ORIENTAL HOTELS LTD.,CHENNAI vs. DCIT, CORPORATE CIRCLE-5(1), CHENNAI

For the Assessment Year 2018-19, Assessee filed its return of income on 29.11.2018 declaring total income of Rs.8,86,48,670/- and claimed refund of Rs.2,90,58,959/-. The return of income was processed vide intimation u/s.143(1) of the Act dated 25.01.2021 wherein, the gross total income was determined at Rs.9,48,59,398/- as against Rs.8,86,48,670/- declared by the assessee. Subsequently, the case was taken up for scrutiny under CASS and :-3-: ITA No: 2601/Chny/2025 the assessment order u/s.143(3) of the Act came to be passed on 17.02.2021, wherein, the disallowance was made on account of section 14A read with rule 8D to the tune of Rs.7,46,949/-.

Against the order of intimation, the assessee preferred both rectification petition u/s.154 of the Act as well as the appeal before the ld.CIT(A). Against the assessment order u/s.143(3) of the Act, assessee preferred an appeal before the ld.CIT(A).

The assessee was under the strong belief that the additions made in the intimation u/s.143(1) of the Act would be deleted on the basis of petition for rectification and appeal filed against the intimation u/s.143(1) of the Act. In that view of the matter, the assessee again did not raise the issue in the appeal against the assessment order u/s.143(3) of the Act.

The orders were passed by the ld.CIT(A) dated 07.10.2021 and 14.10.2021 b y rejecting the appeals filed against the intimation order u/s.143(1) of the Act and the order u/s.154 of the Act respectively, concluded that, since the assessment order u/s.143(3) of the Act has been passed subsequently, the intimation u/s.143(1) of the Act got subsumed and merged in the said assessment order passed u/s.143(3) of the Act; the assessee has already filed an appeal against the assessment u/s.143(3) of the Act and hence this appeal becomes infructuous.

:-4-: ITA No: 2601/Chny/2025 As per the directions given by the ld.CIT(A) in his separate orders dated 7.10.2021 & 14.10.2021 (on appeal u/s.143(1) and u/s.154) and given the fact that the starting point of assessment order u/s.143(3) of the Act was the income determined in the intimation u/s.143(1) of the Act, the Assessee raised 3 additional grounds in the appeal filed against the assessment order u/s.143(3) of the Act before the ld.CIT(A) on 18.10.2021 by objecting for adopting the income determined in the intimation.

However, the ld.CIT(A) in the impugned order dated 31.07.2025 did not adjudicate the above additional grounds of appeal stating that he is not inclined to adjudicate upon the other aspects raised in the main grounds of appeal and the additional grounds stating they were general or omnibus in nature, lacking specific arguments and that the core issues raised namely disallowance u/s.14A r.w.r 8D and the consequential adjustment of brought forward specified business losses have already been addressed and resolved on merits.

Thus, the issues that need to be adjudicated by us are twofold. One is regarding the disallowance u/s.14A r.w.r 8D for an amount of Rs.7,46,949/- both on normal computation as well as book profit computation u/s.115JB of the Act and the second is the refusal of the ld.CIT(A) to entertain the additional grounds before him.

The assessee had suo-moto disallowed Rs.6,10,051/- on the basis of 50% of salary of one official but the Assessing Officer, disregarded this and without arriving at any satisfaction, had merely held “…assessee has not contended that it has maintained separate accounts for the expenses incurred for earning exempt income” and calculated Rule 8D disallowance of Rs.13.57 lakhs. After reducing the assessee’s own disallowance at Rs.6,10,051/-, the Assessing Officer had arrived at a final disallowance of Rs.7,46,949/-. The assessee submits that no satisfaction was recorded by the Assessing Officer; there is no :-5-: ITA No: 2601/Chny/2025 such requirement, as seems to have been posited by Assessing Officer, to maintain separate books of accounts for earning exempt income. This could not be the basis for rejecting assessee’s suo moto disallowance. The Assessing Officer did not refute the suo moto disallowance made by the assessee, in terms of quantum. Thus, invoking Rule 8D is incorrect and the assessee relied on the following judgments: i. PCIT v Envestor Ventures Ltd [2021] 123 taxmann.com 378 (Mad) ii. PCIT v Atria Power Corporation Ltd [2022] 142 taxmann.com 413 (SC).

In addition, the assessee also submitted that the invocation of Rule 8D while computing the book profits u/s 115JB of the Act by Assessing Officer is without any basis, as upheld by the Special Bench in ACIT vs Vireet Investments 82 taxmann.com 415

With regard to the second issue on the refusal of the ld.CIT(A) to entertain the additional grounds before him, the ld.AR submitted that the following additional grounds were raised before the ld.CIT(A), which was refused to be adjudicated by the ld.CIT(A).

