KHIM ENGINEERING INDUSTRIES PRIVATE LIMTIED,MUMBAI vs. INCOME TAX OFFICER, WARD-4(1)(2), BANGALORE

10. I have thoughtfully considered the aforesaid contention of the Ld. AR and principally concurred with him that in case if the assessee has sufficient self-own funds, the presumption would be that the investment in the exempt income yielding investment was sourced out of the same. My aforesaid conviction is fortified by the judgment of the Hon'ble High Court of Bombay in the case of CIT v. HDFC Bank Ltd. . The Hon'ble High court had observed that where the assessee has more interest free funds than the tax-free investments, then a presumption would arise that tax free investments would be out of the interest-free funds. In fact, the aforesaid view is further supported by the judgment of the Hon'ble Supreme Court in the case of South Indian Bank Ltd. v. CIT , wherein the Hon'ble Apex Court had held that if investment in exempt income yielding shares is made out of common funds and the assessee had available non-interest bearing funds larger than the investments made in tax-free securities then in such cases, no disallowance u/s. 14A would be called for. Although, I am principally in agreement with the aforesaid contention of the Ld. AR but the said factual position, in all fairness, would be required to be verified. Accordingly, I restore the matter to the file of the A.O with a direction to verify the aforesaid factual position. In case, if the aforesaid claim of the assessee as regards the availability of the sufficient self-owned funds is found to be in order, then, no disallowance of any part of the interest expenditure u/s. 14A r.w.r. 8D would be warranted in its case. Accordingly, this part of the ground is allowed for statistical purposes to the extent relevant in terms of my aforesaid observations.

11. Apropos the disallowance of administrative/other expenses u/s. 14A r.w.r. 8D(2)(ii), I finds substance in the claim of the Ld. AR that as the A.O had failed to record his dissatisfaction as regards the assessee's claim that no part of such expenditure claimed as deduction in the profit and loss account was attributable towards earning of the exempt income, therefore, he could not have mechanically worked out the disallowance to the said extent.

12. On a careful perusal of the assessment order, I find substance in the claim of the Ld. AR that the A.O had without dislodging the assessee's claim that no part of the administrative/other expenditure claimed as deduction in the profit and loss account was attributable to earning of the exempt income, and had mechanically worked out the disallowance u/s.14A of the Act as per the methodology contemplated under Rule 8D of the Income Tax Rules, 1962. Also, the CIT(Appeals), without correcting the aforesaid lapse of the A.O had merely approved his order. I find that a similar issue had been dealt with and adjudicated by the ITAT, Panaji Bench in the case of Infrastructure Logistics (P.) Ltd. (supra) wherein it was held that where the A.O made disallowance u/s. 14A r.w.r.8D, but had failed to record his dissatisfaction as regards the claim of the assessee that no part of expenditure claimed as deduction could be attributed towards earning of the exempt income, he had wrongly assumed jurisdiction u/s. 14A as a result whereof disallowance determined by him by triggering the mechanism contemplated in Rule 8D(2)(iii) could not be sustained and was liable to be vacated. For the sake of clarity, the relevant observations of the Tribunal are culled out as under: "13. After giving a thoughtful consideration to the issue in hand in the backdrop of the aforesaid contentions advanced by the Ld. Authorized Representatives of both the parties, we find substantial force in the claim of the Ld. AR. Admittedly, pursuant to the judgment of the Hon'ble Supreme Court in the case of Maxopp Investment Ltd. v. CIT, New Delhi (2018) , the A.O prior to dislodging the disallowance, if any, offered by the assessee u/s.14A of the Act remains under a statutory obligation to record his dissatisfaction as regards the correctness of the said claim of the assessee in reference to its accounts and therein, categorically record the reasons as to why the claim of the assessee qua the disallowance so offered by him is not being accepted. On a similar footing would be a case where the assessee had not attributed any part of the expenditure for earning of exempt dividend income and, the A.O is not satisfied with the said claim. Apart from that we find that the Hon'ble Jurisdictional High Court in the case of CIT v. Sociedade De Fomento Industrial (P). Ltd (supra) had observed, that the A.O before rejecting the disallowance offered by the assessee remains under a statutory obligation to give a clear finding with reference to the accounts of the assessee that the other expenditure which were being claimed qua the non-exempt income were in fact related to its exempt income. Also, as stated by the Ld. AR, and rightly so, a similar view had been taken by the Hon'ble High Court of Delhi in the case of H.T Media Ltd. v. Pr. CIT . Now, in the case before us, we find that the A.O had though deliberated at length on the scheme of section 14A of the Act, but had failed to give any reason as to why the claim of the assessee that no part of the expenditure could be attributed towards earning of exempt income was not to be accepted. Although, the CIT(Appeals) in his order had tried to improve upon the aforesaid lapse of the A.O, but a perusal of his observations too do not inspire much of confidence, as the statutory obligation requiring recording of a clear finding with reference to the assessee's accounts that the expenditure claimed by the assessee to have been incurred in respect of its non-exempt income was in fact related to its exempt income, is not found to be satisfied. Although the CIT(Appeals) had referred to the assessee's claim for deduction of certain expenses, but the same are more or less in the nature of general observations which would not suffice the satisfaction of the obligation that is cast upon the revenue for dislodging the claim of the assessee qua attribution of any part of the expenditure for earning of exempt dividend income. Be that as it may, we, in terms of our aforesaid observations, concur with the claim of the Ld. AR that as the A.O had failed to record his dissatisfaction as regards the claim of the assessee that no part of the expenditure claimed as deduction could be attributed towards earning of exempt dividend income, therefore, he had wrongly assumed jurisdiction u/s.14A of the Act, as a result whereof the disallowance of Rs. 15,03,242/-determined by him by triggering the mechanism contemplated in Rule 8D(2)(iii) cannot be sustained and is liable to be vacated. As we have vacated the disallowance made by the A.O u/s.14A(2)(iii) for want of valid jurisdiction on his part, therefore, we refrain from adverting to the other contentions that have been advanced by the Ld. AR qua sustainability of the said disallowance on merits which are left open. Thus, the Ground of appeal

