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Income Tax Appellate Tribunal, ‘D’ BENCH: CHENNAI
Before: SHRI MAHAVIR SINGH, HON’BLE & SHRI G. MANJUNATHA, HON’BLE
आदेश / O R D E R PER MAHAVIR SINGH, VICE PRESIDENT:
ITA No.941/Chny/2020
This appeal by the assessee is arising out of the order of the
Commissioner of Income Tax (Appeals)-15, Chennai, in ITA No.280/CIT(A)-
ITA Nos.941 & 942/Chny/2020 :: 2 ::
15/2019-20, dated 24.09.2020. The assessment was framed by the ACIT,
Corporate Circle-6(1), Chennai, for the AY 2017-18, u/s.143(3) of the
Income Tax Act, 1961 (hereinafter “the Act”) vide his order dated
31.12.2019.
The only issue in this appeal of the assessee is as regards to the order
of the Ld.CIT(A) confirming the action of the AO in making disallowance of
expenses relatable to exempt income claimed u/s.10(34) of the Act, by
invoking the provisions of Sec.14A of the Act r.w.r.8D(2)(iii) of the Income
Tax Rules, 1962(hereinafter ‘the Rules’) amounting to Rs.37,17,04,365/-
(which includes the suo moto disallowance made by the assessee
amounting to Rs.10,66,916/-). The assessee first raised the grounds as
regards to recording of satisfaction by the AO in terms of the provisions of
Sec.14A(2) r.w.r.8D(1) of the Rules. For this, the assessee has raised the
following grounds:
The order of the CIT(A) in I.TA. No.280 / 2019 / CIT(A) -15 dated 24.09.2020 is against law and facts of the case.
The CIT(A) erred in confirming part of the disallowance made u/s.14A r.w Rule 8D.
The CIT(A) erred in not appreciating the fact that the entire dividend income was credit to the appellant's bank account under ECS.
The CIT(A) erred in not appreciating the fact that the investments were made not with an intention of earning exempt income but as a matter of commercial expediency and investments in subsidiary companies were made for strategic purposes.
The CIT(A) erred in not appreciating the fact that the appellant is a core investment company and is in the business of investment promotion and therefore sec.14A r.w Rule 8D is not applicable.
The CIT(A) erred in not appreciating the fact that the appellant has already disallowed Rs.10,66,916/- u/s.14A.
The CIT(A) erred in not appreciating the fact that the Assessing Officer has applied rule 8D without recording having regard to the account's of the assessee, as to why he was
ITA Nos.941 & 942/Chny/2020 :: 3 ::
not satisfied with the correctness of the amount disallowed by the appellant of Rs.10,66,916/-. In this connection, the appellant relies on the following decisions: i. Principal CIT Vs Reliance Capital Asset Management Limited (Bombay HC (400 ITR 217)). SLP against this judgment has been dismissed by the Hon'ble SC. SLP(C) No.11379 of 2018 dated 07.09.2018 (259 Taxman 83). ii. Marg Limited Vs CIT [2020] 120 Taxmann.com 84 (Madras) iii. CIT Vs Taikisha Engineering India Ltd (229 Taxman 143) Delhi HC. iv. CIT Vs I P Support Services India P Ltd (378 ITR 240) Delhi HC.
The CIT(A) erred in not appreciating the fact that in the appellant's case the ITAT Chennai in their orders in 1.T.A No.1766 / Chny / 2019 dated 16.12.2019 for the assessment year 2013-14, has deleted the addition made u/s.14A r.w.rule 8D as the Assessing Officer has not recorded any findings as to the correctness or otherwise of the appellant's claim that only expenditure of Rs.73,602/- was incurred to earn exempt income.
Brief facts of the case are that the AO on perusal of financials of the
assessee noted that the assessee company has made investment in shares
of associate and other companies, mutual funds and government securities
and earned dividend income of Rs.240,66,89,000/- from such investment
of Rs.3739,48,95,000/-. The AO noted that the assessee has suo moto
disallowed a sum of Rs.10,66,916/- as expenses relatable to earning of
dividend income. The AO asked the assessee to explain as to why
disallowance made u/s.14A(2) r.w.r.8D of the Rules be not made by
applying formula laid down under Rule 8D of the Rules. The assessee
replied before the AO that the assessee has computed the expenses
relatable to exempt income and made suo moto disallowance amounting to
Rs.10,66,916/- and no other expenses is relatable to exempt income. The
AO accordingly resorted to Rule 8D(2)(i) and (iii) and thereby, disallowed
a sum of Rs.10,66,916/- and Rs.37,06,37,449/- respectively. The AO
disallowed total amount of Rs.37,06,37,449/- excluding the suo moto
disallowance made by the assessee of Rs.10,66,916/-. Aggrieved, the
assessee preferred an appeal before the Ld.CIT(A).
