DXC TECHNOLOGY INDIA PVT LTD,INDORE vs. DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE 1(1), INDORE, INDORE

आदेश/ O R D E R

Per B.M. Biyani, A.M.:

Page 1 of 19 AY 2017-18 “1. That on the facts and circumstances of the case and in law, the Commissioner of Income tax (Appeals)-National Faceless Appeal Centre, Delhi ("the CIT(A)-NFAC") has erred in upholding the disallowance of Rs. 7,27,84,216/- under section 14A of the Income tax Act, 1961 ("the Act") r/w Rule 8D of Income tax Rules, 1962 ('the Rules').

2. That on the facts & circumstances of the case and in law, the CIT(A)-NFAC has erred in holding that the satisfaction required to be recorded by the Assessing Officer under section 14A(2) of the Act was properly recorded. Mere reference to the amount of investment in shares & mutual funds yielding dividend, Circular No. 5/2014 dated 11.2.2014 and Notification 43/2016 dated 2.6.2016 is no satisfaction particularly because expenditure suo-moto disallowed was neither adjudicated nor adversely commented upon. 2.1 That on the facts & circumstances of the case and in law, the CIT(A)-NFAC has failed to appreciate that the Assessing Officer invoked Rule 8D even before recording requisite satisfaction based on examination of accounts as to the correctness of claim of suo-moto disallowance.

3. That on the facts & circumstances of the case and in law, the CIT(A)-NFAC in upholding disallowance of Rs. 7,27,84,216/- u/s 14A r/w Rule 8D did not appreciate that: (a) Since the Appellant out of 'employee benefit expense' had disallowed salary of the employees of treasury branch, therefore, proportionate disallowance out of same expense head as expenditure indirectly attributable to earning of exempt income was not called for, more-so because mutual funds investment was in growth funds, where the dividend is automatically reinvested without any effort of the investor (the Appellant). (b) Out of 'other expenses' of Rs. 587.38 Cr., expenditure of Rs. 496.54 Cr. was incurred on (i) rent (ii) repairs & maintenance (iii) travelling & conveyance (iv) technical services (v) corporate charges (vi) printing & stationery (vii) provisions for doubtful trade and receivable and (vii) foreign currency loss, which per- se are not related to earning of dividend income. (c) All the investments were made out of own funds. No investment was made out of borrowed funds, as is evident from Note 13 to the Balance Sheet under the head other financial liabilities, Further, during the relevant previous year, the finance cost was only Rs. 0.33 Cr (Note 21 to the Balance sheet).

4. That on the facts & circumstances of the case and in law, the CIT(A)-NFAC has erred in not appreciating that the Assessing officer except for mechanically applying Rule 8D, has failed to establish nexus between the expenditure and dividend income.”

Section 14A – Expenditure incurred in relation to income not includible in total income 14A.(1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act.

Page 3 of 19 AY 2017-18 (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. (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:” Rule 8D – Method for determining amount of expenditure in relation to income not includible in total income: (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 provisions of sub-rule (2). (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:- (i) the amount of expenditure directly relating to income which does not form part of total income; and (ii) an amount equal to one per cent of the annual average of the monthly average of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income: Provided that the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure claimed by the assessee. [Emphasis supplied]

“Disallowance under rule 8D r.w.s 14A:- 3.1 During the course of assessment proceedings, on perusal of balance sheet, it was found that the assessee company had invested in mutual funds from which income earned from investment which is not forming part of the taxable income. Therefore, vide notice u/s 142(1) dated 14.11.2019,

