BHARAT BIJLEE LIMITED,PRABHADEVI, MUMBAI vs. ADDITIONAL-JOINT-DEPUTY-ASSISTANT COMMISSIONER OF INCOME TAX, INCOME TAX OFFCIER, DELHI

In response to the show cause notice issued, the assessee furnished a detailed reply, not only objecting to the assumption of jurisdiction u/s. 263 of the Act, but also emphasizing that the A.O. having accepted assessee’s claim after proper enquiry and due application of mind, the assessment order cannot be termed as ‘erroneous and prejudicial to the interest of Revenue’. In support of such contention, the assessee relied upon a catena of the assessee. He was of the view that while accepting assessee’s claim, the A.O. has not made full and proper enquiry, as was required to be made. Further, referring to clause (c) under Explanation 2 to section 263 of the Act, he observed that the A.O. has not passed the order in accordance with CBDT Circular No. 05/2014, which mandates computation of disallowance u/s. 14A of the Act read with Rule 8D. Thus, he ultimately concluded that non computation of disallowance in terms of Rule 8D has made the assessment order erroneous and prejudicial to the interest of Revenue. Having held, he set aside the assessment order, directing the A.O. to make enquiry on the issue of disallowance u/s. 14A of the Act and reassess the income after providing opportunity of being heard to the assessee.

Before us, the ld. Counsel appearing for the assessee submitted that, the assessee is carrying out its investment activities from past several years and from 2012 onwards, the investments have remained steady. He submitted that, since there was no fresh investments made during the current year, the assessee had not incur any interest cost for investment.

The learned Departmental Representative ('ld. DR' for short), strongly relied upon the observations of the ld. PCIT. Further, he submitted that Explanation 2 to section 263 of the Act, empowers the Revisionary Authority to declare an assessment order erroneous and prejudicial to the interest of the Revenue, if in his opinion, the conditions enumerated under the said explanation are fulfilled.

We have considered rival submissions, in light of the decisions relied upon and perused the materials on record. Undisputedly, the only issue on which ld. PCIT has u/s. 14A of the Act read with Rule 8D. As discussed earlier in the order, in the year under consideration, the assessee has earned exempt income amounting to Rs.2.47 crores, whereas, suo motu, it has disallowed Rs.58,456/-. At this stage, what is required to be examined is, whether in course of assessment proceeding the A.O. had enquired into and examined, the issue of disallowance to be made u/s. 14A of the Act. As we find, on 17.02.2020, the A.O. issued a notice u/s. 142(1) of the Act, wherein, an Annexure was attached specifying various aspects in relation to claims made in the return of income and computation of income, on which the assessee was required not only to furnish the necessary details, but also to justify the claim. One of the issues specifically raised in the said Annexure is, with regard to, non computation of suo motu disallowance of expenses relating to exempt income in terms with Rule 8D.

It is evident, in response to the query raised by the A.O., the assessee furnished its reply on 09.03.2020, wherein, detailed submission was made justifying the suo motu disallowance of expenses relating to earning of exempt income. In the said reply, the assessee further brought to the notice of the A.O., the past assessment history relating to the very same issue and stated that the disallowances made in various assessment years, have been deleted by the appellate authorities, being ld. CIT(A) or the Tribunal. In the said reply, it was explained by the assessee that it has computed the suo motu disallowance by considering the salary cost of the employees assigned to the investment activity, electricity and certain other costs on proportionate basis. assessment order after examining in detail the various issues raised in the notices issued either u/s. 142(1) of the Act or u/s. 143(2) of the Act. The assessment order certainly cannot be considered to be a cryptic or non-speaking order accepting assessee’s claim. In fact, as against the nil income declared by the assessee, the A.O. has determined the total income at Rs.15,26,53,132/-, after making couple of disallowances. These facts clearly reveal that the A.O. has passed the assessment order after conducting thorough enquiry and due application of mind.

At this stage, we need to examine the provisions of section 14A of the Act. A reading of the said provision, reveals that it has an overriding effect and provides for disallowance of expenses attributable to earning of exempt income. Sub section (2) of section 14A of the Act empowers the A.O. to compute disallowance, in case, he is satisfied that the disallowance computed by the assessee is incorrect, having regard to the accounts of the assessee. Therefore, the catch is, the A.O. must be satisfied that the suo motu disallowance computed by the assessee is incorrect having regards to the accounts. In other words, the A.O. is empowered to reject the suo motu disallowance made by the assessee, only when he records a dissatisfaction regarding the incorrectness of assessee’s claim having regard to the accounts. In case, the A.O. is satisfied with the correctness of assessee’s claim having regard to its accounts, there is no requirement in law that the A.O. must record such satisfaction in the body of the assessment order itself.

In the facts of the present appeal, having perused the materials on record, we are of the view that after examining the explanation of the assessee, the A.O. prima facie was satisfied with the correctness of the suo motu disallowance made by the assessee, having order itself. A careful reading of the provision contained u/s. 14A(2) of the Act, read with Rule 8D(1), clearly indicates that the satisfaction postulated in the aforesaid provisions is that of the A.O. and no other authority. Therefore, by merely stating that the A.O. has not properly recorded his satisfaction, the revisionary authority cannot substitute the satisfaction of the A.O. with his own, that too, without making any enquiry himself.

Now coming to the enquiry part, ld. PCIT himself admits that assessee’s case does not fall under no enquiry. According to ld. PCIT, the A.O. has made partial enquiry and has not carried the enquiry to its logical end. In this context, ld. PCIT has referred to CBDT Circular No. 05/2014 and has observed that it mandates disallowance to be made in terms with the methodology provided under Rule 8D. If such a view is adopted, then the recording of satisfaction in terms of section 14A(2) of the Act read with Rule 8D(1) becomes otiose. This is so because, in case Rule 8D(2) has to be applied mandatorily, then there is no need to record satisfaction. In our view, the sanctity of recording satisfaction u/s.14A(2) of the Act has been judicially settled, hence, the issue should not detain us any further. At this stage, it needs to be observed that while justifying his action u/s. 263 of the Act, ld. PCIT has taken shelter under clause (c) to Explanation 2 which reads as under:

In the result, the appeal is allowed.