2019 (2) TMI 819 - HC - Income Tax

Disallowance of exempt income under Rule 8D requires the assessing officer to record dissatisfaction with the assessee's suo-moto adjustment before invocation.

Invocation of Rule 8D to compute disallowance for exempt income is impermissible where the assessing officer has not recorded that the assessee's suo moto ... Disallowance u/s 14A r.w.r. 8D - scope of invoking Rule 8D - suo moto disallowance - Held that:- Rule 8D of the Rules cannot be invoked where the suo moto disallowance made by the respondent assessee is not found to be satisfactory by the Assessing Officer having regard to the accounts of the assessee. In the absence of recording the aforesaid fact of nonsatisfaction in terms of Section 14A(2) of the Act, invocation of Rule 8D is not permissible. Issues:1. Disallowance of expenditure on 'Corporate Brand' building2. Adjustment of guarantee commission chargeable to Associate Enterprises3. Disallowance made under Section 14A read with Rule 8DAnalysis:Issue 1: Disallowance of expenditure on 'Corporate Brand' buildingThe Tribunal had previously decided in favor of the respondent assessee for Assessment Year 2006-07 on this matter. The Revenue's appeal to the High Court was dismissed in 2016 as it did not raise substantial questions of law. The Revenue failed to provide any new grounds in the current assessment year to warrant a different view. Consequently, the questions proposed did not give rise to any substantial question of law and were not entertained.Issue 2: Adjustment of guarantee commission chargeable to Associate EnterprisesSimilar to the first issue, the Tribunal had previously ruled in favor of the respondent assessee for Assessment Year 2006-07. The High Court dismissed the Revenue's appeal in 2016 as it did not raise substantial questions of law. The Revenue could not establish any distinguishing features in the current assessment year to justify a different stance. Therefore, the questions raised did not give rise to any substantial question of law and were not entertained.Issue 3: Disallowance made under Section 14A read with Rule 8DThe respondent had made a suo moto disallowance of Rs. 15.21 lakhs for expenditure incurred to earn exempt income under Section 14A of the Act. However, the Assessing Officer disregarded this and disallowed Rs. 1.10 crores under Section 14A read with Rule 8D, adding it to the respondent's income. The Tribunal, on appeal, held that the Assessing Officer must first record non-satisfaction with the suo moto disallowance before applying Rule 8D. Citing the Supreme Court's decision in Gorej & Boyce Mfg. Co. Ltd. Vs. Dy. CIT, the Tribunal emphasized the need for the Assessing Officer to be satisfied before invoking Rule 8D. Since the Assessing Officer did not record non-satisfaction, the disallowance of expenditure to earn exempt income was deemed unsustainable. The High Court, in line with the Apex Court's decision, found no substantial question of law in this regard and dismissed the appeal.In conclusion, the High Court dismissed the appeal, upholding the Tribunal's decisions on all three issues without any costs awarded.