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Income Tax Appellate Tribunal, DELHI BENCH: ‘G’: NEW DELHI
Before: SHRI AMIT SHUKLA & SHRI ANADEE NATH MISSHRA
appellate order dated 21.10.2015 of learned Commissioner of Income Tax (Appeals)-22, New Delhi. The grounds of appeal are as under:-
1. That order made u/s 250 of the Income Tax Act dated 21.10.2015 by the learned CIT(A)-22 is erroneous in nature as he has confirmed the order of Ld. AO who made additions u/s 14A in the total income of the assessee company.
2. That addition u/s 14A of the Act was made by making disallowance of Rs. 7,10,476/- against the total expenditure of Rs. 8,69,681/- which is quite unjustified and is bad in law. 3. That the learned CIT(A) has erred in law by affirming the disallowance made by AO amounting to Rs. 7,10,476/- over and above the disallowance already made by the assessee company under section 14A of the Act, ignoring the basic fact that no expenses had been incurred for earning exempt income.
ITA No: - 6679/Del/2015 [A.1] The assessee also filed an additional grounds of appeal during appellate proceedings in Income Tax Appellate Tribunal which are as under:-
1. Whether the Ld. AO has gravely erred in making a disallowance / addition under Section 14A of the Act without complying with the express legal mandate of ‘recording of satisfaction’ before making the impugned disallowance/addition? 2. Whether the Ld. CIT(A) can cure the defect of non- compliance of the express legal mandate by the Ld. AO in not recording of satisfaction before making disallowance under Section 14A of the Act; by supplying reasons/satisfaction in the Appellate Order?
[B] The only issue involved in this appeal is disallowance made by the Assessing Officer under section 14A of the Income Tax Act read with Rule 8D of I.T. Act. The assessee had suo moto made a disallowance of an amount of Rs. 1,59,205/- under section 14A of the I.T. Act. The Assessing Officer, however, computed a further disallowance amounting to Rs. 7,10,476/-. The total expenditure debited in the profit and loss account was Rs. 8,69,681/- out of which the appellant had made a suo moto disallowance of Rs. 1,59,205/- which left a balance as of Rs. 7,10,476/-. After the further aforesaid disallowance of Rs. 7,10,476/-, the total amount of all the expenses claimed by the assessee as per Profit & Loss Account (Rs. 8,69,681) stood disallowed by the Assessing Officer.
ITA No: - 6679/Del/2015 The assessee filed appeal before the Commissioner of Income Tax (Appeals). During appellate proceedings before the learned CIT(A), the assessee submitted that all the expenses debited in a profit and loss account stood entirely disallowed as a result of aforesaid disallowance of Rs. 7,10,476/- made by the Assessing Officer and pleaded that this was not just. The assessee also relied on several decided precedents during appellate proceedings before the learned CIT(A), which included the following decisions:-
Wimco Seedings Ltd. Vs. DCIT. 107 ITD 267 (Del) 2. Impulse (India) (P) Ltd. vs. ACIT, 22 SOT 368(Del). 3. Maruti Udyog Ltd. vs. DCIT, 92 ITD 119 (Del). 4. CIT vs. Walfort Share and Stock Brokers (P) Ltd. 326 ITR 1 (SC). 5. CIT vs. Calcutta Agency Ltd. [195] 19 ITR 191. 6. Saraswati Industrial Syndicate Ltd. vs. CIT [1982] 136 ITR 361. 7. The Printers House Pvt. Ltd. in dated 16.04.2009. 8. CIT vs. Hindustan Tin Works Limited in ITA No. 55/2009 dated 13.02.2009. 9. Design Co. Ltd. (presently known as PBC Ventures Ltd.) in ITA No. 803/2008 dated 15.07.2008. 10. Maharashtra Seamless Ltd in ITA No. 4063/D/2006 for assessment year 2003-04 dated 16.12.2010. 11. CLP Power India (P) Ltd. vs. ITO in ITA No. 499/Ahd/2007 for Assessment Year 2003-04 dated 31.10.2011.12. 12. Bombay High Court in the case of M/s Godrej and Boyce Mgf. Co. Ltd. vs. DCIT reported in 328 ITR 81. 13. Maxopp Investment Ltd. vs. CIT in ITA No. 687/2009 dated 18.11.2011.”
[B.1] However, the learned CIT(A) held that the entire disallowance made by the Assessing Officer under section 14A of I.T. Act read with Rule 8D of Income Tax Rules (I.T. Rules for short) was in ITA No: - 6679/Del/2015 accordance with provisions of law; and upheld the disallowance amounting to aforesaid Rs. 7,10,476/-made by the Assessing Officer. Aggrieved, the assessee has filed this present appeal in Income Tax Appellate Tribunal (ITAT for short) against the order of learned CIT(A).
[C] At the time of hearing before us, the learned counsel for the assessee drew our attention to section 14A(2) of Income Tax Act and contended that the Assessing Officer can take recourse to Rule 8D of Income Tax Rules for computing the disallowance under section 14A of Income Tax Act only if the Assessing Officer is not satisfied with the correctness of the quantum of disallowance suo moto made by the assessee under section 14A of Income Tax Act. She further contended that the Rule 8D of Income Tax Rules does not come into operation automatically. She further submitted that Rule 8D is triggered only when the Assessing Officer is not satisfied with correctness of the assessee’s claim on account of suo moto disallowance made by the assessee under section 14A. She further submitted that the Assessing Officer has not expressed, in speaking manner, the reasons in detail for his dissatisfaction with correctness of the claim of the assessee regarding suo moto disallowance under section 14A of the Income Tact Act. In view of these facts, she contended that the further disallowance of aforesaid Rs. 7,10,476/-. For this purpose, the learned counsel for ITA No: - 6679/Del/2015 the assessee relied on order of Coordinate Bench of ITAT Delhi in the case of Azimuth Investments Ltd. vs. ACIT 2016 SCC Online ITAT 2948.
