expenses claimed as deduction in the profit and loss account.
2.2 But the Ld. AO after providing opportunity of hearing made a disallowance of Rs.5,29,150/- under section 14 A read with rule 8D based on a calculation of 1% of the average monthly investment balance as stipulated in CBDT notification no. 43/2016 dated 02/06/2016. 3. Aggrieved by the said order, assessee preferred appeal and the same was partly allowed by confirming but restricting the disallowance to Rs.1,62,215/- as per the rate on total expenses claimed in the profit and loss account.
Aggrieved by the impugned order passed by Ld. CIT(A), the assessee has preferred the present appeal before us on the grounds mentioned hereinabove.
All the grounds raised by the assessee before us are interconnected and interrelated and pertains to Challenging the order of ld CIT (A) in restricting the disallowance, therefore, we have decided to take up all these grounds together and dispose of the same through the present consolidated order.
The Ld.AR appearing on behalf of the assessee, reiterated the same arguments as raised by him before the 4 lower authority‘s and also submitted that the lower authority has erred in relying upon CBDT notification no. 3 of 2016 dated 02/06/2016, without appreciating, as the said notification cannot be applied simpliciter, and that the Ld.AO has to be first satisfied that the appellant has incurred expenses some of which relates to exempt income and the same has been claimed as deduction in the return of income.
6.1 It was further submitted that the issue in question is squarely covered in favour of the assessee by the decision of the ITAT in assessee’s own case in and the same was decided on 24/01/2023. 7. On the contrary, Ld. DR relied upon the orders passed by the revenue authorities.
We have heard the counsel for both the parties and have also considered the material placed on record and judgments cited before us alongwiththe orders passed by the revenue authorities.
8.1 At the very outset, we noticed that similar issue has already been taken up and decided by the coordinate bench of ITAT in assessee’s own case in and the operative portion of the order of ITAT is reproduced here in below:
“8. Further, we also find merit in the contention advanced by the Ld. Authorised Representative 5 for the Appellant that the Assessing Officer was under obligation to record satisfaction before invoking provisions of Section 14A of the Act. The Hon’ble Supreme Court had, in the case of MaxoppInvestments Ltd. Vs CIT, Delhi : 402 ITR 640 (SC), held 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 beforeapplying the theory of apportionment, the AO needs to recordsatisfaction that having regard to the kind of the assessee, suomoto disallowance under Section 14A was not correct. It will be inthose cases where the assessee in his return has himselfapportioned but the AO was not accepting the said apportionment.In that eventuality, it will have to record its satisfaction to thiseffect. Further, while recording such a satisfaction, nature of loantaken by the assessee for purchasing the shares/making theinvestment in shares is to be examined by the AO.
9. As held by the Hon‟ble Supreme Court, the Assessing Officerought to have recorded satisfaction, having regard to theaccounts of the Appellant, that the suo-motu disallowanceoffered 6 by the Appellant was not correct. In the present casethe Appellant had not claimed deduction for expenses incurredfor earning exempt income which were debited to the CapitalAccount of the Appellant. Thus, in effect, the Appellant hadsuo- motu offered disallowance in respect of the aforesaidexpenses. The Assessing Officer acted in a mechanical mannerwithout recording satisfaction under Section 14A(2) of the Actas mandated by the judgment of the Hon‟ble Supreme Court inthe case of Maxopp Investments Ltd. (supra) and therefore, wehold that the Assessing Officer incorrectly invoked theprovisions of Section 14A of the Act read with Rule 8D of theRules.
10. In view of the above, we overturn the order, dated 28.10.2022,passed by CIT(A) and delete the addition of INR 3,84,418/-made by the Assessing Officer by incorrectly invoking theprovisions of Section 14A of the Act read with Rule 8D of theRules.
In the result, the present appeal is allowed.”
After having gone through the orders passed by the coordinate bench in assessee’s own case (supra),we are of the view that under the identical facts, ITAT has deleted the 7 additions made by the AO under section 14 A, read with Rule 8D, Therefore, keeping in view, the principles of judicial discipline and consistency, we apply the same findings in the facts of the present case and delete the additions made by the Ld.AO and restricted by the Ld. CIT(A) by incorrectly invoking the provisions of section 14 A of the Act read with Rule 8D of the Rules.
In the result the appeal filed by the assessee is allowed.