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Facts
M/s Exim Scrips Dealers Pvt. Ltd. appealed against the CIT(A)'s confirmation of an addition made by the AO for disallowance of expenditure related to exempt income under Section 14A read with Rule 8D. The assessee contended that the AO failed to record satisfaction regarding the correctness of their claim before invoking these provisions.
Held
The Tribunal found that no satisfaction was recorded by the Assessing Officer for invoking Section 14A read with Rule 8D. Citing its own past decisions in the assessee's similar cases and judicial precedents, the Tribunal ruled that such an omission makes the application of these provisions invalid, leading to the deletion of the addition.
Key Issues
Whether the Assessing Officer is required to record explicit satisfaction regarding the correctness of the assessee's claim of expenditure in relation to exempt income before applying the provisions of Section 14A read with Rule 8D of the Income Tax Rules.
Sections Cited
14A, 14A(2), 14A(3), 10(34), 10(38)
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Income Tax Appellate Tribunal, “SMC” BENCH KOLKATA
Before: SHRI GEORGE MATHAN
O R D E R This is an appeal filed by the assessee against the order dated 28.03.2025 passed by the ld. Addl./JCIT(A)-1, Bengaluru for the assessment year 2014-2015 2. Shri Siddharth Parekh, ld. AR appeared on behalf of the assessee. Shri Somnath Das Biswas, ld.Sr. DR appeared on behalf of the revenue.
It was submitted by the ld. AR that the only issue in assessee’s appeal was against the action of the ld. CIT(A) in confirming the addition made by the AO in respect of the disallowance of expenditure earned in respect of exempt income by applying the provisions of rule 8D read with the provisions of Section 14A of the Act. It was the submission that the there was no satisfaction recorded for the purpose of invoking the provisions of Section 14A of the Act. It was the submission that on identical circumstances the coordinate bench of this Tribunal in assessee's own case for the assessment year 2008-2009 in vide an order dated 14.12.2016 has in para 6 to 11 held as follows :- 6. We have gone through the record in the light of the law on the aspect. Observations in the order of the Assessing Officer for invoking provisions under section 14A of the Act read with Rule 8D of the Rules are as follows: “Reg: Disallowance u/s 14A of Rs. 11,84,981/- The assessee has earned dividend income u/s10(34) of Rs.48,04,057/- & LTCG u/s 10(38) of Rs. 3,24,18,990/-. Therefore, a query was raised by order-sheet noting dated 08/02/2010 as to why not expenditure related to earning of exempt income be disallowed by following Rule 8D which has been incorporated by Income Tax (%th amendment) Rules, 2008. The assessee submit reply stating – “That we have offered Rs.8,050/- in our computation being the amount of expense related to dividend and disallowed u/s 14A. In our opinion no other expenses can be categorized with earning of dividend.” The reply of the assessee is not accepted. The Hon’ble ITAT (Spl. Bench) Mumbai has already decided in the case of M/s Daga Capital that application of Rule 8D is retrospective in nature. The disallowance u/s 14A as per Rule 8D is as follows:”
It was argued before the Learned CIT (Appeals), as could be seen from his order at page No 3, that while framing the Assessment order the Assessing Officer arbitrarily and mechanically applied Rule 8 D of the IT Rules and disallowed expenses of Rs. 11,93,031/- without recording any dissatisfaction about the correctness of the claim of the assessee and reliance on a decision of a coordinate Bench of this Tribunal in DCIT Versus Ashish Jhunjhunwala, was placed. However, learned CIT(Appeals) observed that, “It may be mentioned that prior to introduction of Rule 8D, jurisdictional bench of Tribunal in a number of cases taken 1% of exempted income to be reasonable estimate for expenditure relatable to exempt income. Even by that yard stick the claim of having incurred expenditure of Rs. 8,050/- in relation to dividend income of Rs. 48,04,057/- and “Long Term Capital Gain” Rs. 3,24,18,990/- appears to be quite meagre. I am, therefore, satisfied that the claim of expenditure incurred and shown by the appellant with regard to the accounts is not correct”.