Page 4 of 19 AY 2017-18 assessee was asked to explain as to why for earning exempt income, disallowance as per section 14A read with rule 8D may not be made. The assessee had submitted its reply on 16.12.2019 stating that the company had suo moto disallowed Rs. 31,97,455/- under normal provision as well as book profit u/s 115JB. However, the disallowance suo moto made by the assessee was not found complete. The other grounds raised by the assessee have also been considered and were not found to be forceful. Therefore, the disallowance u/s 14A is further called for as per all limbs of Rule 8D. 3.2 On perusal of balance sheet of the assessee company, it was noticed that the assessee had shown total investment of Rs. 1006,54,16,396/- as on March 31, 2017 in shares and mutual funds yielding exempt dividend income. As per section 14A, expenditure incurred for earning income not forming the part of total income is not be allowed in computing the total income of the assessee. The method for determining of expenses to be disallowed is prescribed under Rule 8D of the Income Tax Rules, 1962. Rule 8D, as amended by Notification 43/2016 dt June 2, 2016 issued by CBDT, provides as under:- XXX (Rule 8D already re-produced by us in foregoing para) 3.3 The assessee has argued in its reply that all limbs of u/s 14A r.w.r 8D were not applicable in this case referring judgment of various Court's order. The reply of the assessee was considered but found not acceptable because: (i) Rule 8D was brought especially to compute the proportionate disallowance as indirect expenses. Hence, even though there is no direct expenditure in earning exempt income, rule 8D is applicable for computing indirect expenses incurred for earning such income. (iii) CBDT's Circular no. 5/2014 dated 11.02.2014 provides that Rule 8D r.w.s 14A provides for disallowance of expenses even when a tax payer has not earned any exempt income in a particular year. However, in this case, assessee has claimed exempt income of Rs. 33,93,37,816/- as dividend income in the ITR filed. 4.4. Hence, I am satisfied that in this case provisions of section 14A read with rule 8D are applicable. The calculation of disallowance made u/s 14A read with rule 8D is as under: Para of Particulars Values (in Rs.) Disallowance (in rule 8D Rs.)

2(i) Expenditure 31,97,455/- directly related to exempt income 2(ii) B Annual average of 727,84,21,647/- 1% 7,27,84,216/ the monthly average of the of B - opening and Page 5 of 19 4.5 Since, the assessee has made suo-moto disallowance of Rs. 31,97,455/- in its computation of income, therefore, difference amount of Rs. 7,27,84,216/- (7,59,81,672 - 31,97,455) is hereby further disallowed u/s 14A read with rule 8D and added to the total income of the assessee company for A.Y. 2017-18. I am satisfied that the assessee has under reported its income and therefore, penalty proceeding u/s. 270A of the Act is initiated for under reporting of income. Addition - Rs.7,27,84,216/-”

“5.2 I have perused the assessment order, grounds of appeal, submission filed by the appellant and arguments made by the appellant during VC. The appellant has contended that the satisfaction recorded by the AO in para 4.4 of the assessment order is vague and not as per law since the satisfaction is recorded in a very general manner without making any references to the accounts of the appellant. The appellant by relying on various decisions including decision of jurisdictional Hon'ble High Court in the case of CIT vs. Taikisha Engineering India Ltd (2015) 370 ITR 338 and decision of Hon'ble Supreme Court of India in the case of Godrej & Boyce Mfg. Co Ltd vs. Dy CIT (2017) 394 ITR 449 has claimed that without making reference to the accounts, satisfaction cannot be recorded by the AO. Secondly the appellant has claimed that it had voluntarily disallowed the entire salary expenses of the two employees of Rs. 31,97,455/- which was directly relating to exempt income. I find from the assessment order that the satisfaction for invoking the provisions of section 14A and Rule 8D(2)(ii) starts from para 3.1 on page 2 of the assessment order. The relevant portion of the assessment order is reproduced as under – XXX (Paras 3.1, 3.2, 3.3 and 4.4 of assessment-order already re-produced above) From the above discussion made in the assessment order, I find that the AO has recorded the satisfaction properly by making reference to the accounts of the appellant, hence the contention of the appellant is not found acceptable.

Page 6 of 19 AY 2017-18 I find that with effect from 2-6-2016, the method of computation of disallowance u/s 14A r.w.s. Rule 8D has been modified as under- XXX (Rule 8D already re-produced by us in foregoing para) As per Rule 8D, disallowance u/s 14A will be of (i) Expenditure directly related to exempt income; and (ii) 1% of the annual average of the monthly average of the opening & closing balances of investment, income from which does not or shall not form part of total income. Total disallowance u/s 14A read with Rule 8D shall not exceed the total expenditure claimed by the assessee. I find that once the computation of disallowance made by the appellant is found unsatisfactory by the AO, the AO has no other alternative but to compute the disallowance as per the method prescribed in Rule 8D(2)(ii) of the IT Rules as discussed above. In the regard, reliance is placed on the decision of Hon'ble Supreme Court of India in the case of Maxopp Investment Ltd wherein it is held as under – “where the disallowance or 'nil' disallowance made by the assesse is found to be unsatisfactory on examination of accounts, the assessing officer is entitled and authorised to compute the deduction under Rule 8D of the Rules". I find that the disallowance made by the AO in the present case does not exceed the total expenditure or even exempt income. However, the appellant in para 8 of its submission claimed that in computing the average value of investments, only the investments which actually yield exempt income has to be considered. In para 8.1 of its submission, the appellant claimed that the investment of Rs. 20.12 crores has to be excluded in arriving value of annual average of investments since no exempt income was received from the investment of Rs. 20.12 crores made in XSL Ltd. The argument of the appellant is found acceptable in principle. Therefore, the AO is directed to re- compute the average value of investment after due verification of the contention of the appellant and revise the disallowance accordingly. I find that the facts of the other decisions relied upon by the appellant are not identical to the facts of present case, therefore the contention of the appellant is not found acceptable. In view of the above discussion, the grounds of appeal raised by the appellant are partly allowed.”