ITA Nos.941 & 942/Chny/2020 :: 4 ::
The Ld.CIT(A) noted that the AO has discussed the details, back
ground and particulars of the assessee’s investment and other details in
this regard and according to him, his satisfaction for necessity to examine
the assessee’s case and bring in it within the scope of the examination for
applying provisions of Sec.14A r.w.r.8D of the Rules, is discernible. The
Ld.CIT(A) rejected the issue of satisfaction by observing in Para No.5.1.3
as under:
“…..5.1.3 The Appellant contended that AO did not record his satisfaction for applying Rule 8D for computation of disallowance. However, the A.O, in the assessment order, discussed in details the background of the case and particulars of Appellant's investment and other details in this regard. From this, his satisfaction for necessity to examine Appellant's case and bring-in it within the scope of examination for applying provisions of sec. 14A r.w.r 8D is discernible. Hence, this objection of the Appellant is not acceptable and hence, dismissed.
In view of the above discussion in para 5.1 above, the AO is directed to re-compute the disallowance u/s.14A as per discussion in para 5.1.1 above in adherence to decisions of judicial authorities as mentioned therein. The Appellant's ground of appeal on the issue related to the disallowance u/s 14A is partly allowed….”.
Aggrieved, the assessee is in appeal before the Tribunal.
Before us, the Ld.Counsel for the assessee argued that the AO has
not gone into the details of expenditure and he has simply applied the
formula prescribed u/r.8D of the Rules and computed the disallowance
under Rule 8D(2)(i) & (iii) of the Rules. The Ld.Counsel for the assessee
took us through the assessment order Para No.5.1, wherein the AO noted
as under:
5.1 On perusal of the financials of the assessee shows that the assessee has investments in shares of associate and other companies, mutual funds and government securities. The assessee has received a dividend income of Rs.240,66,89,000/- from such investments of Rs.3 39,48,95,000/- However the assessee has suo moto disallowed Rs.10,66,916/- as expenses pertaining to earning the above dividend income. However, since disallowance u/s.14A is to be' made by applying the procedural provisions laid down under rule 8D, the assessee was asked to show-cause as to why expenditure in relation to exempted income cannot be disallowed as per u/s 14A r.w.r. 8D.
ITA Nos.941 & 942/Chny/2020 :: 5 ::
In response, the Assessee Company vide letter dated 28/12/2018 has submitted as follows: We hereby clarifying that the AO has not re-produced the assessee’s
explanation submitted vide letter dated 28.12.2018 and this portion of the
order is left blank.
The Ld.Counsel for the assessee took us through Para No.5.3 of the
assessment order, wherein he has interpreted the CBDT Circular issued vide
No.5/2014[F.No.225/182/2013-ITA.II] dated 11.02.2014 and noted that
this circular has clarified Rule 8D r.w.s.14A of the Act, which provides for
disallowance of expenditure, even where taxpayer in a particular year has
not earned any exempt income. According to the Ld.Counsel for the
assessee, Para Nos.5.3 (a) to (e) are dedicated to this issue only that
expenditure has to be disallowed even where the assessee has not earned
any exempt income. The Ld.Counsel for the assessee then took us through
Para No.5.4 which deals with the issue of investment made by the assessee
for acquiring shares of subsidiaries companies with an intention to
consolidate its long term strategic investment or to meet solvency
requirement. The Ld.Counsel for the assessee finally stated vide Para
No.5.6, the AO simpliciter noted that even the disallowance of expenses
relatable to exempt income need to be added even under the provisions of
Sec.115JB of the Act i.e. to the book profit in terms of Explanation-1(f) of
the Act. The AO in Para No.5.6 computed the disallowance by resorting to
the formula provided under Rule 8D as under:
5.6 Disallowance has been made as per the introduction of Rule 8D by the Income Tax (Fifth Amendment) Rules 2008 vide Notification No.25/2008 dated 24.03.2008 and since the
ITA Nos.941 & 942/Chny/2020 :: 6 ::
disallowance relates to expenditure on income exempt u/s 10, the same needs to be added to Book Profit u/s 115JB in terms· of explanation 1 (f).
