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.:

Feeling aggrieved by order of first appeal dated 30.11.2023 passed by learned Commissioner of Income-Tax (Appeals)-NFAC, Delhi [“CIT(A)”] which in turn arises out of assessment-order dated 30.12.2019 passed by learned DCIT/ACIT-2(1), Indore [“AO”] u/s 143(3) of Income-tax Act, 1961 for Assessment-Year [“AY”] 2017-18, the assessee has filed this appeal on following grounds:

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DXC Technology India Pvt. Ltd. ITA No. 58/Ind/2024 – 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.”

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DXC Technology India Pvt. Ltd. ITA No. 58/Ind/2024 – AY 2017-18

assessee is a company engaged in the business of software development. For

AY 2017-18, the assessee filed its original return followed by a revised

return declaring a total income of Rs. 2,62,66,59,110/-. The case was

selected for scrutiny and the notices u/s 143(2)/142(1) were issued which

were complied by assessee. During scrutiny-proceeding, the AO found that

the assessee has claimed tax-free dividend of Rs. 33,93,37,816/- but made

suo moto disallowance of Rs. 31,97,455/- only u/s 14A for the expenses

incurred for earning tax-free dividend. The AO, however, computed

disallowance at Rs. 7,59,81,216/- in terms of Rule 8D(2) and made a further

disallowance of Rs. 7,27,84,216/- while passing assessment-order u/s

143(3). Aggrieved, the assessee carried matter in first-appeal and succeeded

partly. Still aggrieved, the assessee has come in next appeal before us.

made by AO u/s 14A read with Rule 8D and upheld by CIT(A).

tax Act, 1961 and Rule 8D of Income-tax Rules, 1962 which would be

relevant in subsequent discussions:

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.

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DXC Technology India Pvt. Ltd. ITA No. 58/Ind/2024 – 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]

impugned disallowance:

“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,

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DXC Technology India Pvt. Ltd. ITA No. 58/Ind/2024 – 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

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DXC Technology India Pvt. Ltd. ITA No. 58/Ind/2024 – AY 2017-18 closing balances of the value of investment (B) Total 7,59,81,672/-

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/-” 6. Now, we also re-produce the order passed by CIT(A) who has upheld

the disallowance made by AO but has given a limited relief to assessee by

way of direction to the AO to re-compute the amount of disallowance in a

correct manner:

“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.

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DXC Technology India Pvt. Ltd. ITA No. 58/Ind/2024 – 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

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DXC Technology India Pvt. Ltd. ITA No. 58/Ind/2024 – AY 2017-18 by assessee in Ground No. 2 & 4) that the assessee has suo moto before

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).

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DXC Technology India Pvt. Ltd. ITA No. 58/Ind/2024 – AY 2017-18 8. Ld. AR submitted that in present case, the AO raised following query

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)

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DXC Technology India Pvt. Ltd. ITA No. 58/Ind/2024 – AY 2017-18 as well as Rule 8D(1), the AO can 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 [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.

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DXC Technology India Pvt. Ltd. ITA No. 58/Ind/2024 – AY 2017-18 9. Ld. AR also relied upon following judicial rulings in this regard:

(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.

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DXC Technology India Pvt. Ltd. ITA No. 58/Ind/2024 – 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

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DXC Technology India Pvt. Ltd. ITA No. 58/Ind/2024 – 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." 28. In the same decision, the Supreme Court explained that "The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14A." 29. How this apportionment should take place was prescribed under Rule 8D which came to be introduced with effect from 24th March 2008. XXX (Rule 8D) 30. Rule 8D(1) states more or less what Section 14A(2) of the Act states. It requires the AO to first 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 clam of the 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. That this is a mandatory pre-requisite for applying Rule 8D(2) is fairly well-settled. 34. The Assessee had explained that Rs. 3 lakhs was being disallowed voluntarily as an “expenditure which could be attributable for earning the said income.” The Assessee explained that the disallowance had been determined on the basis of cost of finance department in the ratio of exempt income to total turnover. On that basis the disallowance in AY 2005-06 was upheld by CIT(A) at Rs. 1 lakh. The disallowance for this AY was worked out as Rs. 1,42,404/- and since the Assessee had already made a disallowance of Rs. 3 Lacs, no further disallowance was called for. 35. In order to disallow this expense the AO had to first record, on examining the accounts, that he was not satisfied with the correctness of the Assessee's claim of Rs. 3 lakhs being the administrative expenses. This was mandatorily necessitated by Section 14A(2) of the Act read with Rule 8D(1)(a) of the Rules. 36. In para 3.2 of the assessment order, the AO records that, in answer to the query posed by the AO requiring it to produce calculation for disallowances, the Assessee “submitted that they have not incurred any expenditure for earning the dividend income.” Thereafter, in para 3.3, the AO records “I have considered the submissions of the Assessee and found not to be acceptable.” Thereafter, the AO proceeded to deal with the said provisions of Section 14A and Rule 8D and observed, in para 3.3.1, that making of investment, maintaining or continuing investment and time of exit from investment are well informed and well coordinated management decisions that, in relation to earning of income, are embedded in indirect expenses. It is then stated in para 3.4 that, in view of the above, the provisions of sub-section (2) of Section 14A

