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Facts
The assessee filed its return for AY 2014-15 declaring an income of Rs.33,94,30,646/-. During the assessment completed u/s 143(3), the Assessing Officer (AO) made a disallowance of Rs.2,93,27,456/- under Section 14A of the Income Tax Act by invoking Rule 8D. The Ld. CIT(A) upheld this disallowance.
Held
The Tribunal, following the Bombay High Court's decision in Pr. CIT v. Bombay Stock Exchange Ltd., held that the AO was not justified in invoking Rule 8D without recording explicit or implied dissatisfaction with the assessee's suo-motu disallowance of expenditure for earning exempted income. The disallowance made by the AO was deleted, and the appeal was allowed.
Key Issues
Whether the Assessing Officer is justified in invoking Rule 8D to disallow expenses under Section 14A without first recording dissatisfaction with the assessee's own computation of disallowance.
Sections Cited
Section 14A, Rule 8D of Income-tax Rules, 1962, Section 234C, Section 143(3)
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Income Tax Appellate Tribunal, MUMBAI BENCH “B” MUMBAI
Before: SHRI OM PRAKASH KANT & SHRI RAJ KUMAR CHAUHAN
This appeal by the assessee is directed against order dated 05.12.2023 passed by the Ld. Commissioner of Income-tax (Appeals) – National Faceless Appeal Centre, Delhi [in short ‘the Ld. CIT(A)’] for assessment year 2014-15, raising following grounds:
Bennett Property Holdings Company Ltd. Bennett Property Holdings Company Ltd.
On the facts and circumstances of the case and in law, the Ld. 1. On the facts and circumstances of the case and in law, the Ld. 1. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in confirming the disallowance CIT(A) erred in confirming the disallowance of Rs 2,93,27,456 made of Rs 2,93,27,456 made by the Ld. AO u/s 14A (2) of the Income Tax Act, 1961 (the Act), by by the Ld. AO u/s 14A (2) of the Income Tax Act, 1961 (the Act), by by the Ld. AO u/s 14A (2) of the Income Tax Act, 1961 (the Act), by invoking Rule 8D. invoking Rule 8D.
AO erred in invoking Rule 8D to disallow Rs 2,93,27,456 under 2. AO erred in invoking Rule 8D to disallow Rs 2,93,27,456 under 2. AO erred in invoking Rule 8D to disallow Rs 2,93,27,456 under Section 14(2) of the Act without coming to an objective satisfaction Section 14(2) of the Act without coming to an objective satisfaction Section 14(2) of the Act without coming to an objective satisfaction based on the accounts of the appellant that the disallowance made in accounts of the appellant that the disallowance made in accounts of the appellant that the disallowance made in the return of income was incorrect, the order of the Ld. CIT(A) the return of income was incorrect, the order of the Ld. CIT(A) the return of income was incorrect, the order of the Ld. CIT(A) confirming the said disallowance of Rs 2,93,27,456 was erroneous. confirming the said disallowance of Rs 2,93,27,456 was erroneous. confirming the said disallowance of Rs 2,93,27,456 was erroneous. 3. On the facts and circumstances of the case and in law, assuming 3. On the facts and circumstances of the case and in law, assuming 3. On the facts and circumstances of the case and in law, assuming without admitting that Rule 8D is applicable and can be invoked the hout admitting that Rule 8D is applicable and can be invoked the hout admitting that Rule 8D is applicable and can be invoked the appellant submits that: appellant submits that: - (a) Since no income was received by the (a) Since no income was received by the appellant from its subsidiaries, the value of investments held by the appellant from its subsidiaries, the value of investments held by the appellant from its subsidiaries, the value of investments held by the appellant in its subsidiaries are not includible in arr appellant in its subsidiaries are not includible in arriving at the iving at the monthly averages of the opening and closing balances of monthly averages of the opening and closing balances of investment under the said Rule. (b) Since the income earned by the appellant in under the said Rule. (b) Since the income earned by the appellant in under the said Rule. (b) Since the income earned by the appellant in mutual fund units held under growth schemes are taxable, the value mutual fund units held under growth schemes are taxable, the value mutual fund units held under growth schemes are taxable, the value of investments held by the appellant in of investments held by the appellant in mutual fund units under mutual fund units under growth schemes are not includible in arriving at the monthly averages growth schemes are not includible in arriving at the monthly averages growth schemes are not includible in arriving at the monthly averages of the opening and closing balances of investment under the said Rule. of the opening and closing balances of investment under the said Rule. of the opening and closing balances of investment under the said Rule. 4. On the facts and in the circumstances of the case and in law the 4. On the facts and in the circumstances of the case and in law the 4. On the facts and in the circumstances of the case and in law the appellant submits that appellant submits that the Ld. Assessing Officer erred in levying Assessing Officer erred in levying interest u/s 234C interest u/s 234C on the assessed income when the provisions of on the assessed income when the provisions of Section 234C of the Act only empower him to charge interest on the Section 234C of the Act only empower him to charge interest on the Section 234C of the Act only empower him to charge interest on the returned income. returned income. 5. On the facts and in the circumstances of the case and in law, 5. On the facts and in the circumstances of the case and in law, 5. On the facts and in the circumstances of the case and in law, the appellant having paid more than the prescribed percentage by way of appellant having paid more than the prescribed percentage by way of appellant having paid more than the prescribed percentage by way of instalments of advance tax before the relevant due dates prescribed, instalments of advance tax before the relevant due dates prescribed, instalments of advance tax before the relevant due dates prescribed, there is no deferment of advance tax based on the returned income there is no deferment of advance tax based on the returned income there is no deferment of advance tax based on the returned income and consequently the appellant denies its liabili and consequently the appellant denies its liability to be charged ty to be charged interest u/s 234C of the Act. interest u/s 234C of the Act. 2. Briefly stated facts of the case are that the assessee filed Briefly stated facts of the case are that the assessee filed Briefly stated facts of the case are that the assessee filed return of income on 29.11.2014 declaring total income at return of income on 29.11.2014 declaring total income at return of income on 29.11.2014 declaring total income at Rs.33,94,30,646/-. The return of income filed by the assessee was . The return of income filed by the assessee was . The return of income filed by the assessee was selected for scrutiny selected for scrutiny and statutory notices under the Income and statutory notices under the Income-tax Act, 1961 (in short ‘the Act’) were issued and complied with. In the Act, 1961 (in short ‘the Act’) were issued and complied with. In the Act, 1961 (in short ‘the Act’) were issued and complied with. In the assessment completed u/s 143(3) of the Act dated 06.12.2016, the assessment completed u/s 143(3) of the Act dated 06.12.2016, the assessment completed u/s 143(3) of the Act dated 06.12.2016, the Assessing Officer made disallowance including disallowance u/s Assessing Officer made disallowance including disallowance u/s Assessing Officer made disallowance including disallowance u/s Bennett Property Holdings Company Ltd. Bennett Property Holdings Company Ltd.
