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Income Tax Appellate Tribunal, “G” BENCH, MUMBAI
These two appeals by Revenue are arising out of the different orders of Commissioner of Income Tax (Appeals)-21, Mumbai, [in short CIT(A)] in appeal No. CIT(A)-21/IT/91 & 412/2010-11 & 2011-12 dated 12.11.2012 & 01.06.2012. The Assessments were framed by the Dy. Commissioner of Income Tax & Income Tax Officer, Circle 10(2) & ward- 10(2)(3), Mumbai (in short DCIT/ITO/ AO) for the AY 2008-09 & 2009-10 order dated 30.09.2010 & 29.12.2011 under section 143(3) of the Income Tax Act, 1961(hereinafter ‘the Act’).
The only common issue in both the appeals of Revenue is as regards to the order CIT(A) deleting the disallowance made by AO in regard to expenses relatable to exempt income by invoking the provisions of section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 (hereinafter ‘the Rules’). For this Revenue has raised identical worded grounds in both the appeals. Both the parties admitted before us that facts are exactly identical in both the years. Hence, we will take up the grounds raised
and facts from AY 2009-10. The following are the grounds raised by Revenue: -
1. (a) On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance uls.14A. r.w. Rule 8D, made by the AO.
(b) On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred M holding that the disallowance suo-motto offered 5879/Mum/2012 by the assessee was reasonable as it was based on scientific working.
2. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in not appreciating the fact that the assessee has not provided the working as to how the suo-motto disallowances u/s14A were computed.”
Briefly stated facts are that the assessee is engaged in the business of non-banking finance Company, classified as Investment Company not accepting / holding any public deposits. During the course assessment proceedings, the AO noticed from the computation of income that the assessee has earned dividend income of Rs. 112,56,66,350/-. The assessee computed the expenses relatable to earning of this exempt income and made suo moto disallowance of Rs. 1,08,11,971/- but according to AO the actual disallowable expenses relatable to this exempt income are to the tune of Rs. 3,10,04,504/- and hence, he required the assessee to explain as to why the disallowance under section 14A of the Act should not be considered at Rs. 3,10,04,504/- as against the suo moto disallowance made by assessee at Rs. 1,08,11,971/-. The assessee explained that in view of specific provisions of section 115JB of the Act, starts that a non-obstante clause, “notwithstanding anything contained in any other provisions of this Act”. Therefore, it has the effect of making the provisions relating to book profit tax, a self contained code so that one have not to look to any other section for determination of book profit. Hence, no disallowance under section 14A read with rules 8D of the Rules can be made. The AO computed the disallowance while working out book profit under section 115JB of the Act at Rs. 3,10,04,504/- and ignoring suo moto disallowance 5879/Mum/2012 made by assessee at Rs. 1,08,11,971/-. Aggrieved, assessee preferred the appeal before CIT(A), who deleted the disallowance by observing that no satisfaction is recorded by the AO with regard to correctness of claim of assessee in respect of such expenditure in relation to income which does not form apart of total income. According to CIT(A), once the assessee suo moto worked out disallowance under section Rule 8D(2)(ii) at Rs. 1,06,61,930/- against the interest expenditure and administrative expenses at Rs. 1,50,004/- under Rule 8D (2)(iii) of the Act being administrative expenses, thereby total disallowance at Rs. 1,08,11,971/-. According to CIT(A), the AO could not point out any defect in the scientific computation of disallowance suo moto made and there is no satisfaction recorded qua that, no disallowance under section 14A of the Act read with rule 8D of the Rule can be made. Accordingly, the CIT(A), restricted the disallowance at Rs. 1,08,11,971/-. Aggrieved, now Revenue is in second appeal before Tribunal.
