ORBIT ELECTRICALS PVT. LTD.,,PUNE vs. DEPUTY COMMISSIONER OF INCOME-TAX,,

The brief facts of the case as emanating from records are : The assessee filed its return of income for the impugned assessment year on

Shri Nikhil Pathak appearing on behalf of the assessee submitted that the Assessing Officer has erred in making disallowances u/s. 14A r.w. Rule 8D without recording satisfaction as envisaged under the provisions of the Act. The Assessing Officer has not recorded reasons as to why suo- moto disallowance made by the assessee is not acceptable. The ld. AR submitted that the provisions of Sub-section (2) of section 14A mandates that the Assessing Officer has to record satisfaction before resorting to the provisions of Rule 8D. To support his submissions the ld. AR placed reliance on the following decisions : i. Godrej & Boyce Manufacturing Company Ltd. Vs. Deputy Commissioner of Income Tax, 81 taxmann.com 111 (SC); ii. Maxopp Investment Ltd. Vs. Commissioner of Income Tax, 347 ITR 272 (Delhi).

Dr. Vivek Aggarwal representing the Department vehemently defended the order of Commissioner of Income Tax (Appeals) in confirming addition. The ld. DR submitted that the Assessing Officer has made disallowance under Rule 8D in accordance with law. The ld. DR pointed that the Assessing Officer has recorded reasons for not accepting suo-moto disallowance of Rs.5,000/- made by assessee.

We have heard the submissions made by representatives of rival sides and have perused the orders of authorities below. The solitary issue raised in the appeal is disallowance u/s. 14A r.w. Rule 8D without recording satisfaction. Before we proceed to decide the issue, it would be relevant to refer to the provisions of section 14A. The same are reproduce here-in-below : “14A. Expenditure incurred in relation to income not includible in total income.— (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act:]”

The Hon’ble Delhi High Court in the case of Maxopp Investment Ltd. Vs. Commissioner of Income Tax (supra) has held that the Assessing Officer before rejecting the claim of assessee with regard to expenditure or no expenditure, as the case may be in relation to exempt income as to indicate cogent reasons for the same. The relevant extract of the findings of Hon’ble High Court on the issue explaining the scope of sub-section (2) of section 14A and the application of Rule 8D are as under : “30. As we have already noticed, sub-s. (2) of s. 14A of the said Act refers to the method of determination of the amount of expenditure incurred in relation to exempt income. The expression used is—"such method as may be prescribed". We have already mentioned above that by virtue of Notification No. 45 of 2008 dt. 24th March, 2008, the CBDT introduced r. 8D in the said Rules. The said r. 8D also makes it clear that where the AO, having regard to the accounts of the assessee of a previous year, is not satisfied with (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act for such previous year, the AO shall determine the amount of the expenditure in relation to such income in accordance with the provisions of sub-r. (2) of r. 8D. We may observe that r. 8D(1) places the provisions of s. 14A(2) and (3) in the correct perspective. As we have already seen, while discussing the provisions of sub-ss. (2) and (3) of s. 14A, the condition precedent for the AO to himself determine the amount of expenditure is that he must record his dissatisfaction with the correctness of the claim of expenditure made by the assessee or with the correctness of the claim made by the assessee that no expenditure has been incurred. It is only when this condition precedent is satisfied that the AO is required to determine the amount of expenditure in relation to income not includible in total income in the manner indicated in sub-r. (2) of r. 8D of the said Rules. 31. It is, therefore, clear that determination of the amount of expenditure in relation to exempt income under r. 8D would only come into play when the AO rejects the claim of the assessee in this regard. If one examines sub-r. (2) of r. 8D, we find that the method for determining the expenditure in relation to exempt income has three components. The first component being the amount of expenditure directly relating to income which does not form part of the total income. The second component being computed on the basis of the formula given therein in a case where the assessee incurs expenditure by way of interest which is not directly attributable to any particular income or receipt. The formula essentially apportions the amount of expenditure by

The Co-ordinate Bench of the Tribunal in the case of Kalyani Steels Ltd. Vs. Addl. Commissioner of Income Tax in ITA No. 1733/PN/2012 for the assessment year 2008-09 decided on 30-01-2014 after placing reliance on the judgment of Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Vs. Deputy Commissioner of Income Tax & Anr. reported as 328 ITR 81 (Bom.) has held that the Assessing Officer can take recourse to Rule 8D only if he records finding that he is not satisfied with the correctness of the claim of assessee in respect of such expenditure.

In the present case we find that the Assessing Officer observes that the assessee has made suo-moto disallowance of Rs.5,000/- u/s. 14A and thereafter proceeds on to compute disallowance under the provisions of Rule 8D. The Assessing Officer has not given any cogent reasoning for rejecting disallowance made by the assessee. The manner in which Assessing Officer has enhanced disallowance u/s. 14A r.w. Rule 8D falls

Thus, in view of the decisions discussed above, the mandatory provisions of section 14A and the facts of the case, we find merit in the appeal of the assessee. Accordingly, the impugned order is set aside and the appeal of assessee is allowed.

In the result, the appeal of assessee is allowed.