BIDDLE SAWYER LTD,MUMBAI vs. ADDL CIT RG 6(1), MUMBAI

The only issue raised by the assessee is against the confirmation of disallowance of Rs.9,61,980/- by the ld.CIT(A) as made by the AO under section 14A of the Act read with rule 8D of the Rules without recording any satisfaction and another ground without prejudice as raised by the assessee is qua making the disallowance on reasonable basis.

Facts of the case are that the assessee filed return of income on 29.9.2009 declaring total income of Rs.91,31,91,876/-. The return was processed u/s 143(1) of the Act. Thereafter, the case of the assessee was selected for scrutiny and statutory notices u/s 143(2) and 142(1) of the Act were issued and served upon the assessee. During the course of assessment proceedings, the AO noticed from the balance sheet that the assessee has made investments in mutual funds and also received dividend income of Rs.1,31,64,000/- which was claimed as exempt income under the provisions of section 10(34) of the Act. However, the assessee suo motu disallowed an amount of Rs.3,886/- as expenditure towards exempt dividend income under section 14A which is not as per the methodology laid down in sub-section (3) to Section 14A r.w.r. 8D of the Rules. Accordingly, the AO issued show cause notice to the assessee 3 which was replied by the assessee by submitting that the assessee has incurred only Rs.3886/- in connection with earning of exempt income and no more disallowance u/s 14A was called for. The AO did not find the reply of the assessee satisfactory and after applying the provisions of section 14A rule 8D calculated the disallowance at Rs. 9,61,890/- under rule 8D(2)(iii).

In the appellate proceedings, the ld. CIT(A) dismissed the appeal of the assessee on this issue both on principal ground as well as on without prejudice plea by holding that the disallowance was rightly calculated by the AO. Aggrieved by the order of the ld. CIT(A), the assessee is in appeal before us.

The ld.AR vehemently, submitted before us that the order of the ld. CIT(A) was wrong and is against the facts of the case as the assessee has incurred only Rs.3886/- for earning exempt income u/s 14A r.w.r 8D. The AO without giving any reason for disagreeing with the assessee has not recorded any satisfaction with reference to the claim of the assessee. The ld. AR submitted that as per the provisions of section 14A sub-section (2) of the Act, the AO has to determine the expenditure incurred in relation to the income which does not form part of the total income under the Act in accordance with such method as may be prescribed only if the AO having 4 regard to the account of the assessee is not satisfied with the correctness of the claim of the assessee etc qua such expenditure in relation to the income which does not form part of the total income under the Act. The ld. AR further stated that even under rule 8D(1), the same condition is mentioned as in section 14A(2) of the Act as regards satisfaction to be recorded by the AO. The ld. AR lastly, submitted that since the AO has not recorded any satisfaction in the assessment order with regard to the claim of the assessee by having regard to the accounts of the assessee, therefore the provisions of section 14A r.w.r.8D would not be invoked. In support of his contentions, the ld. AR relied upon the following decisions : • Smartchem Technologies (ITA No. 7014/M/2013) dated 23 June 2017 • Pawan Kumar Jhunjhunwala (157 ITD 667) (Kol ITAT) dated 6.11.2015 • Ashish Jhunjhunwala (88 CCH 470) (Cal HC) dated 8.1.2014 • JK Investors (Bombay) Ltd. (ITA No.7858/Mum/2011) AY 2008-09 dated 13 March 2013 Without prejudice to the main submissions, the ld. AR prayed before the Bench that if the first contentions is not accepted then the reasonable disallowance may kindly be made by relying upon the decision in assessee’s own case in (AY-2008-09) dated 31.7.2015 and the decision in the case of Sheba Properties Ltd (ITA No.2927/M/2013) dated 16.6.2017. 5 6. The ld. DR on the other hand, relied on the orders of authorities below by drawing our attention to the provisions of section 14A of the Act read with rule 8D of the rules and submitted that these are to be mandatorily applicable and the AO has rightly applied the same by giving comprehensive findings of the same. The ld DR while defending the order of CIT(A) submitted that he has rightly upheld the order of the AO. The ld. DR, therefore prayed that the appeal of the assessee be dismissed.

We have carefully considered the rival submissions and perused the material placed before us including the impugned orders of authorities below. On perusal of the assessment order, we find that the AO has not recorded any dissatisfaction with respect to the claim of the assessee of expenditure of Rs.3886/- claimed u/s 14A r.w.r.8D as expenses relating to the exempt income not forming the part of the income of the assessee. After perusal of the provisions of section 14A(2) and rule 8D, we observe that it is mandatory on the part of the AO to record dis-satisfaction by having regard to the accounts of the assessee qua the claim of the assessee i.e. AO must point out as to how the claim of the assessee is wrong and not acceptable and only after rejecting the said claim of the assessee, the AO can apply the provisions of section 14A r.w.r.8D otherwise not. In the case of Smartchem Technologies Ltd., V/s ACIT, 6 Central Circle-44, (ITA NOS. 7014-7016/MUM/2013) (AY-2008-09-2010-11) dated 23.6.2017, the co-ordinate Bench of the Tribunal has held as under : “10. We have perused the relevant discussion in the assessment order, which is quite sketchy. There is no reference to any of the factsituation or any credible reasoning or material by the Assessing Officer before rejecting the plea of the assessee and proceeding to determine the disallowance by applying the formula contained in Rule 8D of the Rules. In fact, the phraseology of Sec. 14A of the Act itself specifies that the satisfaction contemplated is required to be arrived at “having regard to the accounts”, an approach which is conspicuous by its absence in the present case. Therefore, in view of such an inadequacy in the action of the Assessing Officer, it has to be held that the satisfaction contemplated u/s 14A(2) of the Act has not been recorded by the Assessing Officer and thus, he has failed to comply with the condition precedent before embarking on applying the formula contained in Rule 8D of the Rules in order to compute the disallowance u/s 14A of the Act. Thus, in our considered opinion, on this aspect itself, the determination of disallowance made by the Assessing Officer at Rs.9,95,080/- is untenable. 11. Even otherwise, we find that in its written submissions made to the Assessing Officer during the assessment proceedings, copies of which are placed in the Paper Book, assessee had explained the manner and justification for estimating such expenditure at Rs.57,790/- and there is nothing on record to suggest as to why the same has been disregarded by the Assessing Officer. Therefore, in consequence, it has to be held that the disallowance of Rs.9,95,080/- made by the Assessing Officer over and above the suo motu disallowance made by the assessee is unjustified and is directed to be deleted.”

We, therefore, respectfully following the decision of the co-ordinate Bench of the Tribunal in the case of Smartchem Technologies Ltd.(supra)