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Facts
The assessee, Piem Hotels Ltd., filed appeals against the CIT(A)'s orders concerning Assessment Years 2014-15 and 2016-17. The appeals primarily dealt with disallowances made under Section 14A of the Income Tax Act, 1961, related to expenditure incurred for earning exempt income.
Held
The Tribunal held that the Assessing Officer (AO) failed to record his satisfaction with the correctness of the assessee's claim regarding disallowance of expenses under Section 14A before invoking Rule 8D. This procedural lapse, as established by various High Court judgments, renders the disallowance unsustainable.
Key Issues
Whether the disallowance of expenditure under Section 14A of the Income Tax Act, 1961, is valid when the Assessing Officer has not recorded proper satisfaction regarding the assessee's claim before applying Rule 8D of the Income Tax Rules.
Sections Cited
Section 14A, Rule 8D, Section 143(3), Section 234D
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Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
Before: SHRI PRASHANT MAHARISHI, AM & SHRI RAJ KUMAR CHAUHAN, JM
are filed by Piem Hotels Limited (assessee / appellant) against the appellate order passed by the National Faceless Appeal Centre, Delhi [the learned CIT (A)] on 16th October, 2013, against the A.Y. 2014-15 and 2016-17.
For A.Y. 2014-15, by this appellate order appeal filed by the assessee against the assessment order dated 24th November, 2016, passed under Section 143(3) of the Income-tax Act, 1961 (the Act), was partly allowed.
The assessee is aggrieved for confirmation of disallowance under Section 14A of the Act for both these years.
As the facts and circumstances in both the appeals are identical, we set out the facts for A.Y. 2014-15. The assessee filed its return of income on 29th November, 2014 at ₹55,31,90,420/- from its business of running hotels. The learned Assessing Officer selected the case for scrutiny and held that assessee has made huge investment of ₹169 crores and has offered suo moto disallowance of ₹24,23,717/- under Section 14A of the Act. The assessee has earned dividend income from domestic companies of ₹365.92 lacs. The assessee has computed administration cost and certain other charges amounting to ₹24,23,717/- as an amount disallowable under Section 14A of the Act. The learned Assessing Officer applied the provision of Rule 8D of the IT Rules u/s 14A of The Act and computed the disallowance of ₹57,96,654/-. As assessee has offered suo moto disallowance of ₹24.23,717/-, therefore, further disallowance of ₹37,30,672/- was made. Consequently, the assessment order under Section 143(3) of the Act was passed on 24th November, 2016, determining the total income of the assessee at ₹55,69,21,100/-.
6. Assessee approached the learned CIT (A) who passed the order on 16th October, 2023, wherein the order of the learned Assessing Officer was confirmed. 07. For A.Y. 2016-17, assessee filed return on 29th November, 2016 at ₹40,62,06,850/-. The assessee has made investment of ₹96.82 crores
8. The assessee approached the learned CIT (A), wherein the disallowance of ₹22,69,014/- made by the learned Assessing Officer was confirmed. Therefore, the assessee is in appeal for both the years.
9. The learned Authorized Representative submitted that the disallowance confirmed by the learned CIT (A) is bad and illegal for the reason that (i) the learned Assessing Officer has not recorded his satisfaction prior to invoking provision of Rule 8D of the Rules. The learned Authorized Representative says that issue is covered by the decision of Hon'ble Bombay High Court in case of Tata Capital Limited in Income Tax Appeal No.1081 of 2018, dated 3rd April, 2021 [2024] 161 taxmann.com 557 (Bombay). He further submitted that identical issue has been decided in assessee’s own case for earlier years. (ii) He further submitted that even if the disallowance is to be made only those investments which yielded exempt income during the year are required to be considered. As CIT (A) has rejected both
10. The learned Departmental Representative vehemently submitted that (i) there is a proper satisfaction recorded by the learned Assessing Officer and (ii) further even if there is no exempt income earned during the year those investments are also required to be taken in to computation of disallowance. Therefore, there is no infirmity in the orders of lower authorities.
11. We have carefully considered the rival contentions and perused the orders of the lower authorities. We find that For AY 2014-15 , assessee has earned exempt income of ₹365.92 lacs being exempt income. The assessee has computed a suo moto disallowance under Section 14A of the Act of ₹20,65,982/- of administrative cost and further, ₹3652/- as Demat charges. With respect to the disallowance of ₹20,65,982/-, the assessee has considered percentage wise disallowance of total finance department overheads and salaries etc. of ₹3.72 crores. To this expenditure the assessee has applied certain percentage to each of the expenditure and computed the disallowance of ₹20,65,982/-. The learned Assessing Officer did not mention any reason to state that why he has not agreeing to disallowances computed by the assessee.
