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Income Tax Appellate Tribunal, MUMBAI BENCH “C”, MUMBAI
Before: SHRI C.N. PRASAD, HONBLE & SHRI G. MANJUNATHA, HONBLEShri Beharilal
O R D E R PER C.N. PRASAD (JM) 1. This appeal is filed by the assessee against the order of the Ld. Commissioner of Income-tax (Appeals) – 2, Mumbai [hereinafter for short “Ld. CIT(A)”] dated 15.01.2018 for the A.Y. 2009-10.
We find from the records that in the first round of appeal the Tribunal in dated 19.01.2015 restored the issue of disallowance made u/s. 14A r.w Rule 8D(2)(ii) of I.T. Rules to the file of the Assessing Officer with a direction to verify the correctness of the claim (A.Y: 2009-10) M/s. Cyrus Investment Pvt. Ltd., of the assessee as the assessee itself made suomoto disallowance of ₹.1,16,36,172/- u/s. 14A of the Act while computing its income. In the consequential assessment made by the Assessing Officer u/s. 143(3) r.w.s. 254 of the Act dated 05.03.2016 the Assessing Officer restricted the disallowance u/s. 14A of the Act to ₹.37,89,019/- as against ₹.60,01,670/- made in the original assessment, over and above the suomoto disallowance of ₹.1,16,36,172/- made by the assessee. In the consequential assessment proceedings, the Assessing Officer accepted without prejudice claim of the assessee that it had already disallowed ₹.22,12,651/- towards administrative expenses while computing the suomoto disallowance and therefore it should not be again disallowed u/s. Rule 8D (2)(iii) of I.T. Rules. The Assessing Officer did not point out in clear terms as to why the suomoto disallowance of ₹.1,16,36,175/- made by the assessee is not correct with reference to the books of accounts of the assessee. Assessing Officer all along stated in the assessment order that only partial application of Rule 8D has been applied by the assessee and he has not pointed the incorrectness of the suomoto disallowance made by the assessee or as to why this is not adequate disallowance u/s. 14A of the Act to meet the expenses attributable for earning dividend income. The Ld. CIT(A) sustained the same.
(A.Y: 2009-10) M/s. Cyrus Investment Pvt. Ltd., 3. Before us, the Ld. Counsel for the assessee submitted that there is no objective satisfaction recorded by the Assessing Officer in invoking provisions of Rule 8D of I.T. Rules, even though the assessee itself disallowed suomoto disallowance of ₹.1,16,36,175/-. Further, Ld. Counsel for the assessee invited our attention to the decision of the Coordinate Bench of the Tribunal in its own case in ITA.No. 6191/Mum/2016 dated 25.07.2018 for the A.Y. 2011-12 wherein a similar issue has come up for consideration and the Tribunal following its order for the A.Y. 2012-13 in restricted the disallowance u/s. 14A to the suomoto disallowance made by the assessee.
Ld. DR vehemently supported the orders of the authorities below.
We have heard the rival submissions and perused the orders of the authorities below and the decision of the Coordinate Bench of the Tribunal in assessee's own case. We find that, more or less an identical issue has come up before the Tribunal in assessee's own case for the A.Y. 2011-12 in dated 25.07.2018 and the Tribunal restricted the disallowance u/s. 14A to the extent of suomoto disallowance made by the assessee observing as under: - "5. The CIT(A), after considering relevant submissions of the assessee and also by following the decision of ITAT, Mumbai Benches in the case of Graviss Hospitality Ltd in.lTA (A.Y: 2009-10) M/s. Cyrus Investment Pvt. Ltd., No.3542/Mum/2013 deleted addition made by the AO towards disallowance of expenditure determined in accordance with Rule 8D(2) over and above the suo moto disallowance made by the assessee. The relevant portion of the order of the Ld.CIT(A) is extracted below:- "Decision: The AO has added sum of Rs. 1,56,86,1627- u/s 14A read with Rule 8D of the Income-tax Act stating the reasons that disallowance made of Rs.86,57,565/- is not proper. On the other hand, the AR of the appellant argues that following expenditure has been disallowed u/s 14A of the Act. I Interest Rs. 63,82,177/- ii. Legal and professional expenses Rs. 1,19,492/- iii Demat charges Rs. 2,45,276 iv Dividend collection Charges Rs 18,80,620/- Rs. 86,57,565/- Further, the AR of the appellant relies on the following jurisdictional IT AT decision in the case of DCIT, Range 1(1) vs. Graviss Hospitality Ltd. for A.Y.2009-10-dated 21.11.2014 vide 1TA No. 3542/Mum/2013 wherein it is held that 11. Once all these details were made available along with the entire accounts of the assessee, the A.O. was required to record his “satisfaction” or satisfied himself that having regard to the accounts of the assessee, the claim of the assessee in respect of expenditure debited is not correct and there could have been certain