7. During hearing before us, Ld. AR for assessee attacked the orders of lower-authorities by advancing his first and foremost contention (as is raised

Page 7 of 19 filing return of income disallowed salary of two employees of treasury function amounting to Rs. 31,97,455/- incurred for earning impugned tax- free dividend. However, the AO has mechanically applied Rule 8D(2) to compute disallowance at Rs. 7,59,81,672/- and thereby made a further disallowance of Rs. 7,27,84,216/-. Ld. AR submitted that the section 14A(2) clearly prescribes that the AO shall determine the amount of expenditure in accordance with prescribed method only, 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 expenditure in relation to income which does not form part of the total income. Similarly, Rule 8D(1) also prescribes that where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with the correctness of the claim of expenditure made by the assessee in relation to income which does not form part of the total income under the Act, then only the AO shall determine the amount of expenditure in relation to such income in accordance with sub-rule (2) of Rule 8D. Thus, both section 14A(2) as well as Rule 8D(1) are very much clear and loudly prescribe that ‘the AO should not be satisfied with the correctness of the claim of assessee in respect of expenditure incurred for earning tax-free income’ and the AO must derive such dis-satisfaction ‘having regard to the accounts of assessee’, then only the AO can apply the methodology prescribed in Rule 8D(2).

Page 8 of 19 to assessee vide notice dated 14.11.2019 (Page 80 of Paper-Book):

“14. Please furnish working of expenses debited in P&L A/c for earning exempt income and justify the same vis-à-vis substantial investments as per Part-A-Balance Sheet of ROI and to explain why the same should not be reworked u/s 14A r.w.r. 8D.” In reply, the assessee filed a detailed explanation vide Para No. 9 of letter dated 16.12.2019 to AO, copy at Pages 84-87 of Paper-Book. The assessee submitted that it has already disallowed salary cost of personnel in treasury function which had a nexus with the exempt income earned. The assessee also submitted that Rule 8D would not apply to it because the assessee has already made disallowance on a rational basis. However, the AO, in Para 3.2 of assessment-order, merely mentioned that the method of disallowance is prescribed under Rule 8D of the Income-tax Rules, 1962 and re-produced the provision of Rule 8D. Thereafter, in Para 3.3 of assessment-order, the AO merely mentioned two points. In sub-para (i), the AO stated that Rule 8D was brought especially to compute the proportionate disallowance as indirect expenses, hence Rule 8D is applicable. And in sub-para (iii) [correct numbering should be (ii)], the AO stated that the CBDT Circular provides that Rule 8D has application even if the assessee has not earned any exempt income. Ld. AR submitted that the notings made by AO in Para 3.2 and sub-para (i) of Para 3.3 of assessment-order clearly show that the AO has given a mechanical application to Rule 8D(2). Further, the sub-para (iii) of Para 3.3 is totally un-related to assessee since the assessee was having tax-free income during the year. Ld. AR submitted that under section 14A(2)

Page 9 of 19 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 [i.e. Rule 8D(2)] but the pre-condition is that the AO, 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. That means, if the AO has not recorded dis-satisfaction qua assessee’s claim of expenditure on the basis of the accounts of assessee, then no disallowance by invoking rule 8D(2) can be made. Ld. AR submitted that in present case, the notings made by AO in Paras 3.2 & 3.3 of assessment-order nowhere shows that the AO has recorded dis-satisfaction having regard to the accounts of assessee.

He submitted that the notings made by AO clearly speak that the AO has applied the method prescribed in Rule 8D(2) merely because the law prescribes such method. Ld. AR very forcefully and repeatedly contended that the dis-satisfaction has to be derived by AO having regard to the accounts of assessee and such dis-satisfaction has to expressed in concrete and cogent terms. He submitted that a casual kind of compliance about dis- satisfaction is not envisaged in section 14A(2) and Rule 8D(1). He submitted that mere writing in Para 4.4 of assessment-order thus “Hence, I am satisfied that in this case provisions of section 14A read with rule 8D are applicable.” cannot be considered as enough. According to Ld. AR, the compliance of dis-satisfaction has to be substantive and not merely a pretence.

