ELEGANT MARBLES AND GRANI INDUSTRIES LIMITED ,MUMBAI vs. ACIT, CIRCLE 6(2)(2), MUMBAI

The Ld. AR argued and stated that the assessee has made a logical calculation considering its books of accounts and the expenses related to this exempted income disallowed u/sec 14A amount to Rs.10,17,141/-. The details calculation is annexed in appeal submission related to page 37 and 38 which is reproduced as below:

The Ld. AR advanced his arguments and contended that, without first rejecting the computation made by the assessee, the Ld. AO proceeded to determine an excess disallowance by placing reliance on CBDT Circular No. 5/2014 dated 11.02.2014. It was submitted that the Ld. AO was required, as a mandatory precondition, to record dissatisfaction with and reject the assessee’s computation, and only thereafter could he proceed to compute the disallowance by adopting the method prescribed under Rule 8D of the Income-tax Rules, 1962, including the calculation of the annual average of monthly average investments. It was further submitted that an identical issue had come up for consideration before the Coordinate Bench of the ITAT, Mumbai ‘E’ Bench, in the assessee’s own case for AY 2012-13, vide order dated 03.08.2018. The relevant observations of the Coordinate Bench are reproduced hereunder: “6. We have gone through the facts in entirety and also gone through the assessment order. We find that the pre-condition for resorting the provision of section 14A read with Rule 8D(2) of the Rules is that the AO must be satisfied that the computation for disallowance made by assessee is incorrect in respect to expenses relatable to exempt income. Hon'ble Supreme Court in the case of Maxopp Investment Ltd. vs. CIT [2018] 402 ITR 640 (SC), held as under: - “41. Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theoryof apportionment, the AO needs 5 ITA 7415/Mum/2025 Elegant Marbles and Grani Industries Ltd. to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the sald apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO.”

In view of the above facts and respectfully following the Supreme Court, we are of the view that in the present case, the AO has not recorded any satisfaction as to why the disallowance made by assessee, suo motto, is incorrect. Even otherwise, the issue is covered by Tribunal's decision in assessee's own case for immediately preceding year. Accordingly, we delete the disallowance and allow the appeal of the assessee. However, the disallowance will be restricted to the extent of 3,41,235. This issue of assessee's appeal is allowed.”

The Ld. DR argued and stated that the Ld. AO had disallowed the expenses related to section14A read with Rule 8D of the rule relying on the CBDT’s Circular no.5/2024 dated 11.02.2014. He invited our attention in relevant para 4.2 of the assessment order which is reproduced as below: “4.2 The assessee's reply was perused, but not found acceptable in the view of CBDT's Circular No. 5/2014, dated 11th February, 2014, wherein it has been clarified that disallowance under section 14A of the Act read with Rule-8D of the Income Tax Rules' 1962 needs to be made even in a case where the assessee has not earned exempt income during a particular year. In the said Circular, it has, inter-alia, been clarified that use of the word "includible" in heading to Section 14A and Rule 8D and use of phrase "income under the Act" under section 14A of the Act, instead of "income of the year", indicates that for invoking disallowance under section 14A, it is not material that assessee should have earned such exempt income during the financial year under consideration. It has also been clarified in the said Circular that "legislative intent is to allow only that expenditure which is relatable to earning of income and it therefore follows that the expenses which are relatable to earning of exempt income have to be considered for 6 ITA 7415/Mum/2025 Elegant Marbles and Grani Industries Ltd. disallowance, 'irrespective' of the fact whether any such income has been earned during the financial year or not the working for disallowance u/s 14A r.w.r. 8D.”

We heard the rival submissions and considered the documents available in record. The assessee has voluntarily disallowed during filing of return amount of Rs.10,17,141 u/sec 14A of the Act. The details of the calculation related to the expenses connected with exempted income were submitted during the assessment and appeal proceedings. The Ld. AO proceeded to determine an excess disallowance by placing reliance on CBDT Circular No. 5/2014 dated 11.02.2014. It was submitted that the Ld. AO was required, as a mandatory precondition, to record dissatisfaction with and reject the assessee’s computation, and only thereafter could he proceed to compute the disallowance by adopting the method prescribed under Rule 8D of the Income-tax Rules, 1962, including the calculation of the annual average of monthly average investments. The identical issue was squarely dealt by the Coordinate Bench of the ITAT, Mumbai, in the assessee’sown case (supra). We find that there is no merit for due calculation of deduction under section 14A on the basis of the annual average of the monthly average without rejecting the assessee’s calculation. Ratio laid down in the order of the Coordinate Bench of the ITAT, Mumbai, in the assessee’s own case, we find that the excess disallowance made by the Ld. AO u/sec 14A amounting to Rs,7,12,229 is arbitrary and bad in law. We set aside the impugned appellate order. Accordingly, the addition made by the Ld. AO amounting to Rs.7,12,229 is deleted.