Basing on this observation of the learned CIT(Appeals), learned DR argues that here is sufficient compliance of recording of satisfaction for invoking provisions under section 14A of the Act read with Rule 8D of the Rules.
On the aspect of recording of satisfaction, Section 14A(2) mandates that the Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if 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 in relation to income which does not form part of the total income under this Act. Rule 8D(1) of the Rules stipulates that for determining amount of expenditure in relation to income not includible in total income, where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). It is, therefore, clear from the provisions of law that when the assessee himself disallowed some amounts in respect of the expenses attributable to the exempt income, Assessing Officer assumes jurisdiction to invoke section 14A of the Act read with Rule 8D of the Rules only when he reaches a conclusion that the claim of expenditure made by the assessee is not correct. He is required by law to record his non-satisfaction having regard to the accounts of the assessee of the previous year, failing which his assumption of jurisdiction under section 14A of the Act read with Rule 8D of the Rules becomes non est in the eye of law.
Our above understanding is fortified by a decision reported in Maxopp Investment Ltd. & ors. Vs. Commissioner of income tax (2012) 247 CTR 0162 (Del) for the principle that even prior to the introduction of sub-ss. (2) and (3), Section 14A would require the AO to first reject the claim of the assessee with regard to the extent of such expenditure, such rejection must be for disclosed cogent reasons and it is only then that the question of determination of such expenditure by the AO would arise. Further, in Commissioner Of Income Tax, Central-I, Calcutta Versus Ashish Jhunjhunwala G.A. No. 2990 of 2013, wherein the Hon’ble Jurisdictional High Court of Calcutta confirmed the following observations of this Tribunal in “While rejecting the claim of the assessee with regard to expenditure or no expenditure, as the case may be, in relation to exempted income, the AO has to indicate cogent reasons for the same. From the facts of the present case, it is noticed that the AO has not considered the claim of the assessee and straight away embarked upon computing disallowance under Rule 8D of the Rules on presuming the average value of investment at ½% of the total value. In view of the above and respectfully following the coordinate bench decision in the case of J.K. Investors (Bombay) Ltd., supra, we uphold the order of CIT (A)”
When law invests a power in an authority subject to his satisfaction as to the existence of certain conditions, it is the satisfaction of that authority as to the existence or non-existence of such conditions alone that legitimates the exercise of power, but not the satisfaction of appellate authority that would relate back to validate the otherwise invalid orders. For the purpose of provisions under section 14A of the Act read with Rule 8D of the Rules, it is a sine qua non that the Assessing Officer 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, which is conspicuous in this matter. We, therefore, have no hesitation to hold that it is the satisfaction of Assessing Officer and Assessing Officer alone that infuses life into the order of Assessment in respect of disallowance of deductions, and none other much less the learned CIT(Appeals) can substitute his opinion for that of the Assessing Officer to validate otherwise invalid order of Assessing Officer. With this view of the matter we hold that the order of the authorities cannot be sustained and the additions made on account of invocation of Section 14A of the Act read with Rule 8D of the Rules shall be deleted. We accordingly allow the appeal.
It was the submission that for the assessment year 2011-2012 similar findings of the coordinate bench of the Tribunal are available in vide an order dated 04.11.2016. As also for the assessment year 2012-2013 vide an order in ITA No.1959/Kol/2016 dated 10.03.2017 and for the assessment year 2015-2016 in ITA No.11/Kol/2019 vide an order dated 07.05.2019. It was the prayer that as there is no satisfaction recorded, therefore, the addition as made by the AO and as confirmed by the ld. CIT(A) is liable to be deleted.
In reply, ld. Sr. DR submitted that the ld. CIT(A) has relied upon the decision of the Hon'ble Delhi High Court in the case of Maxopp Investment Ltd., reported in (2012) 247 CTR 0162 (Del) to confirm the addition. In