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Income Tax Appellate Tribunal, “J” BENCH, MUMBAI
Before: SHRI C.N. PRASAD & SHRI RAMIT KOCHAR
सुनवाई क" तार"ख /Date of Hearing : 30-01-2017 घोषणा क" तार"ख /Date of Pronouncement : 27-02-2017 आदेश / O R D E R
PER RAMIT KOCHAR, Accountant Member
This appeal, filed by the assessee, being 06-01-2015 passed by the learned Commissioner of Income Tax (Appeals)- 21, Mumbai (hereinafter called “the CIT(A)”), for the assessment year 2011-12, the appellate proceedings before the learned CIT(A) arising from the assessment order dated 6th February, 2014 passed by learned Assessing Officer(hereinafter called “ the AO”) u/s 143(3) of the Income-tax Act,1961 (Hereinafter called “the Act”).
ITA 2205/Mum/2015 2
The grounds of appeal raised by the assessee in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called “the Tribunal”) read as under:-
“1. Disallowance u/ s 14A of Rs. 19,81,195/-:
1.1 On the facts and circumstances of the case and in law, the learned CIT (A) erred in upholding the disallowance u/s 14A read with rule 8D(2) of Rs. 19,81,195/-.
1.2 The learned CIT (A) ought to have appreciated that the Assessing Officer had not reached appropriate satisfaction regarding the amount disallowed by the Appellant of Rs 2,50,000/- was not adequate.
1.3 The learned CIT (A) ought to have appreciated that the provisions of S.14A could not be applied in the instant case, since the investments were made out of own funds and Appellant had submitted nexus of funds used for the purpose of investment during the course of appellate proceedings.
1.4 Without prejudice to the above, the learned CIT(A) grossly erred in upholding the actions of Assessing Officer to include the value of investments that do not produce exempt income while computing disallowance u/s 14A read with rule 8D, without giving any reasoning.
1.5 Without prejudice to the above, the learned CIT(A) grossly erred in upholding the actions of Assessing Officer , by not excluding interest-charges paid on term loan acquired specifically for acquisition of fixed assets while computing disallowance u/s 14A read with rule 8D, without giving any reasoning.
1.6 Without prejudice to above, Rs 2,50,000/- disallowed by the Appellant in computation of income while filing the return of income should be reduced from overall disallowance carried by the Assessing Officer.
1.7 Without prejudice to the above, disallowance u/ s 14A should be substantially reduced.”
Brief facts of the case are that the assessee company is engaged in the business of providing internet service and internet data centre. During the ITA 2205/Mum/2015 3 course of assessment proceedings u/s 143(3) r.w.s. 143(2) of the Act, the assessee was asked to explain about the applicability of section 14A read with Rule 8D of the Income-Tax Rules, 1962 wherein the assessee furnished the following submission:-
a. Investments have been made in mutual funds and in the subsidiary company and received dividend which is claimed exempt u/s 10(34) of the Income Tax Act, 1961. b. The investments were made out of own funds and no borrowed funds were utilized. The same were done through raising of capital by issue of preference shares and used to create fixed deposits which were redeemed to purchase mutual funds. c. Fresh investments were made out of preference shares issued. d. A term loan was obtained from Axis Bank amounting to Rs. 5,83,46,000/- for capital investment and towards additions to fixed assets and not utilized for investments. e. A table showing the profits earned was also submitted which shows share capital at Rs. 205883000/- and reserves and surplus at Rs. 897824000/-. f. No administrative expenditure was incurred towards purchase of mutual fund and were carried out through an agent who used to fill up the forms and dividend and was credited to the account through ECS and cheques were collected by the agent in respect of mutual funds and hence no administrative expenditure was incurred. g. No expenditure was borne towards redeeming of mutual funds as the remittances were done through ECS. h. In case of any disallowance to be made, the assessee has made a suo moto disallowance of Rs. 2,50,000/- being amount disallowed in security transaction tax.
