SHARDUL SECURITIES LTD,MUMBAI vs. DY CIT RANGE 3 (3)(1), MUMBAI

to submit that the additional disallowance as made by Ld. AO while computing Book Profit u/s 115JB should also be deleted. Since the additional ground arises from the main ground, the same is admitted. The Ld. DR, on the other hand, submitted that the disallowance has been worked as per the statutory mandate. Our adjudication would be as given in succeeding paragraphs. 3.1 The material facts from case records of AY 2015-16 are that the assessee being resident corporate assessee is stated to be engaged in the business of leasing, finance, investment and advisory services. It earned exempt income of Rs.155.75 Lacs and offered suo-moto disallowance u/s 14A for Rs.6 Lacs. The same has been computed by apportioning salary expenditure, telephone, postage, electricity charges, STT, rent, demat charges as detailed in para 3.1.2 of the impugned order. 3.2 During assessment proceedings, the assessee submitted that, keeping in view assessee’s computations, no further disallowance would be warranted. However, not convinced with assessee’s explanation, Ld. AO computed additional disallowance of Rs.38.99 Lacs u/r 8D(2)(iii) being 0.5% of average investments. The suo-moto disallowance of Rs.6 Lacs was accepted as direct expense disallowance u/r 8D(2)(i). 3.3 During appellate proceedings, the assessee assailed the action of Ld. AO in making the disallowance, inter-alia, by submitting that invocation of Rule 8D was not automatic. The methodology adopted by the assessee was accepted in appellate order for AY 2012-13. However, Ld. CIT(A), distinguishing the facts of AY 2012-13, confirmed the disallowance. Aggrieved, the assessee is in further appeal before us.

The Hon’ble Apex Court in the cited case of Godrej & Boyce Manufacturing Co. Ltd. V/s DCIT (2017 394 ITR 449) held that 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. Further Hon’ble Apex Court in Maxopp Investment Limited V/s CIT (91 Taxmann.com 154) at para-32 observed that it is that expenditure alone which has been incurred in relation to the income which is not includible in total income, is to be disallowed. If expenditure has no casual connection with the exempt income, such expenditure would be an allowable expenditure.

Applying the aforesaid principles to the fact of the present case, we find that Ld. AO has mechanically applied the provisions of Rule 8D(2)(iii) while making the aforesaid disallowance without establishing any nexus of expenditure claimed by the assessee with that of exempt