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Facts
The assessee, Jaypee Infra Ventures Pvt. Ltd, engaged in technical consultancy, earned significant exempt dividend income from strategic investments. It made a suo moto disallowance of Rs. 1.22 crore under Section 14A read with Rule 8D(2) for expenses related to earning this income. However, the AO ignored this and made a higher disallowance of Rs. 6.05 crore by directly applying Rule 8D(2), which the CIT(A) upheld.
Held
The Tribunal ruled that the AO's basis for applying Rule 8D(2) was flawed, as the assessee had minimal interest expenditure and had already made a reasonable suo moto disallowance. Crucially, the AO failed to record objective satisfaction, as mandated by Section 14A(2) read with Rule 8D(1) and Supreme Court precedents, for rejecting the assessee's own disallowance. Consequently, the disallowance made by the AO under Section 14A and for Section 115JB computation was deleted.
Key Issues
Whether the AO was justified in rejecting the assessee's suo moto disallowance under Section 14A read with Rule 8D(2) for earning exempt income and applying a higher disallowance without recording objective satisfaction.
Sections Cited
Section 14A, Rule 8D(2) of Income Tax Rules, 1962, Section 115JB, Section 143(3), Rule 8D(1), Income-tax Act, 1961
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, DELHI BENCH “C”: NEW DELHI
O R D E R PER M. BALAGANESH, A. M.: The appeal in AY 2014-15, arises out of the 1. order of the National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘ld. CIT(A)’, in short] in Appeal No. ITBA/NFAC/S/250/2022- 23/1050866246(1) dated 16.03.2023 against the order of assessment passed u/s 143(3) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) dated 28.12.2016 by the Assessing Officer, DCIT, circle-13(2), New Delhi (hereinafter referred to as ‘ld. AO’).
Though the assessee has raised several grounds of appeal before us, 2. the only effective issue to be decided is with regard to disallowance made u/s 14A of the Act read with Rule 8D(2) of the Income Tax Rules, 1962 (in short the rules) both under the normal provisions of the Act as well as in the computation of book profits u/s 115JB of the Act.
We have heard the rival submissions and perused the material 3. available on record. The assessee company is engaged in the business of designing and technical consultancy services to various infrastructural projects. The assessee had made various strategic investments in group concerns which were acquired mainly on amalgamation of group concern, Japyee Ventures Pvt Ltd in the year 2011-12. 98% of the entire investments were old investments in group concerns and during the year there were only 2 to 3 instances of sale/ purchase transactions which was also made in the existing group concerns of the assessee. The assessee earned exempt income in the form of dividend amounting to Rs. 36,46,67,524/-. The assessee made suo moto disallowance of expenditure u/s 14A of the Act in the sum of Rs. 1,22,30,414/- both under normal provisions of the Act as well as in the computation of book profits u/s 115JB of the Act. The basis of the said disallowance is as under:-
Depository expense Rs. 568 50% of salary of Directors Rs.1,06,14,101 50% of salary of Accountant and Rs. 4,15,745 Company Secretary Rs. 12,00,000 Administration expenses (Rs.1,00,000/- per month Total Rs.1,22,30,414 The ld AO in page 2 of his order observes that substantial part of 4. interest expenditure has been incurred for the purpose of earning exempt income by the assessee. Apart from that, he also stated that it cannot be denied that a portion of administrative and other expenses were incurred for maintainence of those investments in the form of man hours, use of common facilities like telephone, electricity and other stationery etc. Accordingly, he ignored the suo moto disallowance made by the assessee and proceeded to make disallowance u/s 14A of the Act by directly applying the computation mechanism provided in 2nd and 3rd limb of Rule 8D(2) of the Rules and made net disallowance of Rs. 6,05,91,233/- in the assessment. This action of the ld AO was upheld by the ld CIT(A).
At the outset, we find that the very basis of alleged satisfaction 5. recorded by the ld AO, that the assessee had incurred substantial interest expenditure for the purpose of earning exempt income, per se is factually incorrect as is evident from the perusal of the financial statement that the assessee had incurred interest expenditure only to the extent of Rs 18,436/-. Hence, the very basis of ld AO shifting to adoption of computation mechanism provided under Rule 8D(2) of the Rules ignoring the suo moto disallowance made by the assessee is flawed. We find that the assessee had taken the direct expenditure as well as indirect expenditure incurred which has linkage with the investment activity and made suo moto disallowance. If any mistake or deficiency is found thereon having regard to the books of account of the assessee, the ld AO is entitled to ignore the same and proceed with Rule 8D(2) of the Rules. In the instant case, it was not done by the ld AO. Moreover, as per the provisions of section 14A(2) of the Act read with Rule 8D(1) of the Rules, the ld AO is duty bound to record an objective satisfaction as to why the suo moto disallowance made by the assessee is incorrect having regard to the accounts of the assessee. No such satisfaction in the manner acceptable to law had been recorded in the instant case by the ld AO. This view of ours is further fortified by the decision of Hon’ble Supreme Court in the case of Maxopp Investments reported in 402 ITR 640 (SC). Hence, we have no hesitation to delete the disallowance made u/s 14A of the Act both under normal provisions of the Act as well as in the computation of book profits u/s 115JB of the Act. Accordingly, the grounds raised by the assessee are allowed.
In the result, the appeal of the assessee is allowed. 6.
Order pronounced in the open court on 22/05/2024.