14A of the Act amounting to Rs.2,93,27,456/ mounting to Rs.2,93,27,456/- by way of invoking by way of invoking Rule 8D of the Income Rule 8D of the Income-tax Rules, 1962 (in short ‘the Rules’). tax Rules, 1962 (in short ‘the Rules’).
On further appeal, the Ld. CIT(A) upheld the disallowance of On further appeal, the Ld. CIT(A) upheld the disallowance of On further appeal, the Ld. CIT(A) upheld the disallowance of expenses made by the Assessing Officer under Rule 14A r.w.r. 8D of expenses made by the Assessing Officer under Rule 14A r.w.r. 8D of expenses made by the Assessing Officer under Rule 14A r.w.r. 8D of the Rules.
We have heard rival submission of the parties and perused the We have heard rival submission of the parties and perused the We have heard rival submission of the parties and perused the relevant material on record. Before us, the Ld. counsel for the relevant material on record. Before us, the Ld. counsel for the relevant material on record. Before us, the Ld. counsel for the assessee referred to Ground No. 2 of the appeal and submitted that assessee referred to Ground No. 2 of the appeal and submitted that assessee referred to Ground No. 2 of the appeal and submitted that the Assessing Officer has not recorded dissatisfaction on the the Assessing Officer has not recorded dissatisfaction on the the Assessing Officer has not recorded dissatisfaction on the computation of the disallowance made by the assessee and computation of the disallowance made by the assessee and computation of the disallowance made by the assessee and therefore, disallowance invoking of Rule 8D without recording therefore, disallowance invoking of Rule 8D without recording therefore, disallowance invoking of Rule 8D without recording dissatisfaction is not in accordance with law and therefore, dissatisfaction is not in accordance with law and therefore, dissatisfaction is not in accordance with law and therefore, disallowance need to be deleted. disallowance need to be deleted.
4.1 The Ld. Departmental Representative (D The Ld. Departmental Representative (DR) on the other hand R) on the other hand relied on the order of the Ld. CIT(A). relied on the order of the Ld. CIT(A).
4.2 As far as issue of non As far as issue of non-recording of the dissatisfaction on the recording of the dissatisfaction on the correctness of claim of the assessee relating to computation of the of the assessee relating to computation of the disallowance towards exempted income, the Ld. CIT(A) has followed disallowance towards exempted income, the Ld. CIT(A) has followed disallowance towards exempted income, the Ld. CIT(A) has followed the decision of the Hon’ble Delhi High Court in the case of India the decision of the Hon’ble Delhi High Court in the case of India the decision of the Hon’ble Delhi High Court in the case of India Bulls Financial Services Ltd. v. DCIT 76 taxmann.com 268 (Delhi) Bulls Financial Services Ltd. v. DCIT 76 taxmann.com 268 (Delhi) Bulls Financial Services Ltd. v. DCIT 76 taxmann.com 268 (Delhi) and decision of the Hon’ble High Court of Gujarat in the case of n of the Hon’ble High Court of Gujarat in the case of n of the Hon’ble High Court of Gujarat in the case of Devarsons Industries (P.) Ltd. v. ACIT 84 taxmann.com 244 Devarsons Industries (P.) Ltd. v. ACIT 84 taxmann.com 244 Devarsons Industries (P.) Ltd. v. ACIT 84 taxmann.com 244
Bennett Property Holdings Company Ltd. Bennett Property Holdings Company Ltd.
(Gujarat). The relevant finding of the Ld. CIT(A) is reproduced as elevant finding of the Ld. CIT(A) is reproduced as elevant finding of the Ld. CIT(A) is reproduced as under:
“5. As far as the initial grounds are concerned, Ground 3 is general i As far as the initial grounds are concerned, Ground 3 is general in As far as the initial grounds are concerned, Ground 3 is general i nature and needs no separate adjudication while all other grounds 1 & 2 nature and needs no separate adjudication while all other grounds 1 & 2 nature and needs no separate adjudication while all other grounds 1 & 2 pertain to the enhancement of disallowance u/s 14A of the IT Act from pertain to the enhancement of disallowance u/s 14A of the IT Act from pertain to the enhancement of disallowance u/s 14A of the IT Act from Rs.1,20,835/- (suo-moto computed by appellant to Rs Rs.2,93,27,456/ Rs.2,93,27,456/- computed by assessing officer(AO) in accord computed by assessing officer(AO) in accordance with Rule 8D of the IT ance with Rule 8D of the IT Rules.