Page 10 of 19 (a) Hon’ble Delhi High in Coforge Ltd. Vs. ACIT (2021) 128 taxmann.com 99 (Delhi): “13.2 The approach of the Tribunal has been that since, a disallowance was made, it follows logically, that the AO was not satisfied. This according to us, is not what is envisaged under the provisions of section 14A of the Act. The satisfaction has to be arrived at by the AO having regard to the assessee’s accounts and not otherwise. Concededly, there is nothing in the record to suggest that the AO examined the accounts from this perspective. 13.3 Furthermore, in our view, because the appellant/assessee had itself offered an amount which could be disallowed under section 14A of the Act, the onus shifted onto the revenue to ascertain, after examination of the accounts, as to whether or not the appellant’s/assessee’s claim was correct. It is only after the aforesaid exercise was conducted, could the AO have taken recourse to the prescribed method i.e. rule 8D of the Rules, for determining the expenditure, which, according to him, needed to be disallowed under section 14A of the Act. 13.5 Given the aforesaid position, we are of the view that the Tribunal in calculating the disallowance as per the provisions of rule 8D(2)(iii) of the Rules was not in order. In this context, the observations made by a division bench of this Court in H.T. Media Ltd. Pr. CIT (2017) 85 taxmann.com 113 /399 ITR 576, being apposite, are extracted hereafter. XXX (not reproduced) 13.6 Thus, having regard to the aforesaid, the question of law No. (ii), as framed in ITA 213/2020 and 214/2020, is also decided in favour of the appellant/assessee and against the revenue.” (b) Hon’ble Delhi High Court of Delhi in H.T. Media Ltd. Pr. CIT (2017) 85 taxmann.com 113 /399 ITR 576: The relevant facts of case, as noted by Court, are as under:

“6. During the AY in question, the Assessee had made certain investments in shares/mutual funds/bonds etc. The Assessee received dividend income of Rs. 2,94,38,025 from mutual funds which was claimed as exemption under Section 10(35) of the Act. In response to the questionnaire issued by the AO, the Assessee stated, by way of its letter dated 15th November 2011, that all the investments from which dividend was received had been made by it out of its own funds and no borrowed funds had been utilized for the purpose. Accordingly, no interest expenditure had been incurred in relation to earning of exempt income.

Page 11 of 19 AY 2017-18 7. Furthermore, in regard to the administrative expenses, it was submitted that the income had been earned on units of mutual funds. There were only nineteen entries during the year. It was stated that investments of the Assessee were under the re-investment schemes. Accordingly, no day-to-day activity was involved in relation to earning of exempt income. Income had been reinvested and accounting entries had been passed in the books of account only on redemption or switching over to another scheme. Nevertheless, the Assessee had made disallowance of Rs. 3 lakhs in the return of income in order to cover administrative expenses which are said to have been incurred in relation to earning of exempt income.”

The conclusions taken by Court are as under:

“Analysis of relevant provisions 25. It is necessary in the first place to re-visit the statutory provisions that are involved, viz., Section 14 A of the Act and Rule 8 D of the Rules. XXX (Section 14A) 26. The 'Memorandum Explaining the Provisions of the Finance Bill, 2001 [2001] 248 ITR (St.) 162, 195, by which Section 14A was introduced, with retrospective effect from 1st April 1962, stated: XXX (Memorandum) 27. In cases involving Section 14 A of the Act, the constant tug-of-war lies in the Revenue wanting to increase the expenditure incurred to earn exempt income for the purpose of disallowance, while the Assessee seeks to establish the opposite. In CIT v. Walfort Share and Stock Brokers P. Ltd. [2010] 326 ITR 1 (SC), the Supreme Court noted that legislative intent behind Section 14A was not to allow deduction in respect of any expenditure incurred by an Assessee in relation to exempt income, i.e. income which does not form part of the total income under the said Act, against the taxable income. The Supreme Court observed as under: "In other words, section 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of section 14A, the expenditure incurred in respect of exempt income was being claimed against taxable income. The mandate of section 14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of an exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income . . . Expenses allowed can only be in respect of earning of taxable income. This is the purport of section 14A. In section 14A, the first phrase is 'for the purposes of computing the total income under this Chapter' which makes it clear that various heads of income as Page 12 of 19 AY 2017-18 prescribed in the Chapter IV would fall within section 14A. The next phrase is, 'in relation to income which does not form part of total income under the Act'. It means that if an income does not form part of total income, then the related expenditure is outside the ambit of the applicability of section 14A."

