ROHIT A KAPADIA,MUMBAI vs. ASST CIT 11(3), MUMBAI

The present appeal has been preferred by the assessee against the order dated 28.11.2013 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2010-11.

The assessee in this appeal has agitated the confirmation of disallowance of Rs.10,62,120/- made by the Assessing Officer (hereinafter referred to as the AO) under section 14A of the Income Tax Act read with rule 8D of the Income Tax Rules. The brief facts of the case are that the assessee is an advocate by profession. During the assessment proceedings, the AO noted that the assessee during the year had earned tax exempt income of Rs.1,25,76,001/-. The assessee had suo-moto disallowed a sum of Rs.1,10,974/- in relation to expenditure incurred for earning of tax exempt income. However, the AO noted that for the year under consideration rule 8D was applicable. He rejected the suo-moto disallowance made by the assessee and computed the same under rule 8D2(iii) in relation to administrative expenses incurred for earning of tax exempt income at Rs.11,73,094/- and after deducting the amount of disallowance suo-moto made by the assessee, he further disallowed an amount of Rs.10,62,120/- under section 14A read with rule 8D and added back the same into the income of the assessee. The Ld. CIT(A) also confirmed the disallowance so made by the AO. Being aggrieved, the assessee has come in appeal before us.

We have considered the rival contentions of the Ld. representatives of the parties. Admittedly, the AO, in this case, has straight away applied Rule 8D for computation of disallowance under section 14A. He has not considered the correctness of the working of the suo-moto disallowance of expenditure made by the assessee. It may be observed that in the case of ‘Godrej & Boyce Manufacturing Co. Ltd.’ 328 ITR 81, the Hon'ble Bombay High Court has held that under section 14A of the Act, resort can be made to Rule 8D of the Income Tax Rules for determining the amount of expenditure in relation to exempt income, if, the AO is not satisfied with the correctness of the claim made by the assessee in respect of such expenditure. The satisfaction of the Assessing Officer has to be arrived at, having regard to the accounts of the assessee. Sub section (2) does not ipso facto enable the Assessing Officer to apply the method prescribed by the rules straightaway without considering whether the claim made by the assessee in respect such expenditure is correct. The satisfaction of the Assessing Officer must be arrived at on an objective basis. In a situation where the accounts of the assessee furnish an objective basis for the Assessing Officer to arrive at a satisfaction in regard to the correctness of the claim of the assessee, there would be no warrant for taking recourse to the method prescribed by the rules. An objective satisfaction contemplates a notice to the assessee, an opportunity to the assessee to place on record all the relevant facts including his accounts and recording of reasons by the Assessing Officer in the event that he comes to the conclusion that he is not satisfied with the claim of the assessee. Further, the Hon’ble Delhi High Court in a recent decision has further given a similar view in the case of “CIT vs. Taikisha engineering India Ltd.” (supra) wherein the Hon’ble Delhi High Court has held that the AO having regard to the accounts of the assessee is required to record his satisfaction that the self or voluntarily expenditure offered by the assessee or claim that no expenditure has been incurred by the assessee in relation to earning of exempt income, was not correct or the same was unsatisfactory on examination of the accounts of the assessee. Without recording such a satisfaction he cannot proceed to apply Rule 8D for the computation of disallowance under section 14A. However, a perusal of the assessment order reveals that the AO has not followed the guidelines of objective satisfaction as laid down by the hon’ble Bombay high Court in the case of Godrej & Boyce (supra) while making the disallowance. The ld. CIT(A) also ignored the mandate of the provisions of section 14 A, while confirming the disallowance.

The Ld. AR of the assessee has submitted that the assessee has made a very reasonable and scientific working of the disallowance under section 14A. The Ld. A.R. has invited our attention to the fact that apart from the exempt income, the assessee has earned professional receipts of Rs.6,62,52,459/- (approx. Rs.6.62 crores ) whereas the tax free income received by the assessee has been only Rs.70,42,137 (70 lakhs approx). The total administrative and other expenses claimed by the assessee are at Rs.1,07,32,363/- out of which a sum of about Rs.91 lakhs is on account of loss on shares and Rs.2 lakhs is on account of donations, which amount is not an allowable expenditure. Thus there remains total claim of expenditure of Rs.13,38,769/- ,out of which certain expenses like books and periodical insurance, membership fees, profession tax, professional fees etc. amounting to Rs.4.15 lakhs exclusively relate to the professional activity of the assessee. The Ld. A.R. has explained that after deducting the said professional expenses, the total common expenditure claimed by the assessee comes to Rs.9,23,628/- out of which the assessee has suo-moto disallowed a sum of Rs.1,10,974/- in proportion to the professional income received and exempt income received by the assessee. We find that the AO has totally ignored the above working of the assesse. Even the total disallowance made by the AO made at Rs.11,73,094/- exceeds the claim of total common expenses of Rs.9.3 lakhs. The assessee has given full details and have suo-moto disallowed a sum of Rs.1,10,974/- on scientific basis which seems to be otherwise reasonable also. There is no logic in making a disallowance more than the expenditure incurred especially when the assessee is showing a taxable professional income of Rs.6.62 crores as against the tax exempt income of Rs.70 lakh only. We, therefore, do not find justification on the part of the lower authorities in directly applying rule 8D without considering the working/computation given by the assessee. The computation/working given by the assessee, in our view, is quite reasonable. We therefore restrict the disallowance under section 14A to the extent of suo- moto made by the assessee of Rs.1,10,974/- and the additional disallowance made by the AO is hereby ordered to be deleted.

In the result, the appeal of the assessee is hereby allowed. Order pronounced in the open court on 23.11.2015.