In view of the above facts, disallowance u/s 14A is made by applying rule 8D which is computed as under:
Rule 8D Disallowance
the amount of expenditure directly relating to income which does not form part of total income = 10,66,916/-
an amount equal to 1% of the annual average of the monthly averages of the opening and closing balances of the value of the investment, income from which does not or shall not form part of total income
Average value of investments =
(opening balance as on 01.04.2016 +
closing balance as on 31.03.2017) / 2 =
(Rs.3694,59,78,000 + Rs.3739,48,95,000/-) / 2 = 3717,04,36,500/-
1 % of average of investments= 37,17,04,365/-
Total disallowance u/s.14A under Rule 8D = Rs.37,17,04,365/-
Total amount disallowed by the assessee = Rs.10,66,916/-
Balance amount to be disallowed = Rs.37,06,37,449/-
[Disallowance Rs.37,06,37,449/-]
The Ld.Counsel for the assessee, in view of the above, stated that
provisions of Sec.14A(2) r.w.r.8D(2)(i) very categorically requires that the
AO first has to satisfyy himself about the correctness of claim made by the
assessee by making suo moto disallowance that the expenses relatable to
exempt income already disallowed by the assessee is sufficient or not and
moreover, he has to record satisfaction qua the amount of expenditure
incurred in relation to such income, which does not form part of total
income under this Act in accordance with such method as prescribed u/r.8D
of the Rules and if the AO having regard to the accounts of the assessee,
is not satisfied with the correctness of claim made by the assessee, in
respect to such expenditure in relation to income which does not form part
ITA Nos.941 & 942/Chny/2020 :: 7 ::
of total income under this Act, in that eventuality only he has to resort to
the formula prescribed u/r.8D of the Rules. The Ld.Counsel for the
assessee also took us through Rule 8D(1), which also mandates recording
of satisfaction by the AO for invoking of formula prescribed under rule 8D
of the Rules. The Ld.Counsel for the assessee stated that this issue is
squarely covered by the decision of the Hon’ble Supreme Court in the case
of Maxopp Investment Ltd. v. CIT reported in [2018] 402 ITR 640 (SC) and
also the decision of the Hon’ble Bombay High Court in the case of Godrej &
Boyce Mfg. Co. Ltd. v. DCIT [2010] 328 ITR 81 (Bom). The Ld.Counsel for
the assessee stated that the AO has not at all recorded his satisfaction
having regards to correctness of the accounts of the assessee as to how
the expenses relatable to exempt income are not allowable and which are
those expenses. In terms of the above, the Ld.Counsel for the assessee
stated that there is no satisfaction recorded by the AO and once, there is
no satisfaction recorded as regards to the correctness of claim made by the
assessee qua accounts of the assessee, the disallowance made is to be
deleted as the same is bad in law.
On the other hand, the ld.CIT-DR, Dr.S.Palani Kumar took us through
Para No.5.1 of the assessment order and Para No.5.6 (which we already
re-produced herein above Para Nos.7) and stated that the issue is squarely
covered by the decision of the Hon’ble Delhi High Court in the case of
Indiabulls Financial Services Ltd. v. DCIT reported in [2016] 76
taxmann.com 268 (Delhi), wherein, the Hon’ble Delhi High Court held that,
ITA Nos.941 & 942/Chny/2020 :: 8 ::
according to him, where the AO after carrying out elaborate analysis and
following steps enacted in statute, had determined amount of expenditure
incurred for earning tax exempt income, merely because he did not
expressly recorded his dissatisfaction about assessee’s calculation, his
conclusion could not be rejected and this issue is decided in favour of the
Revenue. The ld.CIT-DR stated that the AO has recorded satisfaction after
analyzing all the details. On a query from the Bench, the CIT-DR could not
point out from the assessment order that where is that analysis carried out
by the AO. He could not reply.