The A.O. rejected the contention of the assessee by holding as under:-
“It is also important to note that a company cannot earn dividend without its existence and management. Investment decisions are ITA 2205/Mum/2015 4 very complex m nature. They require substantial market research, day-to-day analysis of market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate time. It is, therefore, not correct to say that dividend income/exempt income can be earned by incurring no or nominal expenditure. It is difficult to accept that a company can earn dividend income/exempt income without incurring any expenses whatsoever including management or administrative expenses as investment decisions are generally taken in the meetings of the Board of Directors for which administrative expenses are incurred. The term ‘expenditure' occurring in section 14A would take in its sweep not only direct expenditure but also all forms of expenditure regardless of whether are fixed, variable, direct, indirect, administrative, managerial or financial. Sub-section (1) of section 14A provides in unequivocal terms for not allowing deduction in respect of expenditure incurred by the assessee in relation to exempt income and sub-section (2) lays down the mechanism for determining such amount of expenditure incurred in relation to exempt income in accordance with method as prescribed under rule 8D. Reliance in this regard is placed on the recent decision of Hon'ble High Court in the case of Godrej & Boyce Mfg., Co. Ltd. - 234 CTR (Bom)1(2010). Prior to Rule 8D, the apportionment of expenditure was at the discretion of Assessing Officer. But, now Rule 8D has prescribed a formula for calculation of disallowance u/s s14A and the same is binding in nature.
In view of the above and the explicit provisions of sec.14A read with Rule 8D and judicial pronouncements, the amount of disallowance u/ s.14A of the I.T. Act is worked out as under; OPENING CLOSING BALANCE BALANCE (i) The amount of expenditure directly relating to income 0 which does not form part of total income (ii) In case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula A Amount of ITA 2205/Mum/2015 5 expenditure by way of interest other than the amount of interest 1,11,53,000 14,40,397 included in clause(i) incurred during the previous year B The average value of investment, income from which does not or shall not form part of the total income, as 158234000 98393,000 108159,500 appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. C The average of total assets as appearing in the balance 1514373,000 1167494000 1340933,500 sheet of the assessee, on the first day and the last day of the previous year A X B/C 0 (iii) 0.5% of the average of the value of investment, income from which does not or shall not form part of the total ITA 2205/Mum/2015 6 income, as 5,40,798 appearing in the balance sheet of the assessee, on the first day and the last day of the previous year DISALLOWANCE (i) +(ii)+(iii) 19,81,195 U/S.14A Thus the A.O. made a disallowance of expenditure of Rs. 19,81,195/- incurred for earning exempt income u/s 14A read with Rule 8D of the Income-tax Rules, 1962, vide assessment order dated 06.02.2014 u/s 143(3) of the Act.
Aggrieved by the assessment order dated 06.02.2014 passed by the A.O. u/s 143(3) of the Act, the assessee filed first appeal before the ld. CIT(A).
The assessee contended before the ld. CIT(A) that the assessee has voluntarily made disallowance of Rs. 2,50,000/- of expenditure incurred for earning exempt income which was not considered by the A.O. . It was submitted that it had made investment in various mutual funds and its subsidiary companies and has received dividend income of Rs. 48,69,223/- which was claimed as exempt income from tax u/s 10(34) of the Act but there was no such huge expenditure of Rs. 19,81,195/- incurred by the assessee as disallowed by the AO u/s 14A of the Act r.w.s. 8D of Income-tax Rules, 1962 for earning exempt income. It was submitted that during the year no fresh investment had been made and investments made during the previous years were wholly out of own fund by issue of preference shares. No borrowed funds were utilized for investment in mutual fund. It was submitted that the assessee had not incurred any expenses for investment in mutual fund or for ITA 2205/Mum/2015 7 earning dividend. It was submitted that the authorized agent acted as financial adviser for investment as well as redemption of mutual fund, and hence assessee did not have to incur any expenditure. It was submitted that the investment in share of its 100% subsidiary capital Sky N-Land Video Networks Pvt. Ltd. was a strategic investment and was made with an intention to acquire controlling interest in this subsidiary. It was further submitted that no interest bearing fund has been utilized. The interest expenditure appearing in profit and loss account was in respect of term loan utilized for acquiring fixed assets. It was submitted that disallowance of expenses made for earning exempt income should be deleted. The assessee relied upon several judgment as enumerated in learned CIT(A) orders.
