M/S. AHILIABAI SARDESSAI,PANAJI vs. ASSISTANT COMMISSIONER OF INCOME TAX CIRCLE 1(1), PANAJI

O R D E R

PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:

(i) dividend income of Rs.42,77,266/- claimed as exempt u/s. 10(34) of the Act; (II) long term capital gains of Rs.66,86,593/- claimed exempt u/s. 10(38) of the Act; (iii) short term capital gains (Net) Rs.33,45,807/- offered for taxation. 4.1. Assessee submitted that investment related decisions were taken by the partners of the firm only which were based on suggestion/analysis of broking agency who were paid by the Asset Management companies/Mutual Funds and no commission/service fees were borne by the assessee. Accordingly, there were no expenses which were charged to the P&L Account relating to the investments activity and, therefore, assessee did not offer any expenditure towards disallowance u/s. 14A of the Act.

4.2 Assessment was completed by making the disallowance of Rs.10,24,911/- u/s. 14A read with Rule 8D of the Rules. Aggrieved, the assessee went in appeal before the Ld. CIT(A) who deleted the disallowance of Rs.2,01,472/- in respect of disallowance under rule 8D(2)(i) and restricted the disallowance under Rule 8D(2)(ii) to Rs.1,216/-. However, Ld. CIT(A) confirmed the addition of rs.5,29,273/- in respect of disallowance under rule 8D(2)(iii) for which the assessee is in appeal before the Tribunal.

M/s. Ahiliabai Sardessari, A.Y: 2015-16 5. Before us, Ld. Counsel for the assessee reiterated the factual position narrated above and stated that in assessee’s own case for AY 2010-11 and 2012-13 in & 379/PAN/2017 dated 31.03.2022, the Coordinate Bench of ITAT, Panaji, Goa had considered this very issue and deleted the disallowance of Rs.11,59,010/- worked out by the AO u/s. 14A read with Rule 8D(2)(iii) by applying the ratio of the Hon’ble jurisdictional High Court of Bombay in the case of CIT Vs. Sociedade De Fomento Industrial Pvt. Ltd. (No. 2) (2020) 429 ITR 358 (Bom.). The Ld. counsel for the assessee pointed out that the moot point under consideration before the Coordinate Bench in assessee’s own case was in respect of recording of satisfaction by the Ld. AO having regard to the accounts of the assessee as placed before him.

5.1. He submitted that it is only after the AO has recorded his dissatisfaction as regards the correctness of the claim of the assessee that the provisions of section 14A read with Rule 8D(2)(ii) and (iii) could be invoked. For this he also placed reliance on the decision of Hon’ble Supreme Court in the case of Maxopp Investment Ltd. Vs. CIT (2018) 402 ITR 640 (SC).

5.2. He further referred to the decision of Hon’ble jurisdictional High Court of Bombay, Panaji Bench in the case of CIT Vs. Sociedade De Fomento Industrial Pvt. Ltd. (supra) which was relied on by the Coordinate Bench of ITAT, Panaji while deciding the issue in favour of the assessee. Ld. Counsel for the assessee referred to the substantial question of law dealt by the Hon’ble jurisdictional High Court of Bombay, according to which the issue was “Is the tribunal right in deleting the additions made by the AO u/s. 14A of the Act read with Rule 8D of the Income Tax rules?” Hon’ble Bombay High Court answered this substantial question of law in favour of the assessee, relevant extract of which are reproduced as under:

M/s. Ahiliabai Sardessari, A.Y: 2015-16 “11. As the record reveals, the assessee received dividend income of Rs. 13,85,03,376. It was exempted under the Income-tax Act. The assessee claimed that it did not incur any expenditure to earn that dividend. It is said to have invested surplus funds through the bankers and other financial institutions. The mutual fund officials used to come to the assessee's doorstep to fill up the forms and to do all other things necessary in that regard. The assessee only issued the Cheques. The Assessing Officer disagreed. He reckoned that without devoting time and without analysing the nature of the investment, the assessee could not have invested in the mutual funds. The Assessing Officer took the view that section 14A clearly applied to the assessee's case. The Assessing Officer accordingly invoked rule 8D and computed the disallowance at 0.5 per cent. of Rs.381,67,09,731, the average investment. Then, he disallowed Rs. 1,90,83,548. The assessee appealed to the Commissioner of Income- tax (Appeals). Indeed, the appellate authority confirmed the Assessing Officer's disallowance. Of course, the Tribunal reversed it. Let us see whether the Tribunal's view is sustainable. …… 19. Here, on facts, the Tribunal noted that the. Assessing Officer only discussed the provisions of section 14A(1) but has not justified how the expenditure the assessee incurred during the relevant year related to the income not forming part of its total income. The Assessing Officer, according to the Tribunal, straightaway applied rule 8D. Indeed, there must be a proximate relationship between the expenditure and the tax exempt income. Only then would a disallowance have to be effected. This court, we may note, on more than one occasion, has held that the onus is on the Revenue to establish that there is a proximate relationship between the expenditure and the exempt income. That is, the application of section 14A and rule 80 is not automatic in each and every case, where there is income not forming part of the total income. No doubt, the expenditure under section 14A includes both direct and indirect expenditure, but that expenditure must have a proximate relationship with the exempted income. Surmise or conjecture is no answer.

M/s. Ahiliabai Sardessari, A.Y: 2015-16 during the year as stated above. It is also a fact that assessee has not made any disallowance u/s. 14A of the Act suo moto since it claims that it has not incurred any expenditure relating to earning of said exempt income. We also note that in the case before us, it is a matter of fact borne out from the records that there is a failure on the part of the AO to record his satisfaction having regards to the accounts of the assessee, as were placed before him, and that it was not possible on his part to generate the requisite satisfaction with regard to the correctness of the assessee’s claim that no part of expenditure pertaining to its business could be attributed to earning of exempt income. This state of affairs qua the dissatisfaction as regards the claim of the assessee remained the same before the Ld. CIT(A).

7.1. In the light of the judicial precedents referred to above by the Ld. Counsel for the assessee, we note that there was an innate obligation cast upon both the Ld. AO and the Ld. CIT(A) to have recorded requisite satisfaction that having regard to the accounts of the assessee, as placed before them, it was not possible to generate the requisite satisfaction with regard to the correctness of the aforesaid claim of the assessee.

7.2. It is also an important fact to note that Ld. CIT(A) has deleted the addition made by the AO under rule 8D(2)(i) qua the direct expenses and has restricted the disallowance to Rs.1,216/- only under rule 8D(2)(ii). From the findings given by the ld. CIT(A) while deleting the disallowance under rule 8D(2)(i) and restricting the disallowance to Rs.1,216/- only under Rule 8D(2)(ii), we note that Ld. AO has made the disallowance on the basis of estimation and no evidence was brought on record by the Ld. AO that expenditure were incurred relating to earning of exempt income. In respect of interest expenditure except for an interest amount of Rs.9,875/- the entire interest amount was held to be M/s. Ahiliabai Sardessari, A.Y: 2015-16 directly attributable to the loan for purchase of vehicles or for construction of floating cranes.