All the submissions made by the appellant including the judicial All the submissions made by the appellant including the judicial All the submissions made by the appellant including the judicial references cited are perused with care along with the contents of the references cited are perused with care along with the contents of the references cited are perused with care along with the contents of the assessment order. As already stated, the issue is with regard to reworking assessment order. As already stated, the issue is with regard to reworking assessment order. As already stated, the issue is with regard to reworking of disallowance u/s 14A of the IT Act u/r 8D of the IT Rules by the AO as lowance u/s 14A of the IT Act u/r 8D of the IT Rules by the AO as lowance u/s 14A of the IT Act u/r 8D of the IT Rules by the AO as against that working provided by assessee and the appellant contended against that working provided by assessee and the appellant contended against that working provided by assessee and the appellant contended that AO had not recorded any satisfaction before invoking the said Rule. that AO had not recorded any satisfaction before invoking the said Rule. that AO had not recorded any satisfaction before invoking the said Rule. To give effect to the provision of Section 14A To give effect to the provision of Section 14A and in particular subsection and in particular subsection (2) thereof, Rule 8D of the Rules provides the method for determining the (2) thereof, Rule 8D of the Rules provides the method for determining the (2) thereof, Rule 8D of the Rules provides the method for determining the amount of expenditure in relation to the income not includable in the total amount of expenditure in relation to the income not includable in the total amount of expenditure in relation to the income not includable in the total income. Sub-rule (1) echoes the provision of subsections (2) and (3) of rule (1) echoes the provision of subsections (2) and (3) of rule (1) echoes the provision of subsections (2) and (3) of Section 14A where it provides that if the Assessing Officer having regard to on 14A where it provides that if the Assessing Officer having regard to on 14A where it provides that if the Assessing Officer having regard to the accounts of the assessee is not satisfied with the correctness of the the accounts of the assessee is not satisfied with the correctness of the the accounts of the assessee is not satisfied with the correctness of the claim of the expenditure or the claim made is that no expenditure has been claim of the expenditure or the claim made is that no expenditure has been claim of the expenditure or the claim made is that no expenditure has been incurred in relation to the income incurred in relation to the income which does not form part of the total which does not form part of the total income, he would determine the amount of expenditure in relation to such income, he would determine the amount of expenditure in relation to such income, he would determine the amount of expenditure in relation to such income in accordance with the provisions of sub income in accordance with the provisions of sub-rule (2). Sub rule (2). Sub-rule (2) of Rule 8D prior to its amendment with effect from 02.06.2016 provided a Rule 8D prior to its amendment with effect from 02.06.2016 provided a Rule 8D prior to its amendment with effect from 02.06.2016 provided a formula to apportion the expenditure in connection with the tax free ormula to apportion the expenditure in connection with the tax free ormula to apportion the expenditure in connection with the tax free income. However, these statutory provisions do not require that such income. However, these statutory provisions do not require that such income. However, these statutory provisions do not require that such satisfaction must be arrived at in a particular manner. As long as there is satisfaction must be arrived at in a particular manner. As long as there is satisfaction must be arrived at in a particular manner. As long as there is sufficient material to enable the Assessing sufficient material to enable the Assessing Officer to arrive at such a Officer to arrive at such a satisfaction, the requirements of the statute would be satisfied. satisfaction, the requirements of the statute would be satisfied. satisfaction, the requirements of the statute would be satisfied. In the case of India bulls Financial Services Ltd.v.DCIT, Circle In the case of India bulls Financial Services Ltd.v.DCIT, Circle In the case of India bulls Financial Services Ltd.v.DCIT, Circle - 11(1), 76 taxmann.com 268 (Delhi), the hon'ble high court of Delhi held that here taxmann.com 268 (Delhi), the hon'ble high court of Delhi held that here taxmann.com 268 (Delhi), the hon'ble high court of Delhi held that here Assessing Officer after carrying out elaborate analysis and following steps ficer after carrying out elaborate analysis and following steps ficer after carrying out elaborate analysis and following steps enacted in statute, had determined amount of expenditure incurred for enacted in statute, had determined amount of expenditure incurred for enacted in statute, had determined amount of expenditure incurred for earning tax exempt income, merely because he did not expressly record his earning tax exempt income, merely because he did not expressly record his earning tax exempt income, merely because he did not expressly record his dissatisfaction about assessee's calculation, hi dissatisfaction about assessee's calculation, his conclusion could not be s conclusion could not be rejected. The extract of the relevant portion of this decision is as under: rejected. The extract of the relevant portion of this decision is as under: rejected. The extract of the relevant portion of this decision is as under: 7. Undoubtedly, the language of Section 14A presupposes