PRANAVA ELECTRONICS PRIVATE LIMITED ,BANGALORE vs. DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-5(1)(2), BANGALORE

Per Shri Jason P Boaz, A.M. : This appeal by the assessee is directed against the order of Commissioner of Income Tax (Appeals)-5, Bangalore dt.30.01.2017 for the Assessment Year 2012-13. 2. Briefly stated, the facts of the case are as under :- 2.1 The assessee, a company engaged in the manufacture and trading of electronic goods, filed its return of income for Assessment

2 ITA No.798/Bang/2017 Year 2012-13 on 29.09.2012 declaring income of Rs.1,94,07,015. The case was taken up for scrutiny and the assessment was completed under Section 143(3) of the Income Tax Act, 1961 (in short 'the Act') vide order dt.26.2.2015 wherein the assessee's income was determined at Rs.2,07,49,095 in view of disallowance of Rs.13,42,080 under Section 14A of the Act. On appeal, the learned CIT (Appeals) upheld the aforesaid disallowance made by the Assessing Officer under Section 14A of the Act r.w. Rule 8D(2)(iii) of the IT Rules, 1963. 3.1 Aggrieved by the order of the CIT (Appeals) dt.30.1.2017 for Assessment Year 2012-13, the assessee has filed this appeal before the Tribunal, raising therein the following grounds :- “1. That the order of the authorities below in so far as it is against the appellant is against the law, facts, circumstances, natural justice, without jurisdiction, bad in law and all other known principles of law. 2. The total income computed and total tax computed is hereby disputed. 3. The learned authorities below erred making disallowance of Rs.13,42,080 under Section 14A rwr 8D(2)(iii) of the Act. 4. The ld. authorities below erred in applying Rule 8D(2)(iii) of the Income Tax Rules without restricting the same to the actual expenditure incurred. 5. That the learned authorities below erred in not following the binding/relevant decisions of the higher appellate authorities on the issue. 6. For the above and other grounds and reasons which may be submitted during the course of hearing of this appeal, the assessee requests that the appeal be allowed a sprayed and justice be rendered.”

3 ITA No.798/Bang/2017 3.2.1 We have heard the rival contentions of both learned Authorised Representative for the assessee in support of the grounds raised and the learned Departmental Representative for revenue in support of the order of the learned CIT (Appeals) and have perused and carefully considered the material on record. The only issue for consideration in this appeal is with respect to the disallowance made under Section 14A r.w. Rule 8D(2)(iii) of the IT Rules, 1963 amounting to Rs.13,42,080. The facts of the matter, as emanate from the record, are that in the year under consideration, the assessee earned dividend income of Rs.75,21,400 which was claimed as exempt under Section 10(34) of the Act. The Assessing Officer on noticing that the assessee had not claimed any expenditure to earn this exempt income, required the assessee to explain why the provisions of Section 14A r.w. Rule 8D of the IT Rules be not invoked to determine the amount of expenditure incurred in relation to the earning of the aforesaid exempt income. After rejecting the assessee's explanation, that no expenditure was incurred for earning the exempt income and its alternative claim that the disallowance under Section 14A r.w. Rule 8D be restricted to Rs.11,02,106, the Assessing Officer proceeded to make a disallowance of Rs.13,42,080 under Section 14A r.w. Rule 8D(2)(iii) as per the working / computation on page 2 of the order of assessment. On appeal too, the learned CIT (Appeals) rejected the assessee's contentions, that no disallowance under Section 14A r.w. Rule 8D was called for as no expenditure had been incurred for earning exempt income or in the alternative that the disallowance

4 ITA No.798/Bang/2017 thereunder be restricted to Rs.8,46,393, and upheld the disallowance made by the Assessing Officer. 3.2.2 Apart from the contentions raised by the assessee, in the grounds (supra), the learned Authorised Representative submitted that the Assessing Officer failed to satisfy the conditions mandated in Sec. 14A(2) r.w. Rule 8D(1) by recording his satisfaction with reference to the examination of accounts of the assessee elucidating and explaining why the assessee's explanation is not satisfactory. It was submitted that it is only after the Assessing Officer records such satisfaction with reference to an examination of assessee's accounts that the provisions of Rule 8D(2) can be invoked to make a disallowance. It is contended that in view of the above, the disallowance made by the Assessing Officer is liable to be set aside. 3.2.3 Per contra, the learned Departmental Representative for revenue contended that the grounds and arguments raised by the assessee seeking deletion of the disallowance made by the Assessing Officer under Section 14A r.w. Rule 8D(2)(iii) are not tenable as the assessee itself before the Assessing Officer has computed and submitted that the disallowance thereunder should be restricted to Rs.11.02,106. 3.2.4 In our view, after a careful appreciation of the facts on record in the case on hand, we find that the conditions mandated in sub-section (2) of Section 14A r.w. Sub-rule (1) to Rule 8D were not satisfied, as the Assessing Officer erred in invoking Rule 8D(2) without recording his satisfaction with regard to the assessee's accounts by elucidating and

5 ITA No.798/Bang/2017 explaining why the initial claim of the assessee that no expenditure was incurred to earn exempt income or its subsequent alternative claim that the disallowance under Section 14A r.w. Rule 8D(2)(iii) be restricted to Rs.11,02,106 were unreasonable and unsatisfactory. In this factual matrix of the case, we are of the view that in the interest of equity and justice, the orders of the authorities below on disallowance ofRs.13,42,080 made under Section 14A r.w. Rule 8D(2)(iii) be set aside and the issue of disallowance under Section 14A r.w. Rule 8D be remanded to the file of the Assessing Officer for fresh adjudication after recording his satisfaction after examination of the assessee's claim with reference to the book of accounts vis-à-vis both its original claim of Nil expenditure and subsequent alternative working and submission that the disallowance thereunder be restricted to Rs.11,02,106 and the Assessing Officer’s original disallowance at Rs.13,42,080. We hold and direct accordingly. Consequently, the assessee's appeal is partly allowed for statistical purposes. 4. In the result, the assessee's appeal for Assessment Year 2012-13 is partly allowed for statistical purposes. Order pronounced in the open court on the 17th January, 2018.

Sd/- Sd/- (LALIT KUMAR) (JASON P BOAZ) Judicial Member Accountant Member Bangalore, Dt. 17.01.2018. *Reddy gp