No.2 raised by the assessee is allowed in terms of our aforesaid observations.

13. Also, I find that the Hon'ble Supreme Court in the case of Maxopp Investment Ltd. v. CIT has held that that if the A.O was not satisfied with the disallowance that was offered by the assessee, then, he remained under a statutory obligation to record his dissatisfaction to the said effect, as it was only thereafter that he could assume jurisdiction and take recourse to and work out the disallowance as per sub- section (2) and (3) of Sec. 14A of the Act.

14. I further find that the Hon'ble Supreme Court in the case of Godrej & Boyce Manufacturing Company Ltd. v. Dy. CIT [2017] 81 taxmann.com 11/247 Taxman 361/394 ITR 449/[(Civil Appeal No. 7020 of 2011, dated

8-5-2017], dealing with the statutory requirement of satisfaction on the part of the A.O as regards not accepting the correctness of the claim of the assessee in respect of the expenses claimed by him to have been incurred in relation to income which does not form part of the total income of the assessee, had held as under:- "Sub-sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the Assessing Officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8D or in the best judgment of the Assessing Officer, what the law postulates is the requirement of a satisfaction in the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Section 14A(2) and (3) read with Rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable." I am of the view that in the backdrop of the aforesaid judgment of the Hon'ble Supreme Court in the case of Godrej & Boyce Manufacturing Company Ltd. (supra), the issue as regards requirement of a satisfaction of the Assessing Officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee, is obligatory and cannot be dispensed with by the A.O, thus stands settled and is no more res integra. I, thus, in the backdrop of the aforesaid judgment of the Hon'ble Apex Court am of the considered view that now when the assessee company in the present case had claimed that no part of the administrative/other expenses claimed by it as a deduction were incurred in relation to the income which did not form part of its total income, then the A.O only after being satisfied that having regard to the accounts of the assessee, as placed before him, it was not possible for him to generate the requisite satisfaction with regard to the correctness of the claim of the assessee, thus, only after rejecting the said claim of the assessee, after complying with the aforesaid statutory obligation as stood cast upon him, could have validly proceeded with and determined the amount of such other/administrative expenditure incurred in relation to the income which did not form part of its total income. I however find that in the case of the present assessee company the A.O had carried out the disallowance of the other/administrative expenditure under Sec.14A in a mechanical manner as per the methodology provided in Rule 8D(2)(ii). I am of the considered view that the general observations of the A.O can by no means partake the color and character as that of a satisfaction, which as per the mandate of law is required to be arrived at by him with regard to the correctness of the claim of the assessee in respect of the administrative/other expenses claimed to have been incurred in respect of income which did not form part of the total income of the assessee company, having regard to the accounts of the assessee, as were placed before him. I, thus, being of the considered view that as the A.O had summarily carried out the disallowance of the administrative/other expenses under Sec. 14A, as per the methodology provided in Rule 8D(2)(ii), without satisfying the statutory requirement of first arriving at a satisfaction as required by the mandate of law, having regard to the accounts of the assessee as placed before him, therefore, am unable to persuade myself to uphold the disallowance of Rs.2,22,963/- which had been sustained by the CIT(A). The order of the CIT(A) sustaining the disallowance of Rs.2,22,963/- under Sec. 14A is thus set aside. Accordingly, this part of the ground is allowed to the extent relevant in terms of my aforesaid observations Respectfully following the above judgment, we allow the legal issue raised in ground No.1 raised by the assessee. Accordingly the other grounds are not considered for adjudication and are left open.

The issue involved herein is squarely covered by the decision of the Coordinate Bench of this Court in the case of CIT v. Quest Global Engineering Services (P.) Ltd. [IT Appeal No. 133 of 2015, dated 15-2-2021]. Concurring with the same, we answer the said substantial question of law in favour of the assessee and against the Revenue.

Pronounced in the open court on this 28th day of October, 2024.