The ld. CIT(A) after considering the submissions of the assessee rejected the same vide appellate order dated 06-01-2015 , by holding as under:-
4.3 I have considered the rival submission of the appellant, finding of the Assessing Officer and facts of the case, carefully. I find that there is element of expenditure for earning dividend of Rs. 48,69,223/- when there is cautious decision for investment in mutual funds or investment in preference share of subsidiary, there is involvement of management, infrastructure, use of office and rendering of services of various employees. Because of such element of expenditure, appellant has admitted the expenditure to the extent of Rs. 2,50,000/- otherwise on the basis of argument it would have not offered such disallowance. It is important to point out that there is no convincing basis for ascertaining such disallowable expenditure of Rs. 2,50,000/-. The investment in subsidiary is also capable of exempt income, though it might be invested from strategic point of view. Because of difficulty in ascertainment of such expenditure, Rule 8D was prescribed, hence no fault can be seen in working of disallowable expenditure made by the Assessing Officer in Para 4.4 of the assessment order. In the appellant's own case Hon'ble ITAT in and 902 /Mumbai/2010 dated 03.06.2011, has not given any relief to the appellant and has held that Rule 8D is applicable in subsequent year, such expenditure can be disallowed in this year as validity of Rule 8D has been approved ITA 2205/Mum/2015 8 by the Hon'ble Bombay High Court in the case of Godrej and Boyce Manufacturing Ltd. vs. DCIT (2010) 328 ITR 81 (Born). Thus, I find no merit in the arguments of the appellant that no disallowance could be made u/s.14A R.W.R. 8D. Because of the facts and circumstances of the case ratio of none of the decision relied upon by the Ld. A.R. is applicable, hence the finding of the Assessing Officer is approved and therefore disallowance of total expenditure related to such exempt income, of Rs. 19,81,195/- is sustained.
Aggrieved by the above appellate order dated 06-01-2015 passed by the ld. CIT(A), the assesee filed second appeal before the tribunal.
7. The ld. Counsel for the assessee submitted that the disallowance of expenditure for earning exempt income has been made u/s 14A of the Act by the AO amounting to Rs. 19,81,195/-. It was submitted that for the assessment year 2009-10, in assessee’s own case, the tribunal had decided the issue whereby the disallowance has been deleted on account of non- recording of the satisfaction. Our attention was drawn to the decision of the tribunal in vide orders dated 25-08-2016 for assessment year 2009-10 in assessee’s own case, wherein the tribunal deleted the disallowance made by the AO u/s 14A of the Act which disallowance made by the AO was later affirmed by learned CIT(A). It was submitted that despite giving detailed explanations as to the disallowance made u/s 14A of the Act , the AO did not recorded satisfaction before rejecting the contentions of the assesse. It was submitted that the assessee has voluntarily disallowed an amount of Rs. 2,50,000/- towards expenditure incurred for earning exempt income. It was submitted that the assessee has own surplus funds available which are more than sufficient to cover investments made in the shares and mutual funds. The investment as reflected in the Balance Sheet as at 31-03-2011 is only 15.82 crores, while the total shareholder funds are to the tune of Rs. 110.66 crores which are far in excess of investments of Rs.15.82 crores held as at 31-03-2011, hence, no ITA 2205/Mum/2015 9 disallowance is called for. The ld. Counsel drew our attention to paper book page 3 whereby the balance sheet of the assessee as at 31st March, 2011 is placed. The ld. Counsel also drew our attention to paper book page 8 whereby the schedules forming part of the balance sheet is placed on record whereby the investments are reflected of Rs. 15.83 crores out of which investment in subsidiary company are to the tune of Rs. 6.40 crores . It was submitted that no disallowance is called for w.r.t. strategic investments made in subsidiary companies as the investments were made not with an objective to earn dividend income but with a view to have controlling stake in these subsidiary companies. It was submitted that the A.O. has wrongly applied Rule 8D of Income-tax Rules, 1962. It was submitted that the disallowance of Rs. 5,40,798/- was wrongly made by the AO by invoking Rule 8D(2)(iii) of Income-tax Rules, 1962 as the assessee has voluntarily disallowed Rs.2,50,000/- u/s 14A of the Act.
The ld. D.R. submitted that no basis was given by the assessee with regard to the disallowance of Rs. 2.5 lacs made by the assessee u/s 14A of the Act. The A.O. had recorded the satisfaction before invoking Rule 8D of Income-tax Rules,1962. Our attention was invited to para No. 4.3 of the assessment order of the A.O. wherein it was submitted that satisfaction was duly recorded by the AO before invoking Rule 8D of Income-tax Rules, 1962. The ld. D.R. relied on the decision of Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. CIT, (2010) 328 ITR 81(Bom.) and submitted Rule 8D of Income-tax Rules, 1962 is applicable w.e.f. assessment year 2008-09. It was submitted that the tribunal in vide orders dated 03-06-2011 had upheld the disallowance of expenditure for earning exempt income in assessee’s own case for assessment year 2006-07. The show cause notice was issued by the AO to the assessee as to how it arrived at the figure of Rs.2.50 lacs for making disallowance of expenditure for earning exempt income u/s 14A of the Act but no details were submitted ITA 2205/Mum/2015 10 by the assessee and hence the AO applied Rule 8D of Income-tax Act,1961 which is mandatory.