that the 7. Undoubtedly, the language of Section 14A presupposes that the 7. Undoubtedly, the language of Section 14A presupposes that the AO has to adduce some reasons if he is not satisfied with the AO has to adduce some reasons if he is not satisfied with the AO has to adduce some reasons if he is not satisfied with the amount offered by way of di amount offered by way of disallowance by the assessee. At the sallowance by the assessee. At the same time Section 14A (2) as indeed Rule 8D(i) leave the AO same time Section 14A (2) as indeed Rule 8D(i) leave the AO same time Section 14A (2) as indeed Rule 8D(i) leave the AO equally with no choice in the matter inasmuch as the statute in equally with no choice in the matter inasmuch as the statute in equally with no choice in the matter inasmuch as the statute in both these provisions mandates that the particular methodology both these provisions mandates that the particular methodology both these provisions mandates that the particular methodology enacted should be followed. In oth enacted should be followed. In other words, the AO is under a er words, the AO is under a mandate to apply the formulae as it were under Rule 8D because mandate to apply the formulae as it were under Rule 8D because mandate to apply the formulae as it were under Rule 8D because
Bennett Property Holdings Company Ltd. Bennett Property Holdings Company Ltd. of Section 14A(2). If in a given case, therefore, the AO is confronted of Section 14A(2). If in a given case, therefore, the AO is confronted of Section 14A(2). If in a given case, therefore, the AO is confronted with a figure which, prima facie, is not in accord with what should with a figure which, prima facie, is not in accord with what should with a figure which, prima facie, is not in accord with what should approximately be the figur approximately be the figure on a fair working out of the provisions, e on a fair working out of the provisions, he is but bound to reject it. In such circumstances the AO ordinarily he is but bound to reject it. In such circumstances the AO ordinarily he is but bound to reject it. In such circumstances the AO ordinarily would express his opinion by rejecting the disallowance offered would express his opinion by rejecting the disallowance offered would express his opinion by rejecting the disallowance offered and then proceed to work out the methodology enacted. and then proceed to work out the methodology enacted. and then proceed to work out the methodology enacted.
In this instance the e 8. In this instance the elaborate analysis carried out by the AO laborate analysis carried out by the AO - as indeed the three important steps indicated by him in the order, indeed the three important steps indicated by him in the order, indeed the three important steps indicated by him in the order, shows that all these elements were present in his mind, that he did shows that all these elements were present in his mind, that he did shows that all these elements were present in his mind, that he did not expressly record his dissatisfaction in these circumstances, not expressly record his dissatisfaction in these circumstances, not expressly record his dissatisfaction in these circumstances, would not per would not per se justify this Court in concluding that he was not se justify this Court in concluding that he was not satisfied or did not record cogent reasons for his dissatisfaction to satisfied or did not record cogent reasons for his dissatisfaction to satisfied or did not record cogent reasons for his dissatisfaction to reject the AO's conclusion. To insist that the AO should pay such lip reject the AO's conclusion. To insist that the AO should pay such lip reject the AO's conclusion. To insist that the AO should pay such lip service regardless of the substantial compliance with the provis service regardless of the substantial compliance with the provis service regardless of the substantial compliance with the provisions would, in fact, destroy the mandate of Section 14A. would, in fact, destroy the mandate of Section 14A.
Having regard to these facts, this Court is satisfied that the 9. Having regard to these facts, this Court is satisfied that the 9. Having regard to these facts, this Court is satisfied that the disallowance which is otherwise in accord with Rule 8D(c) was disallowance which is otherwise in accord with Rule 8D(c) was disallowance which is otherwise in accord with Rule 8D(c) was justified. No substantial question of law arises. The appeal is justified. No substantial question of law arises. The appeal is justified. No substantial question of law arises. The appeal is dismiss dismissed. In the case of Devarsons Industries (P.) Ltd.v.ACIT (OSD), 84 taxmann.com In the case of Devarsons Industries (P.) Ltd.v.ACIT (OSD), 84 taxmann.com In the case of Devarsons Industries (P.) Ltd.v.ACIT (OSD), 84 taxmann.com 244 (Gujarat), the hon'ble high court of Gujarat held that Where Assessing 244 (Gujarat), the hon'ble high court of Gujarat held that Where Assessing 244 (Gujarat), the hon'ble high court of Gujarat held that Where Assessing Officer gave detailed reasons for making disallowance under section 14A Officer gave detailed reasons for making disallowance under section 14A Officer gave detailed reasons for making disallowance under section 14A in respect of exempt dividend i in respect of exempt dividend income and LTCG earned by assessee ncome and LTCG earned by assessee discarding assessee's theory that to earn assessable income assessee discarding assessee's theory that to earn assessable income assessee discarding assessee's theory that to earn assessable income assessee incurred no expenditure whatsoever, mere fact that Assessing Officer did incurred no expenditure whatsoever, mere fact that Assessing Officer did incurred no expenditure whatsoever, mere fact that Assessing Officer