Provision of section 14 A (2) provides that 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 i.e. u/r 8D of The Income tax Rules 1962, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the
Honourable Bombay High court in case of Tata Capitals Limited [ Supra] has held as under :-
"7. We agree with the finding of the CIT(A) and the ITAT that though the AO has stated that Assessee's explanation is not acceptable, he has not given reasons why it was not acceptable to him. Subsection (2) of Section 14A and Rule 8D provides that if the Assessing Officer is not satisfied with the correctness of the claim in respect of expenditure made by Assessee in relation to income which does not form part of the total income under the Act, he shall determine the amount of expenditure in relation to such income in accordance with the provisions prescribed. The most fundamental requirement, therefore, is the Assessing Officer should record his dissatisfaction with the correctness of the claim of Assessee in respect of the expenditure and to arrive at such dissatisfaction, he should give cogent reasons. We find support for this view in a judgment of this Court in Principal Commissioner of Income Tax (Central) v. JSW Energy Limited [2023] 153 taxmann.com 208/[2024] 460 ITR 496/[2023] 294 Taxman 407 (Bombay) where paragraphs 5 to 11 read as under:
"5. Section 14A of the Act reads as under:
Expenditure incurred in relation to income not includible in total income.
(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:
Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.
Rule 8D of the said Rules that was inserted w.e.f. 24th March 2008 by the Income Tax (5th Amendment Rules) 2008, reads as under:
(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 Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). 2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:-
(i) the amount of expenditure directly relating to income which does not form part of total income; and (ii) an amount equal to one per cent of the annual average of the monthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income: Provided that the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure claimed by the assessee.]
In sub-Section (2) of Section 14A and Rule 8D it is provided that if the Assessing Officer is not satisfied with the correctness of the claim in respect of expenditure made by assessee in relation to income which does not form part of the total income
Therefore, the most fundamental requirement is the Assessing Officer should record his dis-satisfaction with the correctness of the claim of the assessee in respect of the expenditure and to arrive at such dis-satisfaction he should give cogent reasons.
8. Ms Jain relied upon three judgments of this court, viz., Principal Commissioner of Income Tax v. Bajaj Finance Ltd. [[2019] 110 taxmann.com 303 (Bombay) ], Principal Commissioner of Income Tax-2 v. Bombay Stock Exchange Ltd. [[2020] 113 taxmann.com 303 (Bombay) ] and Principal Commissioner of Income Tax v. Godrej & Boyce Mfg. Co. Ltd. [2023] 149 taxmann.com 222/292 Taxman 497 (Bombay) to submit that the Assessing Officer must first record a conclusion that having regard to the accounts of the assessee, he is not satisfied with the disallowance offered by the assessee in terms of Section 14A (2) of the Act and it is only on being dissatisfied with the disallowance offered by the assessee, can Rule 8D of the Rules be invoked to compute the disallowance.
9. Paragraph 9 of Bajaj Fiance Ltd. (supra) reads as under:
"9. Question No. (ii) pertains to disallowance made by the Assessing Officer under Section 14A of the Act read With Rule SD. The Tribunal, however, deleted the disallowance on the ground that the Assessing Officer had not recorded the necessary satisfaction for not accepting the disallowance Paragraph 9 of Bombay Stock Exchange (supra) reads as under:
"9. 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 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 disallowances not being worked out as per Rule 8D of the Rules, that the Assessing Officer is not satisfied with the disallowance offered by the Respondent. This, to our mind, is putting the cart before the horse. The Assessing Officer must first record a conclusion that having regard to the accounts of the assessee, he is not satisfied with the disallowance offered by the Respondent in terms of Paragraph 11 of Godrej & Boyce Mfg. Co. Ltd. (supra) reads as under:
"11. In the present case, the assessee had earned an exempt income of Rs. 84,30,37,423/- from shares and mutual funds and submitted a computation of inadmissible expenditure u/s 14A amounting to Rs. 13,66,635/- The assessee claimed that the disallowance made u/s14A was as per the books of account attributable to earning of exempt income. On a perusal of the assessment order we find that there is no discussion by the AO with regard income. Further, the AO has not recorded any satisfaction that the working of inadmissible expenditure u/s14A is incorrect with regard to the books of account of the assessee. The proviston u/s 14(2) does not empower the AO to apply Rule 8D straightaway without considering the correctness of the assessee's claim in respect of expenditure incurred in relation to the exempt income. We agree with the view of the ITAT that in the present case the AO has neither examined the claim in respect of expenditure incurred in relation to exempt income of the assessee nor has recorded any satisfaction with regard to the correctness of assessee's claim with reference to the books of account. Consequently, the disallowance made by applying the Rule 8D is not only against the statutory mandate but contrary to the legal principles laid down. In our view too, the CIT (A) has rightly deleted the addition made on account of interest expenditure as the assessee had sufficient interest free
Now let us examine the assessment order to see whether this mandatory conclusion that the Assessing Officer is not satisfied with the disallowance made by the assessee, has been arrived at. The only place where the Assessing Officer has come to his findings is at paragraph 5.2 of the assessment order, which reads as under:
5.2. The said submission has been considered. In the assessment order passed u/s 143(3) dated 20.10.2010, the AO has worked out the disallowance u/s 14A as per Rule 8D at Rs.29,66,81,836/-. The assessee has also furnished working u/Rule 8D (though under protest) which amounts to Rs.44,03,33,135/-. Rule 8D is to be applied in the present case based on the various discussions and findings of the AO in the original assessment order passed. However, since the amount worked out by the assessee is higher, the same has been considered for disallowance.