The ld. Counsel for the assessee, in the rejoinder, submitted that the assessee had not incurred any expenses for earning dividend on investments in shares/mutual funds.
We have considered rival contentions and also perused material available on record. The assessee company is engaged in the business of providing internet service and internet data centre. The assessee has made investments in subsidiary company as well as in the mutual funds to the tune of Rs. 15,82,38,000/-. The assessee has earned dividend income of Rs. 48,69,223/- which has been claimed to be exempt u/s 10(34) of the Act. The assessee has suo motu disallowed expenditure of Rs. 2,50,000/- u/s 14A of the Act having incurred in relation to earning of exempt income towards STT.the assessee has claimed that it has its own funds which were invested in shares and mutual funds and no borrowed funds were utilized.Similarly explanations were given that no administrative expenses were incurred , which are detailed hereunder. The assessee came forward with detailed reply before the AO wherein explanations were given by the assessee as to the expenditure incurred in relation to earning of the exempt income, which was offered for disallowance to the tune of Rs 2.50 lacs by the assessee u/s 14A of the Act. The said reply of the assessee before learned AO is reproduced hereunder :
“a. Investments have been made in mutual funds and in the subsidiary company and received dividend which is claimed exempt u/s 10(34) of the Income Tax Act, 1961. b. The investments were made out of own funds and no borrowed funds were utilized. The same were done through raising of capital by issue of preference shares and used to create fixed deposits which were redeemed to purchase mutual funds.
ITA 2205/Mum/2015 11 c. Fresh investments were made out of preference shares issued. d. A term loan was obtained from Axis Bank amounting to Rs. 5,83,46,000/- for capital investment and towards additions to fixed assets and not utilized for investments. e. A table showing the profits earned was also submitted which shows share capital at Rs. 205883000/- and reserves and surplus at Rs. 897824000/-. f. No administrative expenditure was incurred towards purchase of mutual fund and were carried out through an agent who used to fill up the forms and dividend and was credited to the account through ECS and cheques were collected by the agent in respect of mutual funds and hence no administrative expenditure was incurred. g. No expenditure was borne towards redeeming of mutual funds as the remittances were done through ECS. h. In case of any disallowance to be made, the assessee has made a suo moto disallowance of Rs. 2,50,000/- being amount disallowed in security transaction tax.”
The AO did not recorded satisfaction as to the incorrectness of claim/explanation of the assessee of having incurred expenditure to the tune of Rs. 2,50,000/- in relation to the earning of exempt income having regards to the accounts of the assessee before invoking Rule 8D of Income-tax Rules, 1962 for computing disallowance u/s 14A of the Act which method as prescribed u/r 8D of Rules of 1962 was invoked by the AO in an mechanical manner without undertaking exercise by the AO to compute disallowance of expenditure incurred in relation to earning of exempt income having regards to the accounts of the assessee and recording satisfaction that the suo motu disallowance offered by the assessee is incorrect , despite assessee coming forward with detailed reply as enumerated above. The so called satisfaction so recorded by the AO vide para 4.3 of the assessment order for the impugned assessment year as claimed by the learned DR to be satisfaction as mandated ITA 2205/Mum/2015 12 u/s 14A of the Act is not sufficient as required to be recorded by the AO as mandated u/s 14A(2) of the Act to be recorded after being not satisfied with the correctness of the claim of the assessee having regard to the accounts of the assessee, which exercise the AO did not do to identify expenditure having being incurred for earning exempt income having regards to the accounts of the assessee before proceeding to compute disallowance by invoking rule 8D of Income-tax Rules, 1962 r.w.s 14A of the Act .
The facts of the details and nature of the accounts of the assessee are especially within the knowledge of the assessee and hence, the burden of proving that fact is upon the assessee . If a fact which especially are within the knowledge of the person, a duty and onus is cast on the person within whose knowledge especially such facts are , to prove such facts. This is the mandate of Section 106 of The Indian Evidence Act,1872 which is reproduced herein below :-
106. Burden of proving fact especially within knowledge.- When any fact is especially within the knowledge of any person, the burden of proving that fact is upon him. Illustrations (a)*** (b) A is charged with travelling on a railway without a ticket. The burden of proving that he had a ticket is on him.