did not arrive at satisfaction in a particular manner while making said not arrive at satisfaction in a particular manner while making said not arrive at satisfaction in a particular manner while making said disallowance, would not per se destroy mandate of section 14A. , would not per se destroy mandate of section 14A. , would not per se destroy mandate of section 14A. Hence there is no force in the contention of the appellant as the AO had Hence there is no force in the contention of the appellant as the AO had Hence there is no force in the contention of the appellant as the AO had rightly invoked the Rule 8D of the IT Rules to work out the quantum of rightly invoked the Rule 8D of the IT Rules to work out the quantum of rightly invoked the Rule 8D of the IT Rules to work out the quantum of disallowance u/s 14A of the IT Act. disallowance u/s 14A of the IT Act. Accordingly, all the init Accordingly, all the initial grounds 1 to 3 raised by the appellant stands ial grounds 1 to 3 raised by the appellant stands rejected.” 4.3 Thus, the issue in dispute is whether Assessing Officer has Thus, the issue in dispute is whether Assessing Officer has Thus, the issue in dispute is whether Assessing Officer has recorded any express or implied dissatisfaction to the express or implied dissatisfaction to the express or implied dissatisfaction to the correctness of claim of the assessee of disallowance against exempted income. The claim of the assessee of disallowance against exempted claim of the assessee of disallowance against exempted Ld. Assessing Officer has disallowed expenses u/s 14A of the Act Ld. Assessing Officer has disallowed expenses u/s 14A of the Act Ld. Assessing Officer has disallowed expenses u/s 14A of the Act observing as under:
“4. Disallowance u/s 14A of Income Tax ACT, 1961: During assessment 4. Disallowance u/s 14A of Income Tax ACT, 1961: During assessment 4. Disallowance u/s 14A of Income Tax ACT, 1961: During assessment proceedings, following facts are observed: proceedings, following facts are observed:
Bennett Property Holdings Company Ltd. Bennett Property Holdings Company Ltd. a. Assesse has suo moto disallowed Rs. a. Assesse has suo moto disallowed Rs. 1,20,835/- u/s 14A of the Act u/s 14A of the Act b. Assesse has made fresh investments in mutual funds during the year. b. Assesse has made fresh investments in mutual funds during the year. b. Assesse has made fresh investments in mutual funds during the year. c. Assesse has earned exempt income of Rs. 7,52,30,159/ c. Assesse has earned exempt income of Rs. 7,52,30,159/ c. Assesse has earned exempt income of Rs. 7,52,30,159/- during AY 2014- 15 d. Assesee's has not calculated disallowance in line with rule 8D(2) (ili) d. Assesee's has not calculated disallowance in line with rule 8D(2) (ili) d. Assesee's has not calculated disallowance in line with rule 8D(2) (ili) towards administrative and other costs of making and maintaining rds administrative and other costs of making and maintaining rds administrative and other costs of making and maintaining investments. Hence, I am satisfied that ad Hence, I am satisfied that ad-hoc disallowance made by assesee is not hoc disallowance made by assesee is not just in this case and provisions of section 14A r.w.r 8D should be attracted just in this case and provisions of section 14A r.w.r 8D should be attracted just in this case and provisions of section 14A r.w.r 8D should be attracted in this case. Calculation of 14A di Calculation of 14A disallowance
PARTICULARS Amt. (Rs.) Remark 1. Direct expenses attributable Direct expenses attributable Nil 2. Interest Interest claimed claimed (A)* (A)* average average Nil Assessee's own funds are Assessee's own funds are investments(B)/average investments(B)/average of of total total much more than investment much more than investment assets (C) i.e. A*B/C 3. 0.5% of the average investments 0.5% of the average investments 2,94,48,291/- Investment in subsidiaries Investment in subsidiaries (6,33,05,99,124 + (6,33,05,99,124 + companies have also been companies have also been 54.48,71,7345)/2*.5/100 54.48,71,7345)/2*.5/100 considered considered considering considering Karnataka Karnataka HC HC decision decision in in case case of of United United Breweries Breweries Limited Limited vs. DCIT (date of publication vs. DCIT (date of publication 17-08-2016) wherein it has 2016) wherein it has been held that section 14A been held that section 14A is applicable even where the is applicable even where the motive of the assessee in motive of the assessee in acquiring the shares is to acquiring the shares is to obtain controlling interest in obtain controlling interest in a company and not to earn a company and not to earn dividends. dividends. Total 2,94,48,291/- Since assesse has already Since assesse has already disallowed, Rs. 1,20,835/-, a further addition , a further addition of Rs.2,93,27,456/ of Rs.2,93,27,456/- is made in the total income returned by assesse. is made in the total income returned by assesse. Total disallowance = Rs. 2,93,27,456/- Total disallowance = Rs. 2,93,27,456/ 4.4 On perusal of the above, we find that the Assessing Officer has On perusal of the above, we find that the Assessing Officer has On perusal of the above, we find that the Assessing Officer has only mentioned that the assessee only mentioned that the assessee has not calculated disallowance has not calculated disallowance in terms of Rule 8D(2)(iii) of the Rules towards administrative and in terms of Rule 8D(2)(iii) of the Rules towards administrative and in terms of Rule 8D(2)(iii) of the Rules towards administrative and other cost of making and maintaining investments. Thus, the other cost of making and maintaining investments. Thus, the other cost of making and maintaining investments. Thus, the Bennett Property Holdings Company Ltd. Bennett Property Holdings Company Ltd.