We have heard the rival contentions and gone through the facts and circumstances of the case. We gone through the order of the AO and that of the CIT(A). We find from the order of CIT(A) that there is categorical finding by the first appellate authority that the AO has not recorded any satisfaction as to why the assessee’s claim of disallowance of expenditure is not correct. The CIT(A) observed as under: - “As per provisions of see.14A(I) no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of total income under this Act. As per provisions of sec. 14A(2) where the A.O. is not satisfied with the correctness of claim of assessee in respect of such 5879/Mum/2012 expenditure in relation to income which does not form part of total income, the A.O. shall determine amount of expenditure disallowable by applying the formula provided in Rule 8D(2). Thus the A.O. has to apply the provisions of Rule 8D only when he is not satisfied with the appellant's claim of disallowance u/s. 14A offered in the return of income. The Bombay High Court in the case of Godrej & Boycee Mfg. Co. Ltd. 234 CTR 1 has also held that sub- sec.(2) of sec. 14A makes it abundantly clear that the power to apply the prescribed method (Rule 8D) arises only where the A.Q. is not satisfied with the correctness of the claim of the assessee having regard to the accounts of assessee. In the ease under consideration the appellant itself has offered disallowance of Rs. 1,08,11,971/- (interest expenditure Rs.1,06,61,930/- plus administrative expenses Rs.1,50,041/-). Such disallowance was based on scientific working and day to day actual expenditure incurred for the purpose of earning exempt income. In the facts and circumstances the A.O. was required to record the finding that appellant's offer of disallowance u/s'rt4ln the return of income was not correct. Only after recording such reasons, the A.O. could apply the provisions of Rule 8D(2). In the case under consideration the A.O. has not recorded any 5879/Mum/2012 such reasons/ satisfaction for directly applying the provisions of Rule 8D(2) without discussing as to how the appellant's claim was not correct.
Irrespective of the fact that the A.O. has not recorded any such satisfaction as mentioned above, the CIT(A) is empowered and competent enough to examine as to whether or not appellant’s offer of disallowance u/s.14A(1) in the return of income was correct. In my considered view the appellant's offer of disallowance u/s. 14A at Rs. 1,08,11,971 / - in the return of income was justified, logical and based on scientific working of actual day to day working of interest disallowable based on day to day utilization of borrowed funds for the purpose of making investments. In the facts and circumstances the provisions of Sec. 14A(2) were not applicable. Therefore, the A.O. was not justified in making further disallowance by applying the provisions of Rule 8D(2). In the return of income, the appellant had offered the correct interest expenditure disallowable u/s.14A(1) of the Act. The appellant had also offered all other expenses (Admn. Expenses) for disallowance.
Without prejudice to above finding, the appellant's argument is also correct that in the working of Rule 8D the A.O. has committed 5879/Mum/2012 totaling mistake and has also erred in considering taxable investment and the net assets as against gross assets.
In view of the above the appellant's offer of disallowance in the return of income u/s.14A at Rs.1,08,11,971/- is accepted and the further disallowance made by A.O. by applying the provisions of Rule 8D(2) is deleted. These grounds of appeal are therefore, allowed.”
5. We also find that in regard to recording of satisfaction Hon’ble Supreme Court in the case of Maxopp Investment Ltd. vs. CIT [2018] 402 ITR 640 (SC), 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.”
6. We find from the above proposition and the facts of the case that the AO has not at all recorded the satisfaction for rejecting the claim of expenditure suo moto disallowed by assessee in relation to exempt income. Once this is the position, we are of the view that the CIT(A) has rightly deleted the disallowance. Accordingly, we confirm the order of CIT(A).
The assessee has also raised the alternative propositions i.e. interest free funds available with it for making investment and also others. Since, we have already allowed the assessed claim on the issue of satisfaction, we need not to adjudicate the other propositions.
The facts and circumstances are exactly identical in AY 2008-09 and even CIT(A) and AO both have relied on the assessment order 2009- 10. Hence, taking a consistent view, we affirm the order CIT(A) deleting the disallowance. Both the appeals of Revenue are dismissed.
In the result, the appeals of Revenue are dismissed.
Order pronounced in the open court on 09-07-2018.