1.The Assessing officer erred in adding a sum of Rs.62,10,728/- and determining the income from Business at Rs.9,04,58.562/- as against Rs.8,42,47,834/-. 2.It is submitted that the total income after intra head adjustments was determined at Rs.17,91,07,232/- as against Rs.17,28,96,504/-. However, the brought forward loss was set off only to the extent of Rs.8,42,47,834/- as claimed in the ITR instead of setting off correct carry forward business loss to the extent of profits determined at Rs.9,04,58,562/- and thereby determining the gross total income at Rs.9,48,59,398/- as against Rs.8,86,48,676/-.

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3.The appellant craves leave to file additional grounds at the time of hearing.” It was thus prayed that the additional grounds raised by the assessee before the ld.CIT(A) be adjudicated on merits by the ld.CIT(A) and to that extent, the matter may be remitted to the file of the ld.CIT(A).

With respect to the issue on disallowance u/s.14A of the Act r.w.r 8D, we find force in the arguments of the assessee, whereby we hold that “satisfaction” of the Assessing Officer that, the suo moto computation of disallowance made by the assessee on account of expenditure incurred for earning exempt income is improper, is needed before invoking rule 8D computation mechanism. Reliance is placed on the Hon’ble Jurisdictional High Court in the case of Envestor Ventures Ltd (supra), wherein it was held that,

“13. The provisions of section 14A themselves are very clear and without recording satisfaction by the Assessing Authority that the expenditure incurred to earn exempted income, as computed by the Assessee is not acceptable for the specified reasons, the Assessing Authority cannot even resort to computation of such disallowance under rule 8D of the Rules. Despite this being the position of law crystal clear and there being no other contrary view from any other High Court, one fails to understand how the Tribunal in the impugned order could still take a view contrary to this legal position and uphold the disallowance under Rule 8D read with section 14A of the Act, much beyond the quantum of exempted income of dividend earned by the Assessee in this year. The misconception of the Assessing Authority as well as Tribunal appear to have arisen because they have read Rule 8D providing for computation method of disallowance in isolation, as if it were an island provision or stand alone charging provision and they assumed that the disallowance as computed under Rule 8D is to be taxed as a notional income of the Assessee. This is absolutely impermissible in law. The reach of computation provision, namely Rule 8Dcannot be read beyond the parent provision of Section 14A itself, which itself is not a charging provision, but a restriction on allowance of expenditure incurred to earn exempted income. The Assessing Authority has to mandatorily record his satisfaction with regard to the proportionate disallowance of expenditure under section 14A of the Act as made by the Assessee that it is not satisfactory for such cogent reasons as specified and therefore, the same is liable to be rejected and therefore, the computation method under Rule 8D can be invoked as a legislative way out to compute the quantum of disallowance. Unfortunately, the Revenue Authority and the Tribunal have read Rule 8D without context and as an independent provision of :-7-: ITA No: 2601/Chny/2025 disallowance, as if it was an island provision of law and the disallowance computed as per Rule 8D of the Rules can go beyond the exempted income itself and can be added as a taxable income in the hands of the Assessee. Such an interpretation put by Revenue Authorities is pathetic, to say the least.” In the present case, we find that no such satisfaction emanates from the assessment order. The Assessing Officer merely stating that claim was “not acceptable” does not amount to “satisfaction” that the suo moto computation arrived at by the assessee is erroneous. The “satisfaction” even though is a subjective realm of the Assessing Officer, is required to be reduced in writing clearly discernible from the order. That is the fundamental requirement expected of any quasi-judicial authority. Absence of the same, vitiates the disallowance in this case. We accordingly, allow this ground in favour of the assessee and direct the Assessing Officer to delete the disallowance computed by the Assessing Officer u/s.14A of the Act read with rule 8D.

With respect to the second issue on non-adjudication of the additional grounds by the ld.CIT(A), we deem it fit and proper to remit the issues back to the file of the ld.CIT(A) to adjudicate the additional grounds raised by the assessee before the ld.CIT(A). Accordingly we direct the ld.CIT(A) to adjudicate the issues on merits in respect of the (a) errors in considering the declared income, (b) Intra head adjustment of income, (c) set off of business income against the carried forward losses and (d) consequently compute the gross total income and pass the order in accordance with law, after affording opportunity to the assessee to present its case. This ground is accordingly allowed in favour of the assessee, for statistical purpose.

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