other expenditures which can be said to have been incurred in relation to the earning of exempt income. The disallowance u/s 14A (1) can only be triggered, once the conditions under sub section (2) are satisfied. To work out the disallowance u/r 8-D, the A.O. has to first examine the accounts of the assessee and the correctness of the claim and then, if having regard to such accounts and the claim he is not satisfied with either the correctness of the claim made by the assessee or made a claim that no expenditure at all has been incurred for the purpose of earning the exempt income, then only he can resort to Rule 8-D. In the present case, we find that the A.O. has straightaway proceeded to apply Rule 8-D for the purpose of disallowance u/s 14A without satisfying or complying with the mandatory (A.Y: 2009-10) M/s. Cyrus Investment Pvt. Ltd., requirement of section 14A(2) or Rule 8-D(1). Once the A.O. has failed to comply the statutory requirement, then he cannot proceed to make the disallowance u/s 14A(1) and accordingly, the disallowance made by the A.O. and partly sustained byb the ld. CIT(A) over and above the disallowance made by the assessee is deleted.” Respectfully following the ITAT decision cited above, the disallowance made by the appellant company suo moto of Rs.86,57,565/- is more than sufficient and further addition made u/s 14A of Rs. 1, 56,86, 162/-is deleted. Hence, the ground of appeal
is allowed."
6. The Ld.AR for the assessee, at the time of hearing submitted that the issue is squarely covered in favour of the assessee by the decision of ITAT, Mumbai Bench "C" in assessee's own case for AY 2012-13 in wherein under similar circumstances, the ITAT has deleted further disallowance made by the AO over and above suo moto disallowance made by the assessee by holding that the AO has not recorded any satisfaction required u/s 14A(2) as to why disallowance offered by the assessee voluntarily is not a correct disallowance u/s 14A and the same needs to be discarded. The AO has mechanically applied rule 8D(2) to determine further disallowance without arriving at a satisfaction as to incorrectness of disallowance quantified, by the assessee. Facts being identical for the year under consideration, by following the earlier decision of the ITAT, the addition made by the AO needs to be deleted.
7. On the other hand, the Ld.DR fairly accepted that the issue is covered in favour of the assessee by the decision of the ITAT for earlier assessment year.
8. We have heard both the parties and perused the material available on record. The issue of disallowance of expenditure incurred in relation to exempt income u/s 14A has been considered by the ITAT. in assessee's own case for AY 2012-13 in ITA No.6414/Mum/2016 and after considering relevant facts deleted further disallowance made by the AO over and above suo moto disallowance made by the assessee towards expenditure incurred in relation to exempt income u/s 14A of the Act. The relevant portion of the order is extracted below:- “8. We have considered rival contentions and perused the material on record including orders of authorities below and paper book filed by the assessee. We have observed that the assessee is an RBI registered (NBFC) Investment company . The assessee has received Dividend of Rs. 32.57 crores (A.Y: 2009-10) M/s. Cyrus Investment Pvt. Ltd., which was claimed as an exempt income . The assessee suo- motu disallowed expenditure of Rs. 5,44,975/- of its own voluntarily u/s 14A of the 1961 Act being incurred in relation to earning of an exempt income, which included direct expenses of Rs. 143/- and balance Rs. 5,44,832/- towards indirect expenses which were disallowed by the assessee voluntarily suo-motu u/s 14A. The AO invoked provision of section 14A r.w.r. 8D and disallowed Rs. 2,41,07,023/- mainly by invoking Rule 8D(2)(iii) r.w.s. 14A of the 1961 Act despite the fact that the assessee has incurred total expenses of Rs. 15.03 lac during the entire year which is reflected in Profit and Loss Account, out of which Rs. 4,13,486/- was voluntarily disallowed by the assessee and never claimed as business deduction, while out of the balance remaining expenses to the tune of Rs. 10,89,665/-, 50% of the said expenses aggregating to Rs. 5,44,832/- were disallowed by the assessee voluntarily u/s 14A of the 1961 Act while rest 50% of the expenses were claimed by the assessee as an business expenses/deduction .