Assessing Officer for invoking Rule 8D has taken the basis of Rule Assessing Officer for invoking Rule 8D has taken the basis of Rule Assessing Officer for invoking Rule 8D has taken the basis of Rule 8D only and not independently 8D only and not independently examined the correctness of correctness of claim of expenditure of the assessee expenditure of the assessee of Rs. 1,20,835/- towards earning towards earning express or implied exempted income and and not recorded any express or implied dissatisfaction to claim of assessee keeping in view claim of assessee keeping in view the accounts of claim of assessee keeping in view the assessee. In the case of India Bulls Financial Services Ltd. n the case of India Bulls Financial Services Ltd. n the case of India Bulls Financial Services Ltd. (supra), the Hon’ble Court held that implied dissatisfaction is (supra), the Hon’ble Court held that implied dissatisfaction (supra), the Hon’ble Court held that implied dissatisfaction suffice for invoking section 14A of the Act but in the case even there suffice for invoking section 14A of the Act but in the case even there suffice for invoking section 14A of the Act but in the case even there is no implied dissatisfaction by the Assessing Officer and he has is no implied dissatisfaction by the Assessing Officer and he has is no implied dissatisfaction by the Assessing Officer and he has only mentioned that disallowance mentioned that disallowance was not computed by the computed by the as per Rule 8D of Rules. Similarly, in the case of Devarsons Industries (P.) . Similarly, in the case of Devarsons Industries (P.) . Similarly, in the case of Devarsons Industries (P.) Ltd. (supra), Hon’ble Court held that the Assessing Officer did not Hon’ble Court held that the Assessing Officer did not Hon’ble Court held that the Assessing Officer did not arrive arrive arrive at at at satisfaction satisfaction satisfaction in in in a a a particular particular particular manner manner manner while while while said said said would not per se destroy mandate of section disallowance, which which would not per se destroy mandate 14A. In the instant case, the Assessing Officer has not recorded any 14A. In the instant case, the Assessing Officer has not recorded any 14A. In the instant case, the Assessing Officer has not recorded any kind of dissatisfaction as to the kind of dissatisfaction as to the correctness of claim of expenditure claim of expenditure of the assessee. Before us, the Ld. counsel for the assessee relied on of the assessee. Before us, the Ld. counsel for the ass of the assessee. Before us, the Ld. counsel for the ass the decision of the Hon’ble Bombay High Court in the case of Pr. the decision of the Hon’ble Bombay High Court in the case of the decision of the Hon’ble Bombay High Court in the case of CIT v. Bombay Stock Exchange Ltd. [2020] 113 taxmann.com CIT v. Bombay Stock Exchange Ltd. [2020] 113 taxmann.com CIT v. Bombay Stock Exchange Ltd. [2020] 113 taxmann.com 303 (Bombay), wherein wherein in identically circumstances identically circumstances, the Hon’ble High Court observed that recording by the Assessing Officer that High Court observed that recording by the Assessing Of High Court observed that recording by the Assessing Of disallowance was not being worked out as per Rule not being worked out as per Rule 8D , is putting the cart before the horse. The relevant finding of the Hon’ble High the cart before the horse. The relevant finding of the Hon’ble High the cart before the horse. The relevant finding of the Hon’ble High Court is reproduced as under: Court is reproduced as under:
Bennett Property Holdings Company Ltd. Bennett Property Holdings Company Ltd.
“9. We note that it is evident from the extracted part of the assessment We note that it is evident from the extracted part of the assessment We note that it is evident from the extracted part of the assessment order referred to hereinabove that the Assessing Officer has come to the eferred to hereinabove that the Assessing Officer has come to the eferred to hereinabove that the Assessing Officer has come to the conclusion that the disallowance claimed by the Respondent was not conclusion that the disallowance claimed by the Respondent was not conclusion that the disallowance claimed by the Respondent was not consistent with Rule 8D of the said Rules. It is only in view of the consistent with Rule 8D of the said Rules. It is only in view of the consistent with Rule 8D of the said Rules. It is only in view of the disallowances not being worked out as per Rule 8D of t disallowances not being worked out as per Rule 8D of the Rules, that the he Rules, that the Assessing Officer is not satisfied with the disallowance offered by the Assessing Officer is not satisfied with the disallowance offered by the Assessing Officer is not satisfied with the disallowance offered by the Respondent. This, to our mind, is putting the cart before the horse. This, to our mind, is putting the cart before the horse. This, to our mind, is putting the cart before the horse. The Assessing Officer must first record a conclusion that having The Assessing Officer must first record a conclusion that having The Assessing Officer must first record a conclusion that having regard to the accounts of the a regard to the accounts of the assessee, he is not satisfied with the ssessee, he is not satisfied with the disallowance offered by the Respondent in terms of section 14A(2) disallowance offered by the Respondent in terms of section 14A(2) disallowance offered by the Respondent in terms of section 14A(2) of the Act. It only on being dissatisfied with the above, does Rule 8D of . It only on being dissatisfied with the above, does Rule 8D of . It only on being dissatisfied with the above, does Rule 8D of the Rules can be invoked to compute the disallowance. the Rules can be invoked to compute the disallowance.