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DXC Technology India Pvt. Ltd. ITA No. 58/Ind/2024 – 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.” 37. In the considered view of this Court, the above observations of the AO in the assessment order are of a broad general nature not with particular reference to the facts of the case on hand. 38. The Court is also unable to agree with Mr. Singh that on this aspect there are concurrent findings of both the CIT(A) as well as the ITAT. The CIT(A) disallowed the exempt expenses by merely repeating what the AO had stated about the cost that is built into so called ‘passive’ investments and simply recorded that the AO was bound to Rule 8D and, therefore, was justified in determining administrative costs at 0.5%. Here again, the CIT (A) failed to note that without the mandatory requirement, under Section 14A of the Act and Rule 8D of the Rules, of satisfaction being recorded being met, the question of applying Rule 8D (1) did not arise. 39. Turning now to the order of the ITAT, in para 33, it recorded the submission of the AR that the AO did not record any satisfaction about the Assessee not properly offering expenditure incurred in relation to the exempt income at Rs. 3 lakhs. The ITAT reproduced the contents of para 3.3.1 of the assessment order, which has been extracted by this Court hereinbefore, which contains general observations regarding earning of exempt income. This cannot be accepted as a recording by the AO of satisfaction regarding the claim of the Assessee after examining its accounts. Again, in para 34 of its order, the ITAT simply reproduced para 3.3.6 of the assessment order where, again, no reasons have been provided but only a conclusion has been reached that the AO was “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 the true and correct picture of its income and expenses.” 40. Consequently on the aspect of administrative expenses being disallowed, since there was a failure by the AO to comply with the mandatory requirement of Section 14A(2) of the Act read with Rule 8D(1)(a) of the Rules and record his satisfaction as required thereunder, the question of applying Rule 8D (2) (iii) of the Rules did not arise. The question framed in ITA 549 of 2015 is answered accordingly.” 10. Having argued his primary contention, Ld. AR also raised another

contention that the disallowance of Rs. 7,27,84,216/- made by AO is not

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DXC Technology India Pvt. Ltd. ITA No. 58/Ind/2024 – AY 2017-18 having any rationality in the facts of case. For this, he submitted that the

assessee has earned tax-free dividend from ‘debt mutual funds’ which are

passive investments for which no day-to-day monitoring or administration

was required, at the most only services of employees of treasury function

was required whose salary had already been disallowed by assessee. Thus,

no further disallowance is warranted in case of ‘debt mutual funds’. Ld. AR

relied upon a decision of ITAT, Delhi in M/s Gujarat Guardian Ltd. Vs.

DCIT, Circle 10(2), New Delhi – ITA No. 5794/Del/2016 which is a case

dealing with ‘debt mutual funds’ and holding such a proposition. Then, Ld.

AR also drew us to the audited financial statements of assessee filed in

Paper-Book in an attempt to show that (i) the assessee is mainly engaged in

software development business and the revenue derived from software

business was Rs. 2710.33 crore whereas the tax-free dividend was just Rs.

33.93 crore, and (ii) that the various expenses debited to P&L A/c cannot be

said to have been incurred for earning impugned tax-free dividend from

‘debt mutual funds’, and (iii) that the assessee has not utilized any borrowed

fund for making investments from which impugned dividend was earned.

(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

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DXC Technology India Pvt. Ltd. ITA No. 58/Ind/2024 – AY 2017-18 assessment-order. He submitted that the AO has made sufficient

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.

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DXC Technology India Pvt. Ltd. ITA No. 58/Ind/2024 – AY 2017-18 12. In rejoinder, Ld. AR submitted that he agrees that each and every item

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.

orders of lower-authorities as well as the material held on record to which

our attention has been drawn in the light of provisions of section 14A and

Rule 8D as well as the judicial rulings cited before us. Precisely stated, the

dispute in present case relates to the additional disallowance of Rs.

7,27,84,216/- made by AO u/s 14A invoking Rule 8D(2) of the Income-tax

Rules, 1962. Admittedly, the assessee earned tax-free dividend of Rs.

33,93,37,816/- from debt mutual funds and suo moto disallowed

expenditure of Rs. 31,97,455/- before filing return of income. During

proceeding, the AO, vide notice dated 14.11.2019, queried the assessee

about disallowance u/s 14A r.w.s. Rule 8D. In reply it was a submission of

assessee that the suo moto disallowance had already been made on a

rational basis taking into account salary of personnel of treasury function

and no further disallowance was warranted in terms of Rule 8D. The AO has

acknowledged assessee’s reply in Para 3.1 of assessment-order. However, in

Para 3.2 and 3.3 of assessment-order, the AO rejected assessee’s

submission and computed disallowance finally in Para 4.5 of assessment-

order at Rs. 7,59,81,672/- as per standard method prescribed in Rule 8D(2).

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DXC Technology India Pvt. Ltd. ITA No. 58/Ind/2024 – AY 2017-18 Now, in this background, the assessee is claiming that the AO’s action is

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

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DXC Technology India Pvt. Ltd. ITA No. 58/Ind/2024 – AY 2017-18 that the AO has merely proceeded to apply Rule 8D(2) without first

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.

accepting Ld. AR’s first contention of non-compliance of section 14A(2) r.w.r.

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

Order pronounced in open court on 08/05/2025

Sd/- Sd/-

(PARESH M. JOSHI) (B.M. BIYANI) JUDICIAL MEMBER ACCOUNTANT MEMBER Indore िदनांक/Dated : 08/05/2025 Patel/Sr. PS Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) Departmental Representative (6) Guard File By order E COPYSr. Private Secretary Income Tax Appellate Tribunal Indore Bench, Indore

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