The Assessing Officer has not expressed his satisfaction in the way it should have been. The Assessing Officer does not say he is not satisfied and why he was not satisfied. There are no reasons given.
Moreover, Ms Jain submitted that the Assessing Officer, in paragraph 5.2 of the impugned order quoted above, has relied
The order of the ITAT (Panaji Bench) in the case of Sesa Goa Limited has been upheld by the Goa Bench of this Court in CIT, Goa v. Sesa Goa Limited, Panaji, Goa [2021] 127 taxmann.com 354 where the Division Bench concurred with the view taken by the ITAT that the Assessing Officer did not
In the circumstances, in our view, no substantial question of law arises. Appeal dismissed."
Thus, According to Section 14A (2) of the Act, it is the duty of the learned Assessing Officer to first record his satisfaction that why the claim of the assessee is not correct according to him on verification of the accounts of the assessee. There is no whisper in the assessment order about examination of claim of the assessee, holding such claim as not correct on examination of accounts of the assessee. Thus, The learned Assessing Officer has failed to record his satisfaction as provided under that section. Therefore, the issue is squarely covered by the decision of the Hon'ble Bombay High Court in case of Tata Capital Ltd. (supra). In this case, that the learned Assessing Officer has not recorded any satisfaction about the correctness of the claim of the assessee about disallowance offered of ₹20,65,982/-. Thus, without recording of the satisfaction about the correctness of the claim of the assessee, the learned Assessing Officer does not have any authority to compute the disallowance by application of Rule 8D. The learned CIT (A) is also incorrect in holding that the learned Assessing Officer has recorded any satisfaction as provided under Section 14A (2) of the Act. In view of this, we hold that the disallowance made by the learned Assessing Officer confirmed by the learned CIT (A) is not correct. Accordingly, we reverse the orders of the lower authorities and allow the ground no. 2 of the appeal, following the decision of the
Ground no.1 is general in nature and therefore, it is dismissed.
Thus, appeal for A.Y. 2014-15 filed by the assessee is partly allowed.
Coming to the appeal of the assessee for A.Y. 2016-17, facts are identical, therefore, the disallowance offered by the assessee is concerned. Out of the total expenditure of ₹3.78 crores by applying percentage for disallowance, assessee has computed the disallowance of ₹20,80,775/- of administrative expenditure under Section 14A of the Act.
The learned Assessing Officer failed to record any satisfaction for this year also. He without recording satisfaction about correctness of the claim of the assessee applied provision of Rule 8D of the Income Tax Rules. Thus, the issue for this year is also covered by the decision of the Hon'ble Bombay High Court in case of Tata Capital Ltd. (supra). Accordingly, we allow ground no 2 of the appeal of the assessee reversing the orders of the lower authorities and direct to disallowance of ₹22,69,014/-.
Ground no.1 of the appeal is general in nature, and therefore, same is dismissed.
Ground no.3 is with respect to the charging of interest under Section 234D of the Act of ₹99,864/-. We direct the learned Assessing Officer to verify whether the provision of Section 234D is applicable or not in this case and, if no such interest is chargeable, delete the demand of interest to that extent. Accordingly, he may decide the issue in
In the result, the appeal for A.Y. 2016-17 is partly allowed.
Accordingly, both the above appeals are partly allowed.
Order pronounced in the open court on 08.05. 2024.