Mr. Vaidya, learned 10. Mr. Vaidya, learned counsel appearing for the Respondent is correct in counsel appearing for the Respondent is correct in his submission that satisfaction which was to be recorded by the his submission that satisfaction which was to be recorded by the his submission that satisfaction which was to be recorded by the Assessing Officer has to be clear and on an objective basis without any Assessing Officer has to be clear and on an objective basis without any Assessing Officer has to be clear and on an objective basis without any reference to Rule 8D. In support of his contention, our attention is reference to Rule 8D. In support of his contention, our attention is reference to Rule 8D. In support of his contention, our attention is drawn to the judgment of this Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. the judgment of this Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. the judgment of this Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010]_194 Taxman 203/328 ITR 81 while dealing with Dy. CIT [2010]_194 Taxman 203/328 ITR 81 while dealing with Dy. CIT [2010]_194 Taxman 203/328 ITR 81 while dealing with constitutional validity of Rule 8D of the said Rules, negatived the challenge constitutional validity of Rule 8D of the said Rules, negatived the challenge constitutional validity of Rule 8D of the said Rules, negatived the challenge to its validity by, inter alia, re to its validity by, inter alia, recording as under: "57. Now in dealing with the challenge it is necessary to advert to "57. Now in dealing with the challenge it is necessary to advert to "57. Now in dealing with the challenge it is necessary to advert to the position that Sub the position that Sub-section (2) of Section 14A prescribes a uniform section (2) of Section 14A prescribes a uniform method for determining the amount of expenditure incurred in method for determining the amount of expenditure incurred in method for determining the amount of expenditure incurred in relation to income which does not form relation to income which does not form part of the total income only part of the total income only in a situation where the Assessing Officer, having regard to the in a situation where the Assessing Officer, having regard to the in a situation where the Assessing Officer, having regard to the accounts of the assessee is not satisfied with the correctness of the accounts of the assessee is not satisfied with the correctness of the accounts of the assessee is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. It therefore claim of the assessee in respect of such expenditure. It therefore claim of the assessee in respect of such expenditure. It therefore merits emphasis that Sub merits emphasis that Sub-section (2) of Section 14A does not section (2) of Section 14A does not authorize or empower the Assessing Officer to apply the prescribed authorize or empower the Assessing Officer to apply the prescribed authorize or empower the Assessing Officer to apply the prescribed method irrespective of the nature of the claim made by the method irrespective of the nature of the claim made by the method irrespective of the nature of the claim made by the assessee. The Assessing Officer has to first consider the assessee. The Assessing Officer has to first consider the assessee. The Assessing Officer has to first consider the correctness of the claim of the ass correctness of the claim of the assessee having regard to the essee having regard to the accounts of the assessee. The satisfaction of the Assessing Officer accounts of the assessee. The satisfaction of the Assessing Officer accounts of the assessee. The satisfaction of the Assessing Officer has to be objectively arrived at on the basis of those accounts and has to be objectively arrived at on the basis of those accounts and has to be objectively arrived at on the basis of those accounts and after considering all the relevant facts and circumstances. The after considering all the relevant facts and circumstances. The after considering all the relevant facts and circumstances. The application of the prescribed application of the prescribed method arises in a situation where the method arises in a situation where the claim made by the assessee in respect of expenditure which is claim made by the assessee in respect of expenditure which is claim made by the assessee in respect of expenditure which is relatable to the earning of income which does not form part of the relatable to the earning of income which does not form part of the relatable to the earning of income which does not form part of the total income under the Act is found to be incorrect. In such a total income under the Act is found to be incorrect. In such a total income under the Act is found to be incorrect. In such a situation a method had t situation a method had to be devised for apportioning the o be devised for apportioning the expenditure incurred by the assessee between what is incurred in expenditure incurred by the assessee between what is incurred in expenditure incurred by the assessee between what is incurred in relation to the earning of taxable income and that which is incurred relation to the earning of taxable income and that which is incurred relation to the earning of taxable income and that which is incurred in relation to the earning of non in relation to the earning of non-taxable income. As a matter of fact, taxable income. As a matter of fact, the memorandum ex the memorandum explaining the provisions of the Finance Bill 2006 plaining the provisions of the Finance Bill 2006 and the CBDT circular dated 28 December 2006 state that since and the CBDT circular dated 28 December 2006 state that since and the CBDT circular dated 28 December 2006 state that since the existing provisions of Section 14A did not provide a method of the existing provisions of Section 14A did not provide a method of the existing provisions of Section 14A did not provide a method of computing the expenditure incurred in relation to income which did computing the expenditure incurred in relation to income which did computing the expenditure incurred in relation to income which did not form pa not form part of the total income, there was a considerable dispute rt of the total income, there was a considerable dispute between tax payers and the department on between tax payers and the department on the method of the method of determining such expenditure. It was in this background that Sub determining such expenditure. It was in this background that Sub determining such expenditure. It was in this background that Sub-
Bennett Property Holdings Company Ltd. Bennett Property Holdings Company Ltd. section (2) was inserted so as to provide a uniform method section (2) was inserted so as to provide a uniform method section (2) was inserted so as to provide a uniform method applicable where the applicable where the Assessing Officer is not satisfied with the Assessing Officer is not satisfied with the correctness of the claim of the assessee. Sub correctness of the claim of the assessee. Sub-section (3) clarifies section (3) clarifies that the application of the methe would be attracted even to a that the application of the methe would be attracted even to a that the application of the methe would be attracted even to a situation where the assessee has claimed that no expenditure at situation where the assessee has claimed that no expenditure at situation where the assessee has claimed that no expenditure at all was incurred all was incurred in relation to the earning of non-taxable income. taxable income.