[C.1] On the other hand, CIT(DR) appearing for Revenue supported the orders of the Assessing Officer and the learned CIT(A). He also placed reliance on the following precedents.
1. Indiabulls Financial Services Ltd. vs. DICT [2016] 76 taxmann.com 268 (Delhi)
Godrej & Boyce Manufacturing Company Ltd. vs. DCIT [2017] 81 taxmann.com 111 (SC)/[2014] 247 Taxman 361 (SC)/[2017] 394 ITR 449(SC)/[2017] 295 CTR 121 (SC) 3. Punjab Tractors Ltd. vs. CIT [2017-TIOL-353-HC-P&H-IT] 4. Avon Cycles Ltd. vs. CIT [2015] 53 taxmann.com 297 (Punjab & Haryana)/[2015] 228 Taxman 368 (Punjab & Harayana)(MAG.)
Nahar Spinning Mills Ltd. vs. CIT [2017] 82 taxmann.com 154 (Punjab & Haryana).
Dy. CIT vs. Viraj Profiles Ltd. 156 ITD 72/46 ITR 626/177 TTJ 466 7. NYK Line India Ltd. vs. ACIT [175 TTJ 180 / 132 DTR 7]. 8. Super Auto Forge (P.) Ltd. vs. ACIT (156 ITD 467). 9. Vipin Malik vs. ACIT (45 ITR 589).
[C.2] We have heard both sides and perused the materials on record and considered the precedents brought to our attention by both sides and also the precedents referred to in the records. We find from perusal of the assessment order that although the Assessing Officer has invoked Rule 8D of Income Tax Rules; he has not passed speaking order as to why he is not satisfied with the correctness of the claim of the assessee. He has not pointed out the Page | 5
ITA No: - 6679/Del/2015 defects or inaccuracies in the computation of suo moto disallowance made by the assessee under section 14A of I.T. Act, in speaking manner. He has also not given detailed reasons, in a speaking manner, why he is not satisfied with the correctness of the assessee’s claim in respect of suo moto disallowance made by the assessee under section 14A of Income Tax Act. The Assessing Officer has merely stated in a cryptic summary and non speaking manner that the… disallowance worked out of assessee at Rs. 1,59,205/- “…is not as per provisions on Rule 8D and is therefore not correct.” He seems to be of the view that if the disallowance suo moto made by the assessee is not in accordance with Rule 8D of I.T.
Rules, then it is not correct. However, this view is erroneous, when we peruse section 14A(2) of I.T. Act. The Assessing Officer can invoke Rule 8D of I.T. Rules only after establishing with detailed reasons, through a speaking order, that the amount disallowed suo moto by the assessee is not satisfactory. The Assessing Officer having failed to do this, there is justification for applying Rule 8D is completely absent. In the absence of a speaking order by the Assessing Officer on why he invoked the jurisdiction under Rule 8D of Income Tax Rules, we are of the view that further disallowance of Rs. 7,10,476/- made by the Assessing Officer lacked statutory credentials under section 14A(2) of Income Tax Act. For this view, we respectfully follow the order of Coordinate Bench of ITAT Bench
ITA No: - 6679/Del/2015 Delhi in the case of Azimuth Investments Ltd. vs. ACIT (supra) in which it was held as under:-
"7. We have considered the rival submissions and have perused the record of the case. The short issue is whether the basic functions assigned to the assessing officer in the Act can be discharged by CIT(A) while exercising his coterminous power or not. Section 14A(2) reads as under -:
"14A(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 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."
A bare reading of the aforementioned provision makes it clear that the satisfaction is to be recorded by assessing officer and by no other authority. Under section 251 Ld. CIT(A) in an appeal against an order of assessment is empowered to confirm, reduce, enhance or annul the assessment but if the assessment order suffers from jurisdictional errors then Ld. CIT(A) has no power to correct such jurisdictional errors. The coterminous powers vested in CIT(A) does not imply that he can clothe himself with powers to correct the jurisdictional defects in the assessment order. It is well settled law that where the very initiation of assessment proceedings by the AO was invalid then Ld. CIT(A) cannot direct for making a fresh assessment. The CIT(A) should annul the assessment where the assessment proceeding is a nullity in the sense that the AO had no jurisdiction ab initio to take the proceeding. In the present case the AO could take up the issue regarding disallowance u/s 14A only after recording satisfaction. Non- recording of satisfaction results into creeping of illegality in the assessment order and not a mere irregularity. The jurisdiction of recording satisfaction for invoking section 14A lies with the assessing officer and once he has not recorded such satisfaction then the said basic function of AO which clothes him jurisdiction to make disallowance u/s 14A cannot be usurped by Ld. CIT(A). We, therefore set aside the order of Ld. CIT(A).” Page | 7
ITA No: - 6679/Del/2015
We also take guidance from the order of Hon’ble Supreme Court in the case of Godrej & Boyce Manufacturing Company Ltd. vs. DCIT & Another [2017] 394 ITR 449 (SC) in which it was held as under:-
“…Sub sections (2) and (3) of section 14A of the Act read with rule 8D of the Income Tax Rules, 1962 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 to 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…” (Quoted from Headnotes) [C.2.1] In view of the foregoing, the further disallowance of Rs.
7,10,476/- made by the Assessing Officer under section 14A of I.T.
Act, read with rule 8D of I.T. Rules is hereby deleted. For statistical purposes, the appeal is allowed.
Order pronounced in Open Court on 15.11.2019.