We have heard rival contentions and gone through the facts and
circumstances of the present case. We have also perused the case laws
cited by both the sides and material placed before us including assessment
order and the order of CIT(A). We noted that the AO in Para No.5.1 has
simply issued show cause notice, as to why, the expenditure in relation to
exempt income cannot be disallowed as per Sec.14A r.w.r.8D of the Rules
and then he resorted to the disallowance of expenses relatable to exempt
income by invoking formula prescribed u/r.8D of the Rules vide Para No.5.6
(both paras are re-produced hereinabove in this order at Para No.7) as
pointed out by the Ld.Counsel for the assessee on a specific query whether
the copy of show cause notice issued by the AO is available, he referred to
his Paper Book consisting of Pages 1-166 and particularly, he drew our
attention to Page No.34, where show cause notice issued is enclosed and
ITA Nos.941 & 942/Chny/2020
:: 9 ::
the relevant queries raised by the AO in the show cause notice reads as
under:
Government of India Ministry of Finance Income Tax Department Office of the Assistant Commissioner of Income Tax Corporate Circle-6(1), Chennai To Shriram Capital Ltd., 4, Shriram House, Burkit Road, T.Nagar, Chennai-600 017, Tamil Nadu, India . PAN: AY: DIN & Notice No. Dated: Hearing Date & AABCS 2017-18 ITBA/AST/F/143(3)(SCN)/2019- 28.12.2019 Time: 2726 B 20/1023343877(1) 30.12.2019 10:00 AM
SHOW CAUSE NOTICE
On perusal of your financials, it is seen that you have made payment to Shriram Ownership Trust for Artistic copy Right Fee of Rs.5,41,49,057/-. Hence, please explain the purpose of your payment and so as to why it should not be treated as capital in nature as per provision of section 32.
In light of above observations please furnish the following:
Q.1 Why recent judgement passed by the Hon'ble Supreme Court of India in the case of Maxopp Investment vs CIT [2018] 91 Taxmann.com154 (SC) should not be applied for calculating 14A disallowance in your case based on the Theory of apportionment as enumerated in the case law cited supra?
Chandan Kumar Corp. Circle-6(1), Chennai
The Ld.Counsel for the assessee produced copies of the assessee’s
reply vide letter dated 28.12.2019, whereby the assessee filed entire
details of expenses before the AO along with investments made which are
enclosed in assessee’s Paper Book at Page Nos.37-41 and also filed
computation of income at Pages Nos.1-33, he referred to particular Page
No.3, where disallowance of expenditure u/s.37 and particularly relatable
to exempt income disallowed u/s.14A is Rs.10,66,916/-. The Ld.Counsel
for the assessee brought to our notice that all these details were before the
AO and even the AO called for the books of accounts which were produced
ITA Nos.941 & 942/Chny/2020 :: 10 ::
during the course of scrutiny assessment proceedings and this fact is noted
by the AO in Para No.3 which reads as under:
The submissions of the assessee company have been duly considered. On the basis of submissions of the assessee paid on verification of books of accounts and in view of the facts & circumstances of the case, the assessment is completed as under:
We noted that the assessee has made disallowance of expenses
relatable to exempt income suo moto at Rs.10,66,916/- and the AO
simpliciter relying of Rule 8D issued show cause notice which does not
carry out any analysis or exercise as noted by the Hon’ble Delhi High Court
in the case of Indiabulls Financial Services Ltd. (supra) and even from the
assessment order, we noted from Para Nos.5.1 & 5.6 that the AO simpliciter
adopted the formula prescribed under Rule 8D of the Rules without
recorded any finding as to correctness of claim made by the assessee qua
the expenses relatable to exempt income.
Now as argued by both the sides, we have gone through the
provisions of Sec.14A of the Act and the relevant provisions i.e. Sec.14A
(1) to (3) reads as under:
(1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred79a by the assessee in relation to income which does not form part of the total income under this Act.
(2) 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 prescribed80, 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.