Parliament has provided an adequate safeguard to the 58. Parliament has provided an adequate safeguard to the 58. Parliament has provided an adequate safeguard to the invocation of the power to determine the expenditure incurred in invocation of the power to determine the expenditure incurred in invocation of the power to determine the expenditure incurred in relation to the earning of non relation to the earning of non-taxable income by adoption of the taxable income by adoption of the prescribed expend. prescribed expend. The invocation of the power is made conditional The invocation of the power is made conditional on the objective satisfaction of the Assessing miter in regard to the on the objective satisfaction of the Assessing miter in regard to the on the objective satisfaction of the Assessing miter in regard to the correctness of the claim of the assessee, having regard to the correctness of the claim of the assessee, having regard to the correctness of the claim of the assessee, having regard to the accounts of the asis When a statute postulates the satisfaction of accounts of the asis When a statute postulates the satisfaction of accounts of the asis When a statute postulates the satisfaction of the Ass the Assessing Officer "Courts will not readily defer to the essing Officer "Courts will not readily defer to the conclusiveness of an executive authority's opinion as to the conclusiveness of an executive authority's opinion as to the conclusiveness of an executive authority's opinion as to the existence of a matter of law or fact upon which the validity of the existence of a matter of law or fact upon which the validity of the existence of a matter of law or fact upon which the validity of the exercise of the power is predicated". exercise of the power is predicated". - M.A. Rasheed v. The State of M.A. Rasheed v. The State of Kerala AIR 1974 SC 2249 (at para 7 page 2252). A decision by the a AIR 1974 SC 2249 (at para 7 page 2252). A decision by the a AIR 1974 SC 2249 (at para 7 page 2252). A decision by the Assessing Officer has to be arrived at in good faith on relevant Assessing Officer has to be arrived at in good faith on relevant Assessing Officer has to be arrived at in good faith on relevant considerations. The Assessing Officer must furnish to the assessee considerations. The Assessing Officer must furnish to the assessee considerations. The Assessing Officer must furnish to the assessee a reasonable opportunity to show cause on the correctness of the a reasonable opportunity to show cause on the correctness of the a reasonable opportunity to show cause on the correctness of the claim made by him. In the event that the Assessing Officer is not claim made by him. In the event that the Assessing Officer is not claim made by him. In the event that the Assessing Officer is not satisfied with the correctness of the claim made by the assessee, satisfied with the correctness of the claim made by the assessee, satisfied with the correctness of the claim made by the assessee, he must record reasons for his conclusion. These safeguards which he must record reasons for his conclusion. These safeguards which he must record reasons for his conclusion. These safeguards which are implicit in the requirements of fairness and fair pro are implicit in the requirements of fairness and fair pro are implicit in the requirements of fairness and fair procedure under Article 14 must be observed by the Assessing Officer when under Article 14 must be observed by the Assessing Officer when under Article 14 must be observed by the Assessing Officer when he arrives at his satisfaction under Sub he arrives at his satisfaction under Sub-section (2) of Section 14A. section (2) of Section 14A. As we shall note shortly hereafter, Sub As we shall note shortly hereafter, Sub-rule (1) of Rule 8D has also rule (1) of Rule 8D has also incorporated the essential requirements of Sub incorporated the essential requirements of Sub-section (2) of Section section (2) of Section 14A before the Assessing Officer proceeds to apply the method 14A before the Assessing Officer proceeds to apply the method 14A before the Assessing Officer proceeds to apply the method prescribed under Sub prescribed under Sub-rule (2)." (emphasis supplied) 11. Non-satisfaction with the disallowance offered by the assessee has to satisfaction with the disallowance offered by the assessee has to satisfaction with the disallowance offered by the assessee has to be arrived at on the basis of the accounts su be arrived at on the basis of the accounts submitted by the assessee. In bmitted by the assessee. In this case, the Assessing Officer had not carried out the aforesaid exercise this case, the Assessing Officer had not carried out the aforesaid exercise this case, the Assessing Officer had not carried out the aforesaid exercise but rejected the disallowance claimed by the assessee only on the ground but rejected the disallowance claimed by the assessee only on the ground but rejected the disallowance claimed by the assessee only on the ground that it was not in accordance with Rule 8D of the Rules. The application of that it was not in accordance with Rule 8D of the Rules. The application of that it was not in accordance with Rule 8D of the Rules. The application of Rule 8D of the Rules would only arise once the Assessing Officer is not e 8D of the Rules would only arise once the Assessing Officer is not e 8D of the Rules would only arise once the Assessing Officer is not satisfied on an objective criteria in the context of its accounts, that suo satisfied on an objective criteria in the context of its accounts, that suo satisfied on an objective criteria in the context of its accounts, that suo motu disallowance claimed by the assessee is not proper. motu disallowance claimed by the assessee is not proper.” 4.5 Therefore, respectfully following the finding of Therefore, respectfully following the finding of Therefore, respectfully following the finding of the Hon’ble Bombay High Court in the case of Bombay Stock Exchange Ltd. Bombay High Court in the case of Bombay Stock Exchange Ltd. Bombay High Court in the case of Bombay Stock Exchange Ltd. (supra), in absence of any dissatisfaction whether express or in absence of any dissatisfaction whether express or in absence of any dissatisfaction whether express or implied recorded by the AO recorded by the AO on the correctness of claim of the claim of the suo- motu disallowance of expenditure by the assessee for ear disallowance of expenditure by the assessee for ear disallowance of expenditure by the assessee for earning
Bennett Property Holdings Company Ltd. Bennett Property Holdings Company Ltd. exempted income, the Assessing Officer is not he Assessing Officer is not justified in invoking justified in invoking Rule 8D of the Rules. Accordingly, the disallowance made by the Rule 8D of the Rules. Accordingly, the disallowance made by the Rule 8D of the Rules. Accordingly, the disallowance made by the Assessing Officer invoking Rule 8D is hereby deleted. Since, we Assessing Officer invoking Rule 8D is hereby deleted. Since, we Assessing Officer invoking Rule 8D is hereby deleted. Since, we have already allowed the ground No. 2 of the appeal in favour of the have already allowed the ground No. 2 of the appeal in have already allowed the ground No. 2 of the appeal in assessee , therefore, the other grounds are rendered merely therefore, the other grounds are rendered merely therefore, the other grounds are rendered merely academic.
In the result, the appeal of the assessee is allowed. In the result, the appeal of the assessee is allowed. In the result, the appeal of the assessee is allowed.