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Income Tax Appellate Tribunal, MUMBAI BENCH “A”, MUMBAI
Before: SHRI MAHAVIR SINGH & SHRI M. BALAGANESH
PER MAHAVIR SINGH, JUDICIAL MEMBER
This appeal is filed by the assessee against the order of CIT(A) dated 19.01.2018 for assessment year 2012-13 which in turn has arisen from order of Assessing Officer dated 17.03.2016 passed under Section 143(3) of the Income Tax Act, 1916 (in short ‘the Act’).
The only issue in this appeal of assessee is against the order of CIT(A) in confirming the disallowance of expenses relatable to exempt income by invoking provisions of Sec. 14A of the Act read with Rule 8D(2)(iii) of the 2 Tata Lockheed Martin Aerostructures Ltd. Income Tax Rules, 1962 (hereinafter referred to as ‘the Rules’). For this, assessee has raised argument that the Assessing Officer has not recorded any satisfaction before rejecting the claim of the assessee. For this, assessee has raised the following grounds :-
1. In the facts and circumstances of the case and in law, the Learned Commissioner of Income Tax (Appeals) ought to have held that – 1.1 the AO has not recorded his satisfaction before rejecting the appellant’s claim that it has not incurred any expenditure for earning exempt income and hence, ought to have deleted the disallowance made of Rs.56,57,152/- u/s. 14A of the Act read with Rule 8D(2)(iii).
We have heard the rival contentions and gone through the facts and circumstances of the case. The brief facts are that the assessee received dividend income of Rs.8,07,86,148/- from the investments made in such instruments giving rise to exempt income. The Assessing Officer invoked the provisions of Sec. 14A of the Act read with Rule 8D of the Rules and accordingly made disallowance of administrative expenses under Rule 8D(2)(iii) of the Rules being 0.5% of average value of investments at Rs.56,57,152/-. The CIT(A) also confirmed the action of the Assessing Officer and rejected the ground of appeal with regard to the non-recording of satisfaction by observing in para 4.4.1 as under :-
“4.4.1 I have considered the rival contentions. I find that in para 5.1 of the assessment order, the AO has rejected the appellant’s claim that no expenditure was incurred in relation to the exempt income before invoking provisions of section 14A read with rule 8D. The said rejection amounts to non-satisfaction of the AO with the correctness of the appellant’s claim in respect of the expenditure. I, therefore, hold that the AO was right in invoking the provisions of section 14A read with rule 8D. I, therefore dismiss the ground of appeal no. 1.”
3 Tata Lockheed Martin Aerostructures Ltd.
Aggrieved, assessee is in appeal before the Tribunal. We noted that the Assessing Officer has simply recorded a finding that the assessee has received exempt income being ‘dividend’, but no disallowance of expenses in relation to such exempt income has been made. He observed that in the Profit & Loss Account, assessee has claimed various expenses which has nexus to the investment made in mutual funds and shares, but he has not pointed out which expense has nexus with which investment. Even the Assessing Officer has not given any nature of expenditure and their relationship with the exempt income. Before us, the learned counsel for the assessee relied on the decision of the Hon'ble Delhi High Court in the case of Eicher Motors Ltd. vs CIT, 398 ITR 51 (Del), wherein she referred to the following :-
“13. As regards the disallowance of expenditure for earning exempt income in terms of Section 14A of the Act, the settled legal position is that the AO had to record reasons for disagreeing with the submission of the Assessee that it had incurred no expenditure for earning such exempt income. This is plain even from Rule 8D (1) which requires the AO to mandatorily record his satisfaction that the claim made by the Assessee that no expenditure has been incurred is incorrect "having regard to the accounts of the assessee." In this case, a perusal of the AO's reasoning shows that the AO has merely conjectured that there is an inbuilt cost even in passive investment as also incidental expenditure like collection, telephone, follow up etc., The AO thus concludes that the expenses are embedded as indirect expenses. This is not as per the requirements of Rule 8D. There is no satisfaction recorded “based on the accounts of the assessee”. The AO simply presumes that since the exempt income exists and is being claimed by the Assessee, some portion of the expenses ought to be added back. This is not sufficient as per the law. Once this mandatory requirement is itself not fulfilled, in terms of the law explained by this Court in Maxopp Investment Ltd. v. CIT [2012] 347 ITR 272/[2011] 203 Taxman 364/15 taxmann.com 390 (Delhi), the question of remanding the matter to the CIT(A) and to call for a remand report from the AO for the purposes of rectifying this jurisdictional defect simply did not arise.
4 Tata Lockheed Martin Aerostructures Ltd. In this context, the Court also notices that in the order passed by the AO on 28/30th December 2016 pursuant to the impugned order of the ITAT on remand, the AO had simply repeated his entire assessment order passed in the first instance. Be that as it may, the Court is of the view that the ITAT erred in overlooking the correct legal position in remanding the matter to CIT(A).”
We noted that it is a settled position and even the Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. vs CIT, 328 ITR 81 (Bom.) has categorically held that the Assessing Officer has to record an objective satisfaction that the assessee has incurred expenditure qua the exempt income. If there is no satisfaction recorded, the disallowance made by the Assessing Officer cannot be sustained. In view of the above facts and circumstances, we are of the view that the Assessing Officer has not recorded any satisfaction and hence we quash the disallowance made by the Assessing Officer. Thus, this issue of assessee’s appeal is allowed.
In the result, appeal of the assessee is allowed.
Order pronounced in the open court on 24th September, 2019.