CAPRICON REALTY LTD.,MUMBAI vs. DCIT ,CIRCLE -2(1)(1), MUMBAI

2.1 Facts on record reveal that the assessee being resident corporate assessee stated to be engaged as property developer was assessed u/s 143(3) on 28/12/2016 wherein the assessee was saddled with disallowance u/s 14A for Rs.6.80 Lacs. During assessment proceedings, it transpired that the assessee earned aggregate exempt income of Rs.22.02 Lacs and offered suo-moto disallowance against the same u/s 14A in its computation of income for Rs.1.93 Lacs, the working of which was furnished during assessment proceedings. However, finding mistake in the same, Ld. AO computed additional disallowance of Rs.6.80 Lacs u/r 8D(2)(iii) which was nothing but 0.5% of average investments as per formula prescribed under the rule. 2.2 Before, Ld. first appellate authority, the assessee submitted that suo- moto disallowance made by the assessee was sufficient and Ld. AO, without rejecting the same and recording requisite satisfaction, could not proceed to compute the disallowance as per Rule 8D. The attention was drawn to the fact that computations made by Ld. AO were erroneous. The Ld. first appellate authority, while upholding the action of Ld. AO in applying Rule 8D, directed Ld. AO to work out correct computations as submitted by the assessee. Aggrieved, the assessee is in further appeal before us.

The Ld. Authorized Representative for Assessee [AR] submitted that Ld. AO erred in applying Rule 8D without recording requisite satisfaction as to how the disallowance computed by the assessee was not correct. The submissions are sought to be fortified by drawing our attention to the fact that the assessee had made disallowance of Rs.0.90 Lacs on account of indirect expenditure which Ld. AO failed to take note of. Lastly, it has been pointed out that the computations made by Ld. AO were erroneous since value of investments include investment in property which were not capable of yielding exempt income. The correct disallowance, as per Ld. AR, by excluding these investments, would work out to Rs.6.06 Lacs as against Rs.8.74 Lacs worked out by Ld. AO. The Ld. DR supported the stand in the impugned order.

We have carefully heard the rival submissions. We find that assessee had offered suo-moto disallowance of Rs.1.93 Lacs which comprised-off of direct expenditure for Rs.1.03 Lacs and indirect expenditure for Rs.0.90 Lacs. The Ld. AO, assuming the same to be direct expenditure and terming the assessee’s computation as erroneous, proceeded to apply Rule 8D. The said very fact would reveal that the disallowance made by the assessee was not appreciated by the Ld. AO and the action of Ld. AO in proceeding to apply Rule 8D could not be said to be in accordance with law. The Ld. AO, disregarding the assessee’s computations, proceeded to compute disallowance u/s 14A without recording requisite satisfaction as to how the aforesaid estimated disallowance made by the assessee was not correct having regard to the accounts of the assessee. The provisions of Rule 8D, in our opinion, could not be applied mechanically and straightway without considering the computations made by the assessee but the application of the aforesaid Rule, first, had to cross the barrier of requisite satisfaction by Ld. AO as to how the disallowance worked out by the assessee was not correct or reasonable, having regard to his accounts. Our view is fortified by two leading judgements of Hon’ble Apex Court rendered under identical circumstances which could be cited as follows: - (i) Godrej & Boyce Manufacturing Company Ltd. Vs. DCIT [2017] 81 taxmann.com 111 (ii) Maxopp Investment Ltd. Vs CIT [12/02/2018 91 Taxmann.com 154] In the case of Godrej & Boyce Manufacturing Company Limited (supra), the Hon’ble Court has observed as under: - 37. We do not see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Sub-sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable.

In the present case, we do not find any mention of the reasons which had prevailed upon the Assessing Officer, while dealing with the Assessment Year 2002-2003, to hold that the claims of the Assessee that no expenditure was incurred to earn the dividend income cannot be accepted and why the orders of the Tribunal for the earlier Assessment Years were not acceptable to the Assessing Officer, particularly, in the absence of any new fact or change of circumstances. Neither any basis has been disclosed establishing a reasonable nexus between the expenditure disallowed and the dividend income received. That any part of the borrowings of the assessee had been diverted to earn tax free income despite the availability of surplus or interest free funds available (Rs. 270.51 crores as on 1.4.2001 and Rs. 280.64 crores as on 31.3.2002) remains unproved by any material whatsoever. While it is true that the principle of res judicata would not apply to assessment proceedings under the Act, the need for consistency and certainty and existence of strong and compelling reasons for a departure from a settled position has to be spelt out which conspicuously is absent in the present case. In this regard we may remind ourselves of what has been observed by this Court in Radhasoami Satsang v. CIT [1992] 193 ITR 321/60 Taxman 248 (SC). "We are aware of the fact that strictly speaking res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year."

In the above circumstances, we are of the view that the second question formulated must go in favour of the assessee and it must be held that for the Assessment Year in question i.e. 2002-2003, the assessee is entitled to the full benefit of the claim of dividend income without any deductions Similar are the observations in Maxopp Investment Ltd. Vs CIT [supra] wherein it has been 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 theory of apportionment, the AO needs 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 said 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.

Resultantly, the appeal stands allowed in terms of our above order. Order pronounced in the open court on 20/05/2019. Sd/- Sd/- (Saktijit Dey) (Manoj Kumar Aggarwal) �ाियक सद� / Judicial Member लेखा सद� / Accountant Member मुंबई Mumbai; िदनांकDated : 20/05/2019 Sr.PS:-Jaisy Varghese आदेश की �ितिलिप अ�ेिषत/Copy of the Order forwarded to : अपीलाथ�/ The Appellant 1. ��थ�/ The Respondent 2. आयकरआयु�(अपील) / The CIT(A) 3. आयकरआयु�/ CIT– concerned 4. िवभागीय�ितिनिध, आयकरअपीलीयअिधकरण, मुंबई/ DR, ITAT, Mumbai 5. गाड�फाईल / Guard File 6.