NEEL BHUPENDRA DALAL,MUMBAI vs. ITO 4(2)(3), MUMBAI

Date of Hearing 17/12/2019 Date of Pronouncement 15/01/2020 आदेश आदेश / O R D E R आदेश आदेश PER G.MANJUNATHA, Accountant Member:

These two appeals filed by the assessee are directed against separate, but identical orders of the Ld. Commissioner of Income Tax (Appeals)-09, Mumbai, both dated 07/06/2018 for the Asst. Years 2011-12 and 2012-13. Since, the facts are identical issues are common, for the sake of convenience, these appeals were heard together and are disposed- off, by this consolidated order.

ITA.NO.5170/Mum/2018 for AY 2011-12:-

filed for the AY 2011-12 are reproduced as under:-

1. The Learned Commissioner of Income-tax (Appeals) ("CIT(A)") erred in upholding the disallowance under Section 14A of the Income-tax Act, 1961 (the Act') of expenditure of Rs. 19,31,359/-.

2. The Learned CIT(A) ought to have held that the Assessing Officer erred in making an addition under Section 14A in the absence of his being satisfied as required by law.

3. The Learned CIT(A) ought to have held that the margin facility availed by the assessee from Religare Finvest was utilized solely for the purpose of trading in shares and not towards personal investments and hence Section 14A was not applicable to such expenditure,

4. The appellant craves leave to add, amend, alter or delete and/or modify the above grounds of appeal before or during the course of hearing.

3. The brief facts of the case are that the assessee is an individual engaged in the business of share and stock broking, filed his return of income for AY 2011-12 on 28/03/2013, declaring total income at Rs.’Nil’. The case was selected for scrutiny and during the course of assessment proceedings, the Ld. AO noticed that the assesee has earned dividend income from shares, however did not made suo-moto disallowances of expenditure incurred in relation to exempt income as required u/s 14A of the Act. Therefore, called upon the assessee to explain as to why disallowances contemplated u/s 14A shall not be determined in accordance with Rule 8D of I.T.Rules 1962. In response, the assessee, vide letter dated 11/11/2013 submitted that he had not incurred any specific expenditure, including interest for earning exempt income. Therefore, the question of disallowances of expenditure u/s 14A does not arise. The assessee vide his letter dated 27/11/2013 has made an alternative plea without prejudice to his earlier submissions, dated 11/11/2013 and worked out adhoc disallowances of expenditure incurred in relation to exempt income u/s 14A at Rs. 1,08,239/- and also, a further sum of Rs. 55,152/-. The Ld. AO did

3 &5171/Mum/2018 Neel Bhupendra Dalal not convinced with explanations furnished by the assesse and accordingly, by relied upon by the decision of Hon’ble Bombay High Court in the case of Godrej and Boyce Manufacturing Company Limited vs DCIT 328 ITR 81 observed that whether or not any exempt income is earned for the year and any expenditure is incurred in relation to said income, but disallowances contemplated u/s 14A shall be determined in accordance with Rule 8D of I.T.Rules, 1962 and accordingly, determined total disallowances of Rs.27,66,659/- towards expenditure incurred in relation to exempt income u/s 14A of the I.T.Act, 1961.

4 &5171/Mum/2018 Neel Bhupendra Dalal 5. The Ld. AR for the assessee submitted that the Ld.CIT(A) was erred in upholding the disallowances u/s 14A of the I.T.Act, 1961 without appreciating the fact that the Ld. AO has not recorded satisfaction as required u/s 14A(2) having regard to the books of accounts of the assessee and that the claim of the assessee that no expenditure has been incurred to earn exempt income or any suo- moto disallowances made by the assessee is incorrect, he cannot proceed to apply Rule 8D to determine disallowances of expenditure incurred in relation to exempt income. The Ld. AR for the assessee referring to the decision of Hon’ble Supreme Court, in the case of Godrej and Boyce Manufacturing Company Limited vs DCIT (2017) 394 ITR 449 (SC) submitted that the Hon’ble Suprem Court has reiterated the position of law as held by the Hon’ble Bombay High Court, in the case in paragraph 37, where it was categorically held that whether, application of formula prescribed under Rule 8D are in the best judgment of the Ld. AO, in determination of disallowances, what the law postulates is requirement of a satisfaction by the Ld. AO 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 provision of section 14A (2) &(3) r.w.Rule 8D of the I.T.Rules, 1962, or best judgment determination as earlier prevailing would become applicable. The Ld. AR for the assesse further referring to the decision of ITAT in assessee’s own case for earlier year submitted that the Tribunal has held that unless, the Ld. AO has recorded proper satisfaction as required u/s 14A(2) having regard to the books of accounts of the assessee, no disallowances could be made by invoking the formula prescribed under Rule 8D (2) of The Income Tax Rules 1962.

