DCIT CIRCLE 2.3.1, MUMBAI, MUMBA vs. TRENT LIMITED, MUMBAI

Trent Limited 3. The appellant craves the leave to add, amend, alter and/ or delete any of the grounds of appeal as above.

7. Since the issue involved and the grounds raised by the Revenue in both the appeals are identical in nature and differ only in the quantum of disallowance, we, for the sake of convenience and brevity, treat Assessment Year 2018–19 as the lead year and proceed to adjudicate the issue on the basis of facts obtaining in that year. The decision rendered for Assessment Year 2018–19 shall, mutatis mutandis, apply to Assessment Year 2020–21 as well.

8. During the course of hearing before us, the learned Authorised Representative of the assessee reiterated the facts and submitted that the assessee had, in the return of income, made a suo motu disallowance under section 14A of the Act on a scientific and reasonable basis by identifying and allocating only such administrative expenditure as was attributable to earning of exempt income. It was contended that no borrowed funds were utilised for making investments and that the assessee’s own funds were far in excess of the value of investments, and therefore, no interest expenditure was liable to be disallowed.It was further submitted that the methodology adopted by the assessee for computing disallowance under section 14A had been consistently followed in earlier years and had been accepted by the Co-ordinate Bench in assessee’s own case.

9. It was pointed out that the Assessing Officer, without recording any objective dissatisfaction with reference to the Trent Limited accounts of the assessee, mechanically invoked Rule 8D and computed disallowance at one per cent of the average value of investments. It was contended that such action was contrary to the statutory requirement of section 14A(2) and the settled legal position that Rule 8D can be applied only after recording proper satisfaction as to the incorrectness of the assessee’s claim.

Trent Limited 14. From a plain reading of section 14A(2) of the Act, it is manifest that the Assessing Officer can determine the amount of expenditure incurred in relation to exempt income in accordance with the prescribed method only if he, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee. The statutory condition precedent is thus the recording of dissatisfaction on objective examination of the assessee’s accounts and working. In the present case, the assessment order does not disclose any such satisfaction based on examination of the accounts. The Assessing Officer has neither pointed out any defect in the methodology adopted by the assessee nor demonstrated how the disallowance computed by the assessee was incorrect or inadequate.

Trent Limited 81. We also further noticed from the Assessment Order that, the assessee has made elaborate submissions and a detailed computation of the expenditure attributable for earning exempt income which is said to be consistent method of computation on a scientific basis made from the A.Y. 2006-07. We further find that even though the Assessing Officer extracted the elaborate submissions and the computation of disallowance made by the assessee, there is no satisfaction recorded by the Assessing Officer as to why the suomoto computation of disallowance of expenses made by the assessee is not satisfactory having regard to the Books of Accounts of the assessee and the correctness of the claim of expenditure made by the assessee. The Ld. CIT(A) while disposing off the appeal for the A.Y. 2007-08 has examined the issue elaborately and accepted that the computation of disallowance made by the assessee (suomoto disallowance) is on a scientific basis. While dealing with the appeal for the A.Y. 2007-08 we have accepted the computation of the assessee since it is more scientific than the adhoc disallowance made by the Assessing Officer. Even though the provisions of Rule 8D are applicable for the year under consideration i.e. A.Y. 2008-09 in the absence of any satisfaction recorded by the Assessing Officer as to why the suomoto disallowance made by the assessee is not acceptable having regard to the Books of Accounts of the assessee and the correctness of the claim of expenditure made by the assessee, we accept the suomoto disallowance made by the assessee as the computation of disallowance made by the assessee is on a scientific basis and is in consistent with the same method as adopted consistently from the A.Y. 2006-07 onwards. In the circumstances, we sustain the order of the Ld.CIT(A) and direct the Assessing Officer to adopt the suomoto disallowance made by the assessee for computing the disallowance u/s 14A of the Act. Grounds raised by the revenue are dismissed.

17. Similarly, in another order of the Co-ordinate Bench for A.Y. 2017-18 (ITA No. 4074/MUM/2024) in the assessee’s own case, the Bench has decided in favour of the assessee. In paragraphs 8 to 8.8, the Co-ordinate Bench examined the legality of disallowance under section 14A read with Rule 8D. The Co- ordinate Bench first reproduced and analysed the statutory scheme of section 14A(2) and Rule 8D(1) and held that invocation Trent Limited of Rule 8D is conditional upon the Assessing Officer recording objective dissatisfaction, having regard to the accounts of the assessee, with the correctness of the disallowance made by the assessee. It was observed that such dissatisfaction must be based on examination of the assessee’s accounts and methodology and cannot rest on mere disagreement or general presumptions. The Co-ordinate Bench noted that in the assessee’s case, a detailed and scientific working of suo motu disallowance had been furnished. However, the Assessing Officer had not examined this working nor pointed out any defect therein and had invoked Rule 8D merely on presumptions about involvement of administrative effort in managing investments. The Tribunal held that such approach did not satisfy the statutory requirement of section 14A(2).

Trent Limited 19. On the basis of the above statutory analysis and judicial precedents, it was concluded that since no proper satisfaction had been recorded by the Assessing Officer in terms of section 14A(2), the disallowance made under section 14A read with Rule 8D was unsustainable. Accordingly, it directed deletion of the disallowance and allowed the grounds raised by the assessee on this issue.

20. The ratio decidendi of the above-mentioned decisions is that where the assessee has made a disallowance under section 14A on a scientific basis and has furnished a detailed working, the Assessing Officer cannot mechanically invoke Rule 8D without recording dissatisfaction, having regard to the accounts of the assessee, about the correctness of such claim.

21. Applying the aforesaid judicial principle to the facts of the present case, we find that the factual matrix before us is identical. The assessee has consistently followed the same method for computing disallowance under section 14A, which has been accepted in earlier years. The Assessing Officer has not demonstrated any change in facts or any infirmity in the working of the assessee. The invocation of Rule 8D is based merely on presumptions and not on an examination of the accounts.

22. In our considered view, the CIT(A) has correctly appreciated the facts and has applied the law in consonance with the binding decisions of the co-ordinate Benches in the assessee’s own case. There is no material on record to show that the method adopted Trent Limited by the assessee is arbitrary or unscientific. On the contrary, the disallowance has been computed on identification and apportionment of specific administrative expenses, which satisfies the requirement of reasonableness under section 14A.

by the Revenue are dismissed.

24. In the combined result, both the appeals of the Revenue are dismissed. Order pronounced in the open court on 05.02.2026.