(3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act:
ITA Nos.941 & 942/Chny/2020 :: 11 ::
Similarly, we have gone through the Rule 8D(1) which provides when
the AO can exercise this power before invoking of formula, he has to record
satisfaction as regards the correctness of claim expenditure made by the
assessee. The relevant Rule 8D(1) reads as under:
“…..(1) 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 provision of sub-rule (2)….”. 15. On perusal of the provisions of Sec.14A of the Act, more specifically
sub-section 2 & 3 makes it clear that if the AO is not satisfied with the
correctness of the claim of the assessee, then the AO shall determine the
amount of expenditure incurred in relation to such income, which does not
form part of total income under this Act. We noted that for the purpose of
computation of disallowance a formal method is prescribed u/r.8D(2)(i) the
direct expenses, (ii) the interest disallowance and (iii) the administrative
expenses i.e.0.5% of average value of investments. The provisions of
Sec.14A(3) specifies the applicability of the provisions of Sec.14A(2) of the
Act, where the assessee makes a claim that there is no expenditure
incurred, but the provisions of Sec.14A(2) makes it clear that where the
assessee makes disallowance u/s.14A of the Act, in its computation of total
income while filing return of income, then after satisfying the conditions
mentioned the AO should be satisfied having regard to the Accounts of the
assessee with the correctness of the claim of the assessee in respect of
ITA Nos.941 & 942/Chny/2020 :: 12 ::
such expenditure in relation to income, which does not form part of total
income under this Act. In this situation, the AO can make disallowance
u/s.14A of the Act r.w.rule 8D of the Rules. Thus, according to the above
provisions of Sec.14A where the assessee makes a claim that there is
expenditure relatable to exempt income and he makes disallowance i.e. suo
moto disallowance u/s.14A of the Act, if the AO proposed to invoke
Sec.14A, he has to record satisfaction. That this satisfaction cannot be plain
or simple satisfaction or simply invoking the formula prescribed u/r.8D(2),
but it is to be done with regard to the analysis carried out on the accounts
of the assessee.
The Hon’ble Supreme Court in the case of Maxopp Investment Ltd.
(supra) has considered this issue and finally at Para No.41, 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 before applying the theory of apportionment, the AO 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 AO 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, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO.
We also gone through the case law cited by the ld.CIT-DR, Dr.S.Palani
Kumar, of Hon’ble Delhi High Court in the case of India Bulls Finance Ltd.
(supra), wherein the Hon’ble High Court has discussed in Para No.8 that
AO has carried out elaborate analysis in regard to the expenditure incurred
by the assessee in relation to exempt income and the Hon’ble High Court
has recorded this finding in Para No.8 as under:
“….8. In this instance the elaborate analysis carried out by the AO - as indeed the three important steps indicated by him in the order, shows that all these elements were present
ITA Nos.941 & 942/Chny/2020 :: 13 ::
in his mind, that he did not expressly record his dissatisfaction in these circumstances, would not per se justify this Court in concluding that he was not satisfied or did not record cogent reasons for his dissatisfaction to reject the AO's conclusion. To insist that the AO should pay such lip service regardless of the substantial compliance with the provisions would, in fact, destroy the mandate of Section 14A….”.
Further, the reliance placed by Ld.Counsel for the assessee on the
decision of the Hon’ble Bombay High Court in the case of Godrej & Boyce
Mfg. Co. Ltd. (supra), the Hon’ble Bombay High Court has considered the
issue recording of satisfaction as under:
“….33. Under sub-section (2), the Assessing Officer is required to determine the amount of expenditure incurred by an assessee in relation to such income which does not form part of the total income under the Act in accordance with such method as may be prescribed. The method, having regard to the meaning of the expression 'prescribed' in Section 2(33), must be prescribed by rules made under the Act. What merits emphasis is that the jurisdiction of the Assessing Officer to determine the expenditure incurred in relation to such income which does not form part of the total income, in accordance with the prescribed method, arises if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of the expenditure which the assessee claims to have incurred in relation to income which does not part of the total income. Moreover, the satisfaction of the Assessing Officer has to be arrived at, having regard to the accounts of the assessee. Hence, Sub section (2) does not ipso facto enable the Assessing Officer to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income is correct. The Assessing Officer must, in the first instance, determine whether the claim of the assessee in that regard is correct and the determination must be made having regard to the accounts of the assessee. The satisfaction of the Assessing Officer must be arrived at on an objective basis. It is only when the Assessing Officer is not satisfied with the claim of the assessee, that the legislature directs him to follow the method that may be prescribed. In a situation where the accounts of the assessee furnish an objective basis for the Assessing Officer to arrive at a satisfaction in regard to the correctness of the claim of the assessee of the expenditure which has been incurred in relation to income which does not form part of the total income, there would be no warrant for taking recourse to the method prescribed by the rules. For, it is only in the event of the Assessing Officer not being so satisfied that recourse to the prescribed method is mandated by law. Sub section (3) of Section 14A provides for the application of sub section (2) also to a situation where the assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under the Act. Under the proviso, it has been stipulated that nothing in the section will empower the Assessing Officer, for an Assessment Year beginning on or before 1 April 2001 either to reassess under Section 147 or pass an order enhancing the assessment or reducing the refund already made or otherwise increasing the liability of the assessee under Section 154.
