JINDAL DYECHEM INDUSTRIES PVT. LTD.,NEW DELHI vs. DCIT, CIRCLE- 13(2), NEW DELHI

Brief facts of the case are that the assessee is a company engaged in the business of trading of bullion & other commodities, toys and stationery items, manufacturing of medallion and wind mill. For the assessment year 2014-15, the assessee filed its return of income on 20.11.2014 declaring loss of Rs.7,85,86,265/- under normal provisions of the Income-tax Act (“the Act” for short) and a loss of Rs.8,30,01,461/- as book loss. While passing the order dated 29.12.2016 u/s. 143(3) of the Act, Assessing Officer made an addition of Rs.4,89,380/- by making disallowance u/s. 14A of the Act read with Rule 8D of the Income Tax Rules.

Aggrieved by such an addition, the assessee preferred appeal before the CIT(A) and argued that the requisite dissatisfaction as to the claim made by the assessee was not recorded by the Assessing Officer and therefore, the addition is bad under law. Learned CIT(A) recorded that the satisfaction recorded by the Assessing Officer, though not very elaborate, is sufficient to invoke Rule 8D. Learned CIT(A), therefore, dismissed the appeal of the assessee.

While referring to the impugned assessmentorder, it is argued by the ld. AR that by looking at the exempt income, the Assessing Officer straightway proceeded to seek explanation of the assessee as to why disallowance u/s. 14A read with Rule 8D should not be made in respect of investments without his recording that the explanation of the assessee was not satisfactory in respect of expenses to earn exempt income. He placed reliance on the decision in the case ofGodrej & Boyce Manufacturing Company Ltd. v. DCIT [2017] 394 ITR 4495 and Maxopp Investment Ltd. v. CIT [2018] 402 ITR 640.

Per contra, it is the submission of the ld. DR that the very act of the Assessing Officer seeking explanation of the assessee as to why the disallowance u/s. 14A read with Rule 8D should not be made, itself shows that the Assessing Officer formed the requisite satisfaction and therefore, the assessee cannot contend that there was no satisfaction formed by the ld. Assessing Officer.

We have gone through the record in the light of submissions made on either side. In the assessment order, ld. Assessing Officer recorded that the assessee furnished all the requisite information/details including the books of account. But the assessment order does not point out specifically as to why, having regard to the books of assessee, the explanation of the assessee cannot be accepted. Assessment order refers to the explanation of the assessee that the assessee company earned dividend income of Rs.8,47,139/- on shares during the year under consideration and in relation to such earnings, they have not incurred any expenditure.

Law this aspect is no longer res Integra and has been settled by the Hon’ble jurisdictional High Court and also the Hon’ble Apex Court. In the case of Godrej & Boyce Manufacturing Company Ltd. v. Deputy Commissioner of Income-tax [2017] 394 ITR 449, analyzing the current provisions of Section 14A and the earlier prevailing provisions of this section, Hon’ble Apex Court observed that the language of Section 14A(2) makes it clear that before applying the theory of apportionment, learned Assessing Officer needs to record its satisfaction that having regard to the accounts of the assessee, the statement of the assessee that no expenses were incurred to earn the exempt income was not correct. Similar was the view taken by the Hon’ble Apex Court in the case of in the case of Maxopp Investment Ltd. v. Commissioner of Income tax [2018] 402 ITR 640. It was held that the sub-sections (2) and (3) of Section 14A read with Rule 8D of the Rules deal with the prescription of 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 learned Assessing Officer is not satisfied with the claim of assessee; that the learned Assessing Officer, basing on the record available before him, had to satisfied himself that the determination of disallowance has to be made on application of formula prescribed under Rule 8D; that what all the law requires is the satisfaction of the learned Assessing Officer that having regard to the accounts of the assessee, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It was concluded that it is only subsequent thereto 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.

In the case of Principal Commissioner of Income Tax v. Vedanta Ltd. [2019] 102 taxmann.com 95, while referring to the decision of Apex Court in Godrej & Boyce Manufacturing Company Ltd. (supra), the Hon’ble jurisdictional High Court held that Rule 8D cannot be invoked and applied unless the learned Assessing Officer records his dissatisfaction regarding the correctness of claim made by assessee in relation to expenditure incurred to earn exempt income.

In the circumstances, we are of the considered opinion that without recording dissatisfaction with reference to the books of assessee, the addition cannot bemade. Hence, the authorities below are directed to delete the addition.

In the result, the appeal of the assessee is allowed.

Order pronounced in the open court immediately on conclusion of the hearing over virtual mode on this the 25thday of February, 2021.