PAN INDIA NETWORK LIMITED,MUMBAI vs. DCIT - CC -7(1), MUMBAI

Briefly stated facts are that the assessee has earned dividend income of Rs. 21,83,516/- and claimed the same as exempt under section 10(34) of the Act. The AO on perusal of computation of income noticed that the assessee has not disallowed any expenses relatable to exempt income. Hence, he required the assessee to explain as to why disallowance cannot made under section 14A of the Act read with Rule 8D (2) of the Rules. The AO after considering the submissions of the assessee noted that “assessee has incurred expenses under other heads, which cannot be wholly for the purpose of earning business income. Assessee must have incurred few expenses out of the same to earn exempt income. Moreover, assessee has not given explanation on how the expenses debited in its accounts are related to its business.

The AO made disallowance under Rule 8D(2)(iii) being amount equal one and half percent of average value of investment at Rs. 36,79,425/-. Aggrieved, assessee preferred the appeal before CIT(A).

The CIT(A) restricted the disallowance qua the exempt income at Rs. 21,83,516 by observing in Para 6.5 as under: - “6.5 In view of the above, it is held that the appellant's case warrants disallowance u/s 14A. As the assessee has not made any suo moto disallowance and has further contended that there is no case for disallowance, the AO had no choice but to resort to the method of computation prescribed under Rule 8D. The AO did not make any disallowance under Rule 3D 2(i) and 2(11) but worked out the disallowance under Rule 3D 2(iii) which was to the tune of Rs.36,79,425/- as against exempt income of Rs.21,83,516/-. The Hon'ble ITAT, Mumbai in the case of MIS. Daga Global Chemicals Pvt. Ltd. held that disallowance u/s 14A cannot exceed the 4 exempt income. Respectfully following the jurisdictional ITAT's decision in the case of DAGA global Chemicals Ltd (supra) the AO is directed to restrict the disallowance to Rs.21,83,516/- which is the exempt income earned by the assessee. The appellant gets relief for the balance amount. These grounds of appeal are partly allowed.”

Before us, the learned Counsel for the assessee first of all argued that the AO has not recorded any satisfaction for making disallowance and for invoking the provisions of section 14A of the Act read with Rule 8D of the Rules. He stated that the AO has simply noted that the assessee himself have incurred expenses out of the same to earn exempt income. But the AO has not brought out how he satisfies that expenses are relatable to exempt income. In the absence of any satisfaction, according to the learned Counsel for the, the issue is covered in favour of assessee by the decision of Hon’ble Bombay High court in the case of Godrej & Boyce Mfg. Co. Ltd. CIT [2010] 328 ITR 81 (Bombay), wherein it is held that the AO simply states that he was satisfied that the assessee has incurred expenses to manage its investment, which may yield exempt income but the AO grossly failed to note that such expenses are not in relation to exempt income. Similarly, the learned Counsel for the assessee relied on the decision of Hon’ble Delhi High Court in the case of H.T. Media Ltd. V. PCIT [2017] 399 ITR 576 (Delhi), wherein Hon’ble Delhi High Court vide Para 39 and 40 has considered the issue of satisfaction as under: - 5 “39. Turning now to the order of the ITAT, in para 33, it recorded the submission of the AR that the AO did not record any satisfaction about the Assessee not properly offering expenditure incurred in relation to the exempt income at Rs. 3 lakhs. The ITAT reproduced the contents of para 3.3.1 of the assessment order, which has been extracted by this Court hereinbefore, which contains general observations regarding earning of exempt income. This cannot be accepted as a recording by the AO of satisfaction regarding the claim of the Assessee after examining its accounts. Again, in para 34 of its order, the ITAT simply reproduced para 3.3.6 of the assessment order where, again, no reasons have been provided but only a conclusion has been reached that the AO was "satisfied that the Assessee had incurred expenses to manage its investments which may yield exempt income, and Assessee grossly failed to calculate such expenses in a reasonable manner to ascertain the true and correct picture of its income and expenses."

Consequently on the aspect of administrative expenses being disallowed, since there was a failure by the AO to comply with the mandatory requirement of Section 14 A (2) of the Act read with Rule 8D (1) (a) of the Rules and record his satisfaction as required thereunder, the question of applying Rule 8D (2) (iii) of the Rules did not arise. The question framed in ITA 549 of 2015 is answered accordingly.”