The assessee had in its knowledge especially fact of having incurred expenditure in relation to earning of exempt income as the assessee is privy to its accounts. The assessee did come forward and gave comprehensive reply before the AO w.r.t. disallowance u/s 14A of the Act of 1961 and the primary onus/ burden cast on the assessee u/s 14A of the Act r.w.s 106 of the Act of 1872 stood discharged . Now, the onus shifted to the AO to demonstrate having regards to the accounts of the assessee as to how the suo motu disallowance of Rs. 2.50 lacs as offered by the assessee is in-correct having ITA 2205/Mum/2015 13 regards to the accounts of the assessee which exercise was not done by the AO as no satisfaction was recorded showing incorrectness of the disallowance offered by the assesse having regards to the accounts of the assessee by the AO before proceeding to adopt method as prescribed u/r 8D of Rules of 1962 .
The reliance of the learned DR on the order of the tribunal in for assessment year 2006-07 vide order dated 03-06-2011 in assessee’s own case is misconceived as the said assessment year is 2006-07 which is prior to assessment year 2008-09 wherein Rule 8D of Income-tax Rules, 1962 has held to come into effect w.e.f. assessment year 2008-09 as per decision of Hon’ble Bombay High Court in the case of Godrej and Boyce Manufacturing Company Limited v. DCIT in (2010) 328 ITR 81(Bom.)) , wherein tribunal in said order dated 03-06-2011 for assessment year 2006-07 had set aside the matter to the file of the AO to compute reasonable disallowance u/s 14A of the Act in accordance with ratio of law laid down by Hon’ble Bombay High Court in the case of Godrej and Boyce Manufacturing Company Limited v. DCIT in (2010) 328 ITR 81(Bom.))
We have observed that the tribunal in assessee’s own case for assessment year 2009-10 has deleted the additions made by the AO u/s 14A of the Act in vide orders dated 25.08.2016 on grounds of non- recording of satisfaction by the AO which was held to be necessary requirements in terms of Section 14A(2) of the Act before invoking method as prescribed under Rule 8D of Income-tax Rules, 1962 for computing disallowance of expenditure incurred in relation to earning of exempt income u/s 14A of the Act, wherein tribunal observed as under:
“6. We have carefully considered the rival submissions and perused the material placed before us including the orders of authorities below. On perusal of the orders, we find that by invoking the provisions of section 14A r.w.r 8D, the AO has not at all commented on the disallowance of ITA 2205/Mum/2015 14 Rs.2,50,000/- which was made by the assessee suo mottu for earning exempt income. We are of the considered opinion that invoking the provisions of section 14A r.w.r 8D without recording the satisfaction by the AO is wrong and accordingly the order of the ld.CIT(A) by upholding the action of AO cannot be sustained. The case of the assessee finds supports from the various decisions of High Court as well Tribunal referred during the course of hearing. We find that in the case of Kalyani Steels Ltd (supra), the co-ordinate Bench of the Tribunal has held that non recording satisfaction with regard to the correctness of the claim of the assessee which is a mandatory requirement in terms of section 14A of the Act r.w.r 8D to compute the impugned disallowance is untenable in law. The relevant operative part of the order is reproduced below :
“8. We have carefully considered the rival submissions. Section 14A of the Act contemplates that for the purposes of computing the total income, 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 the Act. Sub-section (2) of section 14A of the Act prescribes 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 in accordance with such method as may be prescribed, such prescribed method being contained in rule 8D of the Rules. However, the aforesaid empowerment of the Assessing Officer to invoke application of rule 8D of the Rules is superscribed by a condition contained in subsection (2) of section 14A of the Act which is to the effect that 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 expenditure incurred in relation to the income which does not form part of the total income. Therefore, the invoking of rule 8D of the Rules in order to compute the disallowance u/s 14A of the Act is neither automatic and nor is triggered merely because assessee has earned an exempt income. The invoking of rule 8D of the Rules is permissible only when the Assessing Officer records the satisfaction in regard to the incorrectness of the claim of the assessee, having regard to the accounts of the assessee. In other words, section 14A(2) of the Act envisaged a condition precedent for invoking rule 8D of the Rules and computing disallowance thereof only if the Assessing Officer records that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure, having regard to the account of the assessee. In this context, it would be appropriate to refer to the following observations of the Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. (supra)
