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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
This appeal by the Revenue is arising out of the order of Commissioner of Income Tax (Appeals)-8, Mumbai, [in short CIT(A)] in appeal No. CIT(A)-8/IT-262/15-16 dated 07-10-2016. The Assessment was framed by the Dy. Commissioner of Income Tax, Cir-3(2)(1), Mumbai (in short DCIT/ AO) for the assessment year 2011-12 order dated 23.03.2015 under section 143(3) of the Income Tax Act, 1961(hereinafter ‘the Act’).
The only issue in this appeal of Revenue is against the order of CIT(A) deleting the disallowance of expenses relatable to exempt income by the AO by invoking the provisions of section 14A of the Act, read with Rule 8D of the Income Tax Rules (hereinafter ‘the Rules’) amounting to ₹ 55,40,337/-. For this Revenue has raised the following ground: -
“1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) erred in deleting the disallowance of Rs. 55,10,926/- (out of total disallowance of RS. 55,40,337/-) under section 14A r.w.Rule 8D being Rs. 53,97,568/- u/r 8D(2)(ii) and Rs. 1,13,358 u/r 8D(2)(iii).”
Briefly stated facts are that the assessee is engaged in the business of trading in securities and commodities including derivatives. The AO noticed from the profit and loss account and computation of income that the assessee has earned exempt income i.e. share of profits amounting to ₹ 12,51,43,408/- and claimed the same as exempt income under section 10 of the Act. The AO noted that the assessee company has made investment of ₹ 5,71,07,613/- in equity shares, which resulted in exempt income. The AO also noted that the assessee has suo moto disallowed a sum of ₹ 29,411/- relatable to exempt income. According to AO, the disallowance suo moto made by the assessee is not in accordance with the provisions of section 14A of the Act read with Rule 8D of the Rules and hence, he is not satisfied with the correctness of the claim of the assessee. He directly invoked the formula prescribed under Rule 8D and thereby disallowed interest on expenses under Rule 8D (2)(ii) at ₹ 53,97,568/- and administrative expenses under Rule 8D(2)(iii) i.e. 0.5% of average value of investment at ₹ 1,42,769/-. Aggrieved, assessee preferred the appeal before CIT(A).
The CIT(A) noted that the suo moto disallowance of expenses relatable to exempt income by the assessee has been rejected by the AO by making some general comments. According to him, the AO has not recorded any satisfaction qua, the loans taken and investment made in earning of exempt income and also has not recorded any satisfaction for expenditure along with administrative expenses. According to CIT(A), the AO was not satisfied but he deleted the disallowance on this very premises by observing in Para 5.2 as under: -
“5.2 This ground pertains to disallowance of Rs. 55,10,926/- made by the AO under section 14A r.w.r 8D of the I.T. Rules over and above suo-moto disallowance of Rs.29411/- made by the appellant under section 14A of the Act. The appellant had made suo moto disallowance of Rs. 29,411/-, however, the AO has rejected this computation by making some generalised observations. I find that the AO has not given any justification for rejecting the detailed and scientific methodology of computing expenses attributable to earning of exempt income as submitted by the appellant in Tax Audit Report nor has he given any specific reasons for rejecting the computation of indirect expenses. In order to invoke the provisions of Rule 8D of the IT Rules, it is a prerequisite for the AO, to verify the claim of the appellant and record his objective satisfaction regarding the appellant's claim of expenses incurred or no expenditure incurred in relation to the exempt income having regard to the accounts of the appellant. A far more rigorous rejection of the appellant's contentions and methodology of suo moto disallowance was required from the AO, in absence of which Rule 8D could not be invoked in a mechanical and automatic mann,9This view also finds support in following judicial pronouncements.”
The CIT(A) also recorded on merits that the negative average value will make the formula prescribed under Rule 8D(20(ii)as non- workable and for this he observed in Para 5.2 and 5.3 as under: -
“5.2.3 Moreover, the AO has taken "NIL' as opening value of investment u/R 8D(2)(ii). This is not correct as the opening balance was a negative figure of (-) Rs.9,19,04,092/-. Thus, to arrive at average value, the amount would work out at negative figure giving the numerator as O" in the R. 8D(2)(ii) formula. This makes the Application of the formula itself impossible.”
Aggrieved, now Revenue is in appeal before Tribunal.
We have heard the rival contentions and gone through the facts and circumstances of the case. Before us, the learned Sr. Departmental Representative heavily relied on the assessment order. We have gone through the assessment order and noted that the AO has not recorded how the scientific disallowance made is incorrect in term of the provisions of section 14A of the Act. We are of the view that satisfaction is the primary condition for making disallowance under Rule 8D. Hon’ble Supreme Court in the case of Maxopp Investment Ltd. vs. CIT [2018] 402 ITR 640 (SC), wherein the Hon’ble Supreme Court has held that the positive satisfaction is to be recorded by the AO for making disallowance. Hon’ble Supreme Court 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.”
In view of the above facts and circumstances of Hon’ble Supreme Court in the case of Maxopp Investment Ltd. (supra), we confirm the order of CIT(A) deleting the disallowance. The appeal of Revenue is dismissed.
In the result, the appeal Revenue is dismissed. Order pronounced in the open court on 10-07-2018.