(refer page 8- 17/pb) . The assessee also disallowed Rs. 143/- towards demat charges being direct expenses for earning an exempt income which is not a matter of dispute between rival parties. The total disallowance of expenditure of Rs. 5,44,975/- u/s 14A is also certified by tax- auditors in their tax audit report to be correct disallowance of expenditure u/s 14A incurred in relation to earning of exempt income (refer page 63 and 75/pb). We have observed from the perusal of the Balance sheet that the assessee has investments in properties as well as in shares, debentures, partnership firms, mutual funds, and income is arising from these activities. The AO has not recorded any satisfaction u/s 14A(2) as to why disallowance offered by the assessee suo motu voluntarily is not a correct disallowance u/s 14A and the same needs to be discarded . The AO mechanically applied Rule 8D and arrived at disallowance of Rs. 2,41,07,023/- u/s 14A r.w.r. 8D notwithstanding that the assessee has incurred total expenses of Rs. 15,03,151/- during relevant year which was claimed as an expenses in profit and Loss Account (pb/page 40). Out of these total expenses of Rs. 15,03,151/- , the assessee voluntarily disallowed Rs. 4,13,486/- and never claimed the same as business deduction , while out of the balance remaining expenses of Rs. 10,89,665 , the assessee computed disallowance of Rs. 5,44,832/ u/s 14A towards indirect expenses relatable to earning of an exempt income while also the assessee voluntarily additional disallowed an expenditure of Rs. 143/- directly relatable to an exempt income, thus total disallowance of expenditure to the tune of (A.Y: 2009-10) M/s. Cyrus Investment Pvt. Ltd., Rs. 5,44,975/- was offered by the assessee suo motu voluntarily u/s 14A to have been incurred for earning an exempt income. The AO did not recorded any satisfaction u/s 14A(2) as to why disallowance offered by the assessee to the tune of Rs. 5,44,975/- u/s 14A which was worked out by the assessee having regards to its accounts is not a correct working of disallowance of expenditure in relation to earning of an exempt income having regards to accounts of the assessee and the same needed to be discarded and Rule 8D is to be applied instead. The said working of the assessee was also approved by tax-auditors of the assessee in their tax audit report submitted which is part of paper book(page 63 and 75). The AO has not recorded any reasoning for discarding the working submitted by the assessee as to disallowance of expenditure of Rs. 5,44,975/- u/s 14A. The AO mechanically applied Rule 8D and made disallowance to the tune of Rs. 2.14 crores without understanding that Section 14A clearly speaks of disallowance of the expenditure incurred by the assessee in relation to earning of an exempt income and no notional expenditure can be disallowed u/s 14A which had not even been incurred at all by the assessee. Also there is no allegation or incriminating material on record that the assessee incurred any expenditure out of books of accounts which was not recorded in books of accounts warranting any additions to income to bring to tax the said unrecorded expenditure. Under these facts situation keeping in view totality of the circumstances and suo motu disallowance of 50% expenses offered by the assessee and non recording of satisfaction by the AO u/s 14A(2) before invoking Rule 8D, we are of the considered view that the appellate order of learned CIT(A) needs to be upheld/sustained which we sustain and hence the disallowance offered by the assessee u/s 14A suo-motu voluntarily to the tune of Rs. 5,44,975/- stood accepted. Revenue fails on this ground and hence ground no. 3 is adjudicated against Revenue. We order accordingly.”
9. In view of the o matter and consistent with the view taken by the Coordinate Bench, we are of the considered view that the AO was erred in invoking Rule 8D(2) to compute disallowance contemplated u/s 14A without recording his satisfaction as to incorrectness in disallowance quantified by the assessee. The Ld.CIT(A), after considering relevant submissions of the assessee has rightly deleted further addition made by the AO. Hence, we are inclined to uphold the findings of the Ld.CIT(A) and dismiss appeal filed by the revenue.”
(A.Y: 2009-10) M/s. Cyrus Investment Pvt. Ltd., 6. In the year under consideration the Assessing Officer did not point out in clear terms as to why the suomoto disallowance of ₹.1,16,36,175/- made by the assessee is not correct with reference to the books of accounts of the assessee. Assessing Officer all along stated in the assessment order that only partial application of Rule 8D has been applied by the assessee and he has not pointed the incorrectness of the suomoto disallowance made by the assessee or as to why this is not adequate disallowance u/s. 14A of the Act to meet the expenses attributable for earning dividend income. In the circumstances, respectfully following the said decision, we direct the Assessing Officer to restrict the disallowance u/s. 14A of the Act only to the suomoto disallowance already made by the assessee and delete the balance disallowance.
In the result, appeal of the assessee is allowed.