Page 13 of 19 AY 2017-18 and Rule 8D of the Rules are in operation and therefore, will strictly be adhered to by the Assessee. In para 3.6 of the assessment order, after discussing Section 14A(1) read with Rule 8D and referring to the decision of the Bombay High Court in Godrej and Boyce Mfg. Co. Ltd v. DCIT (supra), the AO simply stated that “in view of the facts and circumstances and legal position on the issue as discussed above, I am satisfied that the Assessee had incurred expenses to manage its investments which may yield exempt income, and Assessee grossly failed to calculate such expenses in a reasonable manner to ascertain to ascertain the true and correct picture of its income and expenses.”

(i) That, the AO raised a specific query No. 14 vide notice dated

14.11.2019 u/s 142(1) to assessee with respect to disallowance in terms of section 14A r.w.s. rule 8D (re-produced in earlier paragraph of this order). He submitted that neither it is not possible nor it is a statutory mandate that the AO must discuss each and every detail in Page 15 of 19 notings in Para 3.1 to 3.4 of assessment-order and taking into same, the CIT(A) has rightly approved the dis-satisfaction of AO.

(ii) That, the Rule 8D is a broader Rule enacted by Parliament to make disallowance. There are administrative expenses like rent, repair, maintenance, printing, stationary in P&L A/c of assessee which must have been incurred for all activities of assessee including earning of tax-free dividend income. Therefore, Rule 8D has been enacted to provide disallowance. The AO has strictly applied the Rule 8D which is in order.

(iii) The assessee has made a high amount of investment in mutual funds.

Further, the assessee has made fresh investments of Rs. 113.33 crores which required an active decision-making process. The contention of assessee that only two treasury personnel were involved, is not tenable.

(iv) The assessee has earned tax-free dividend of Rs. 33,93,37,816/- as against which the total disallowance made by AO u/s 14A is Rs.

7,59,81,672/-. The quantum of disallowance cannot be said be on higher side.

(v) The CIT(A) has already given relief by directing the AO to re-compute disallowance by excluding investment of Rs. 20.12 crores from computation. The assessee does not deserve further relief.

Page 16 of 19 cannot be discussed by AO in assessment-order but the provision of section 14A(2) and rule 8D(1) cannot be taken lightly which require the AO to record dis-satisfaction having regard to the accounts of assessee, which means the AO has to provide some objective reasoning.

Page 17 of 19 against section 14A(2) as well as Rule 8D(1). We have already noted these provisions of law in earlier para 4 of this order and highlighted the relevant portion. The Ld. AR for assessee is submitting that before applying the standard methodology prescribed in Rule 8D(2), it is required by section 14A(2) as well as rule 8D(1) that the ‘AO must record his dis-satisfaction qua the correctness of claim of expenses incurred made by assessee’ and moreover ‘such dis-satisfaction must be arrived having regard to assessee’s accounts’. In present case, the notings made by AO in Para 3.2 and 3.3 of assessment-order clearly show that the AO was prompted only to apply the standard methodology of disallowance prescribed in Rule 8D(2) but nowhere in assessment-order the AO has recorded his dis-satisfaction contemplated by section 14A(2) r.w.r. 8D(1) that having regard to the accounts of assessee, the claim of assessee was not correct. The decisions relied by Ld. AR, as narrated above, clearly hold that the AO is first required to examine the accounts of the assessee and then record that he is not satisfied with (a) the correctness of the assessee's claim of expenditure or (b) the claim made by the assessee that no expenditure has been incurred. Unless this stage is crossed i.e. the stage of the AO recording that he is not satisfied with the claim of assessee in the manner indicated i.e. after examining the assessee's accounts, the question of applying the formula under Rule 8D(2) does not arise. This is a mandatory pre-requisite for applying Rule 8D(2) so clearly mentioned in the language of section 14A(2) and rule 8D(1) and fairly settled in judicial rulings. On a careful examination of assessment-order, we find

Page 18 of 19 complying with such requirement of section 14A(2) and rule 8D(1). Faced with this situation, we hold that the disallowance made by AO invoking Rule 8D(2) is against the provision of section 14A(2) and rule 8D(1) and the same is liable to be deleted. Accordingly, we direct the AO to delete the extra disallowance of Rs. 7,27,84,216/- made by him in assessment-order.

8D(1) itself, there is no necessity to go into other pleadings of both sides.

Order pronounced in open court on 08/05/2025