The circumstances in which the provisions of sub sections (2) and (3) were introduced by an amendment have been adverted to in a circular of the CBDT dated 28 December 2006.11 The circular notes that in the existing provisions of Section
ITA Nos.941 & 942/Chny/2020 :: 14 ::
14A no method for computing the expenditure incurred in relation to income which does not form part of the total income had been provided. As a result, there was a considerable dispute between tax payers and the Revenue on the method of determining such expenditure. In this background, sub section (2) was inserted so as to make it mandatory for the Assessing Officer to determine the amount of expenditure incurred in relation to income which does not form part of the total income in accordance with the method that may be prescribed. The circular, however, reiterates that the Assessing Officer has to follow the prescribed method if he is not satisfied with the correctness of the claim of the assessee having regard to the accounts of the assessee…”.
Even, the Hon’ble jurisdictional High Court in the case of Marg Ltd. v.
CIT reported in [2020] 120 taxmann.com 84 (Madras), had considered the
issue on satisfaction and held that the disallowance u/r.8D of the Rules
r.w.s.14A of the Act, can be computed only after recording satisfaction by
the AO in terms of provisions of Sec.14A r.w.r.8D of the Rules. The Hon’ble
jurisdictional High Court held in Para Nos.21 & 22 are as under:
We cannot approve even the larger disallowance proposed by the Assessee himself in the computation of disallowance under Rule 8D made by him. These facts are akin to the case of Pragati Krishna Gramin Bank (supra) decided by Karnataka High Court. The legal position, as interpreted above by various judgments and, again reiterated by us in this judgment, remains that the disallowance of expenditure incurred to earn exempted income cannot exceed exempted income itself and neither the Assessee nor the Revenue are entitled to take a deviated view of the matter. Because as already noted by us, the negative figure of disallowance cannot amount to hypothetical taxable income in the hands of the Assessee. The disallowance of expenditure incurred to earn exempted income has to be a smaller part of such income and should have a reasonable proportion to the exempted income earned by the Assessee in that year, which can be computed as per Rule 8D only after recording the satisfaction by the Assessing Authority that the apportionment of such disallowable expenditure under section 14A made by the Assessee or his claim that no expenditure was incurred is validly rejected by the Assessing Authority by recording reasonable and cogent reasons conveyed to Assessee and after giving opportunity of hearing to the Assessee in this regard.
We, therefore, dispose of the present appeal by answering question of law in favour of the Assessee and against the Revenue and by holding that the disallowance under rule 8D of the IT Rules read with Section 14A of the Act can never exceed the exempted income earned by the Assesee during the particular assessment year and further, without recording the satisfaction by the Assessing Authority that the apportionment of such disallowable expenditure made by the Assessee with respect to the exempted income is not acceptable for reasons to be assigned the Assessing Authority, he cannot resort to the computation method under Rule 8D of the Income-tax Rules, 1962.
ITA Nos.941 & 942/Chny/2020 :: 15 ::
As in the present case before us, we noted from the assessment order
and the order of the CIT(A) that there is no discussion about any
expenditure which is relatable to exempt income and how the AO recorded
the satisfaction and in our considered view, the AO has not carried out any
analysis of the accounts or he has not gone into the accounts despite
complete books of accounts were produced before him and has not rejected
the disallowance suo moto offered by the assessee. Hence, according to
us, the mandate given by the provisions of Sec.14A(2) and Rule 8D(2) of
the Rules, as regards to recording of satisfaction by the AO qua correctness
of the accounts of the assessee for the expenditure claimed qua exempt
income is absent and hence, on this very issue, we reverse the order of the
lower authorities and allow this jurisdictional issue in favour of the
assessee.
The assessee has raised alternative ground in merits also. Since, we
have adjudicated the issue on jurisdiction i.e. recording of satisfaction by
the AO and allow the assessee’s ground on jurisdiction, we need not go into
the merits of the case.
In the result, the appeal filed by the assessee is allowed partly.
ITA No.942/Chny/2020
This appeal by the assessee arising out of order of the Commissioner
of Income Tax(Appeals)-15 dated 24.09.2020. Assessment was framed by
ITA Nos.941 & 942/Chny/2020 :: 16 ::
ACIT, Corporate Circle-6(1), Chennai, for the AY 2017-18, u/s.143(3) of
the Act, vide order dated 31.12.2019.