ITA 2205/Mum/2015 15 :- “70. Now, in dealing with the challenge it is necessary to advert to the position that sub-section (2) of section 14A prescribes a uniform method for determining the amount of expenditure incurred in relation to income which does not form part of the total income only in a situation where 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. It, therefore, merits emphasis that sub-section (2) of section 14A does not authorize or empower the Assessing Officer to apply the prescribed method irrespective of the nature of the claim made by the assessee. The Assessing Officer has to first consider the correctness of the claim of the assessee having regard to the accounts of the assessee. The satisfaction of the Assessing Officer has to be objectively arrived at on the basis of those accounts and after considering all the relevant facts and circumstances. The application of the prescribed method arises in a situation where the claim made by the assessee in respect of expenditure which is 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 situation a method had to be devised for apportioning the expenditure incurred by the assessee between what is incurred in relation to the earning of taxable income and that which is incurred in relation to the earning of non-taxable income. As a matter of fact, the memorandum explaining the provisions of the Finance Bill, 2006, and the Central Board of Direct Taxes circular dated December 28, 2006, state that since the existing provisions of section 14A did not provide a method of computing the expenditure incurred in relation to income which did not form part of the total income, there was a considerable dispute between taxpayers and the Department on the method of determining such expenditure. It was in this background that subsection (2) was inserted so as to provide a uniform method applicable where the Assessing Officer is not satisfied with the correctness of the claim of the assessee. Sub- section (3) clarifies that the application of the method would be attracted even to a situation where the assessee has claimed that no expenditure at all was incurred in relation to the earning of non- taxable income.
Parliament has provided an adequate safeguard to the invocation of the power to determine the expenditure incurred in relation to the earning of non-taxable income by adoption of the prescribed method. The invocation of the power is made conditional on the objective satisfaction of the Assessing Officer in regard to the correctness of the claim of the assessee, having regard to the accounts of the assessee. When a statute postulates the satisfaction of the Assessing Officer "Courts ITA 2205/Mum/2015 16 will not readily defer 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 exercise of the power is predicated". (M. A. Rasheed v. State of Kerala [1974] AIR 1974 SC 2249*). A decision by the Assessing Officer has to be arrived at in good faith on relevant considerations. The Assessing Officer must furnish to the assessee a reasonable opportunity to show cause on the correctness of the claim made by him. In the event that the Assessing Officer is not satisfied with the correctness of the claim made by the assessee, he must record reasons for his conclusion. These safeguards which are implicit in the requirements of fairness and fair procedure under article 14 must be observed by the Assessing Officer when he arrives at his satisfaction under sub- section (2) of section 14A. As we shall note shortly hereafter, subrule (1) of rule 8D has also incorporated the essential requirements of sub-section (2) of section 14A before the Assessing Officer proceeds to apply the method prescribed under sub-rule (2). [underlined for emphasis by us]”
In the assessee’s case also, we find that no satisfaction has been recorded as regard the invoking of the provisions of section 14A r.w.r 8D, and therefore application of section 14A r.w.r.8D is not correct as the necessary satisfaction in terms of section 14A(2) of the Act has not been recorded. Following the ratio laid down in the decision of the Tribunal (supra), we set aside the order of the ld.CIT(A) and direct the AO to delete the addition. This ground is allowed”
We have observed that facts in the instant year are identical to the facts in the assessee’s own case for the assessment year 2009-10 and respectfully following the decision of the tribunal in assessee’s own case in for assessment year 2009-10, we order deletion of the additions made by the AO as confirmed by the learned CIT(A) on the same grounds that no satisfaction was recorded by the AO u/s 14A(2) of the Act as to the incorrectness of the claim/explanation of the assessee as to the disallowance made by the assessee of expenditure of Rs. 2,50,000/- having incurred in relation to the earning of the exempt income, before invoking Section14A of the Act r.w.r. 8D of Income-tax Rules, 1962 , excluding the suo motu disallowance of Rs. 2,50,000/- as voluntarily offered by the assessee ITA 2205/Mum/2015 17 u/s 14A of the Act which disallowance u/s 14A of the Act to the tune of Rs. 2,50,000/- stood confirmed/sustained. We order accordingly.
In the result, appeal of the assessee in 2011-12 is allowed as indicated above.