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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: HON’BLE SHRI AMARJIT SINGH, JM & HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM
O R D E R Manoj Kumar Aggarwal (Accountant Member) 1. The only grievance of the assessee in aforesaid appeals for Assessment Year (AY) 2015-16 & 2016-17 is disallowance u/s 14A. The facts are pari-materia the same in both the years and therefore, the appeals were heard together and are now being disposed-off by way of this common order for the sake of convenience & brevity. 2. The Ld AR submitted that Ld. AO did not recorded objective satisfaction before applying Rule 8D and therefore, the disallowance would not be sustainable in law as per settled legal position. The Ld. AR also advanced without prejudice argument that disallowance should have been computed only with respect to those investments which have yielded exempt income during the year. The assessee has also raised an additional ground of appeal
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.
4. Upon due consideration of material fact, it could be gathered that the assessee is following particular methodology to make the disallowance u/s 14A. There is no change in assessee’s business. The methodology has been accepted in appellate order for AY 2012-13. The assessee has computed the disallowance in a scientific manner which is evident from the following table: - No. Particulars Amount (Rs.) % Disallowance (Rs.)
1. Vidya Puthran (employee) 2,42,000 100% 2,42,000 2. Tarun Chaturvedi (employee) 9,25,000 15% 1,38,750 3. Telephone 1,45,431 15% 21,815 4. Postage & Telegram 1,05,658 15% 15,849 5. Electricity Charges 94,764 15% 14,215 6. Securities Transaction Charges 66,406 100% 66,406 7. Rent for Table space (notional) 90,000 100% 90,000
8. Demat Charges 9,541 15% 1,431 Total 5,90,465 Disallowance offered 6,00,000 However, Ld. AO, without recording objective satisfaction as to why the assessee’s computation were not acceptable, proceeded to compute disallowance as per Rule 8D. It is settled legal position that the application of Rule 8D is not automatic as held by Hon’ble Supreme Court in Godrej & Boyce Manufacturing Co. Ltd. V/s DCIT (2017 394 ITR 449). Upon perusal of assessment order, we find that Ld. AO has failed to record any objective satisfaction as to why the assessee’s stand was not acceptable having regards to the accounts of the assessee as per the mandate of Sec.14A. This jurisdictional requirement was not satisfied by Ld. AO in the present case and Ld.AO straightway proceeded to compute disallowance as per Rule 8D. The application of Rule 8D, in our considered opinion, was not mechanical or automatic.
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