5 &5171/Mum/2018 Neel Bhupendra Dalal 6. The Ld. DR, on the other hand, strongly supporting order of the Ld.CIT(A) submitted that from the AY 2008-09 onwards disallowances contemplated u/s 14A shall be determined in accordance with the prescribed formula provided under Rule 8D of I.T.Rules, 1962 whether or not any exempt income is earned for the year and also, whether any disallowances is made by the assessee on its own. The Ld. DR, further submitted that in this case, the Ld. AO has recorded satisfaction having regard to the books of accounts of the assessee and also, the claim that no expenditure has been incurred in relation to exempt income after considering the nature and extent of exempt income earned by the assessee. Therefore, there is no merit in the arguments of the Ld. AR for the assessee that no satisfaction was recorded by the Ld. AO.

6 &5171/Mum/2018 Neel Bhupendra Dalal that 14A(2) &(3) of the Act r.w.Rule 8D of the I.T.Rules, 1962 merely prescribed 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 Ld. AO 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 AO, what the law postulates is the requirement of the satisfaction by the ld. AO 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 assesee. It is only, thereafter that provision of section 14A(2) &(3) r.w.Rule 8D of I.T.Rules, 1962 or a best judgment determination as earlier prevailing, would become applicable. This legal principle has been further supported by the findings of the Hon’ble Bombay High Court, in the case of PCIT vs. Bajaj Finance Ltd. (2019) 110 taxmann.com 303, where it was held that in terms of section 14A, satisfaction of Ld. AO about correctness of expenditure offered for disallowances by assesee therefore, is a free condition and, thus where the Ld. AO did not in any manner reject explanation of the assesse, but merely proceeded to make disallowances by invoking section 14A r.w.Rule 8D of I.T.Rules, 1962, the Tribunal was justified in deleting the same. The co- ordinate bench of ITAT in assessee own case for AY 2010-11 in ITA No. 451/Mum/2015 held that unless, the Ld. AO records satisfaction as required u/s 14A(2), he cannot proceed to determine disallowances by invoking Rule 8D of I.T.Rules, 1962. The sum and substance of the ratio laid down by the Hon’ble Supreme Court and High Court including the coordinate bench is that unless, the Ld. AO records satisfaction as required u/s.14A(2), having regard to the books of accounts of the assessee that the claim of the assessee is 7 &5171/Mum/2018 Neel Bhupendra Dalal incorrect, he cannot proceed to compute disallowances by invoking Rule 8D(2) of I.T.Rules, 1962. In this case, on perusal of assessment order passed by the Ld. AO, we find that nowhere, the Ld. AO has recorded objective satisfaction having regard to the books of accounts of the assessee or the claim of the assesee that no expenditure has been incurred in relation to exempt income. In absence of any satisfaction as required u/s 14A(2), the Ld. AO cannot proceed to determine disallowances by invoking prescribed formula provided under Rule 8D of I.T.Rules, 1962. Therefore, we are of the considered view that the Ld. AO, as well as the Ld.CIT(A) were erred in making additions towards disallowances of expenditure u/s 14A r.w.r. 8D of the Income Tax Rules, 1962. Hence, we direct the AO to delete additions made towards disallowances of expenditure u/s 14A of the I.T.Act 1961.

ITA No.5171/Mum/2018:-

Order pronounced in the open court on this 15 /01/2020