GEOJIT FINANCIAL SERVICES LTD( GEOITH BNP PARIBAS FINANCIAL SERVICES LTD),KOCHI vs. DCIT, KOCHI

The impugned addition stem from the fact that the assessee earned certain dividend income and Long-Term Capital gains which were claimed to be exempt during the year. The assessee made suo- moto disallowance of Rs.2.01 Lacs in its computation of income. However, Ld. AO, invoking Rule 8D, computed aggregate disallowance of Rs.70.43 Lacs which was interest disallowance u/r 8D(2)(ii) for Rs.1.50 Lacs and indirect expense disallowance u/r 8D(2)(iii) for Rs.68.93 Lacs. The Ld. CIT(A) restricted the same to the extent of Rs.52.87 Lacs by deleting interest disallowance and by reducing taxable income yielding investments. Aggrieved, the assessee is in further appeal before us.

From the facts, it could be seen that the assessee computed disallowance u/s 14A for Rs.2.01 Lacs having regards to its accounts. However, Ld. AO without rejecting assessee’s computation, mechanically proceed to apply Rule 8D which is impermissible as per the decision of Hon’ble Supreme Court in the case of Godrej & Boyce Manufacturing Co. Ltd. V/s DCIT (2017 394 ITR 449). We are of the opinion that in terms of the statutory mandate of Sec.14A r.w.r. 8D, it was incumbent on the part of Ld. AO to record an objective satisfaction, having regards to the accounts of the assessee, as to why the disallowance offered by the assessee was not acceptable. Without recording such a finding, no disallowance could be made u/s 14A r.w.r. 8D. It is settled legal position that the application of Rule 8D is not automatic. Upon perusal of assessment order, we find that Ld. AO has failed to record such an objective satisfaction and therefore, the ITA Nos.368 & & 369/Coch/2020 - 3 - impugned disallowance as sustained by Ld. CIT(A) is otherwise not sustainable in the eyes of law at its threshold.

The Hon’ble Apex Court in the cited case of Godrej & Boyce Manufacturing Co. Ltd. V/s DCIT (2017 394 ITR 449) held that 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. The said principle has been reiterated by Hon’ble High Court of Madras in the case of Marg Limited V/s CIT (TCA NO.41 to 43 & 220 of 2017 dated 30.09.2020). Further Hon’ble Apex Court in Maxopp Investment Limited V/s CIT (91 Taxmann.com 154) at para- 32 observed that it is that expenditure alone which has been incurred in relation to the income which is not includible in total income, is to be disallowed. If expenditure has no casual connection with the exempt income, such expenditure would be an allowable expenditure.

Applying the aforesaid principles to the fact of the present case, we find that Ld. AO has mechanically applied the provisions of Rule 8D & & 369/Coch/2020 - 4 - while making the aforesaid disallowance without establishing any nexus of expenditure claimed by the assessee with that of exempt income earned during the year. Nowhere a finding has been recorded by Ld. AO as to why the suo-moto disallowance as offered by the assessee was not acceptable. In the absence of such recorded satisfaction, the impugned disallowance could not be sustained in the eyes of law. We order so.

It is admitted position that facts are quite identical in AY 2011-12. The only difference is that Ld. AO has allowed the benefit of suo-moto disallowance offered by the assessee. However, the recording of objective satisfaction is still missing. Therefore, our adjudication as above would, mutatis mutandis, apply to this year also.

Both the appeals stand partly allowed. Order pronounced on 30th November, 2022.