Brief facts of the case are that the assessee has earned dividend
income of Rs.56,15,64,867/- from the investments made of
Rs.2128,40,84,000/- and the assessee has suo moto make disallowance of
Rs.17,925/- pertaining to the exempt income. The AO on perusal of the
financials, issued show cause notice, as to why, expenditure in relation to
exempt income be disallowed as per provisions of Sec.14A r.w.r.8D(2)(iii).
The AO by applying the formula as prescribed u/r.8D(2)(iii), made
disallowance of administrative expenses being on average value of
investment of Rs.21,22,52,055/- by observing as under:
In view of the above facts, disallowance u/s.14A is made by applying rule 8D which is computed as under: Rule 8D Disallowance
the amount of expenditure directly relating to income which does not form part of total income = NIL
an amount equal to 1% of the annual average of the monthly averages of the opening and closing balances of the value of the investment, income from which does not or shall not form part of total income
Average value of investments = (opening balance as on 01.04.2016 +
closing balance as on 31.03.2017)/ 2
= 2116,63,27,000/- + Rs.2128,40,84,000/-) / 2
= 2122,52,05,500/-
1% of average of investments = Rs.21,22,52,055/-
Total 14A disallowance under Rule 8D = Rs.21,22,52,055/-
However, the Assessing Officer restricted the total disallowance to the
extent of total expenditure claimed in the P & L A/c by the assessee to the
ITA Nos.941 & 942/Chny/2020 :: 17 ::
extent of Rs.5,65,000/- and by giving credit for suo moto disallowance of
Rs.1,05,588/-, he worked the disallowance of remaining expenses at
Rs.4,60,181/-.
Aggrieved, the assessee preferred an appeal before the Ld.CIT(A)
and the Ld.CIT(A) also confirmed the action of the AO on the issue of
recording of satisfaction by observing in Para No.5.1.2 as under:
5.1.2 The Appellant contended that A.O did not record his satisfaction for applying Rule 8D for computation of disallowance. However, the A.O, in the assessment order, discussed in details the background of the case and particulars of Appellant's investment and other details in this regard. From this, his satisfaction for necessity to examine Appellant's case and bring it within the scope of examination for applying provisions of sec. 14A r.w.r 8D is discernible. Hence, this objection of the Appellant is not acceptable and hence, dismissed. 26. The Ld.Counsel for the assessee as well as the ld.CIT-DR, both agreed
that the issue is exactly identical in the present appeal also as is in ITA
No.941/Chny/2020. Since, the facts and circumstances are exactly
identical except the quantum of disallowance u/r.8D(2)(iii) and both the
parties have extensively argued and we have already taken a decision
exactly on identical facts, wherein, we have quashed the orders of the lower
authorities on the issue of satisfaction not recorded by the AO. In the
present case also, the AO as well as the ld.CIT(A) passed identically worded
orders and assesees’ grounds are also identically worded. Hence, taking a
consistent view, we allow the appeal of the assessee on the issue of
jurisdiction i.e. non-recording of satisfaction by the AO for making
disallowance u/r.8D(2)(iii) of the Rules.
ITA Nos.941 & 942/Chny/2020 :: 18 ::
The assessee has raised alternative ground in merits also. Since, we
have adjudicated the issue on jurisdiction i.e. recording of satisfaction by
the AO and allow the assessee’s ground on jurisdiction, we need not go into
the merits of the case.
In the result, the appeal filed by the assessee is allowed partly.
In the final result, appeals in ITA Nos.941 & 942/Chny/2020 are
partly allowed.
Order pronounced on the 29th day of July, 2022, in Chennai.
Sd/- Sd/- (जी. मंजूनाथा) (महावीर िसंह) (G. MANJUNATHA) (MAHAVIR SINGH) लेखा सद�य/ACCOUNTANT MEMBER उपा�� /VICE PRESIDENT
चे�ई/Chennai, �दनांक/Dated: 29th July, 2022. TLN आदेश क� �ितिलिप अ�ेिषत/Copy to: 1. अपीलाथ�/Appellant 4. आयकर आयु�/CIT 2. ��यथ�/Respondent 5. िवभागीय �ितिनिध/DR 3. आयकर आयु� (अपील)/CIT(A) 6. गाड� फाईल/GF