2019 (11) TMI 585 - AT - Income Tax

Tribunal overturns AO's disallowance under Section 14A, except for suo-moto disallowance.

The Tribunal allowed the appeal, directing the AO to delete the disallowance under Section 14A, except for the suo-moto disallowance. It ruled that ... Application of Rule 8D for computation of disallowance under section 14A - Assessing Officer's subjective satisfaction requirement for invoking section 14A/Rule 8D - disallowance under section 14A not to be included in book profit for section 115JB - consistency of assessment and need for reasons to depart from earlier ordersApplication of Rule 8D for computation of disallowance under section 14A - Assessing Officer's subjective satisfaction requirement for invoking section 14A/Rule 8D - Whether disallowance under section 14A computed by applying Rule 8D was valid where the Assessing Officer did not record subjective satisfaction that the assessee's claim of incurring no expenditure in relation to exempt income was unacceptable. - HELD THAT: - The Tribunal examined the assessment record and found that the assessee had produced books of account and the Assessing Officer did not point to any material establishing a nexus between the expenditure and the exempt dividend income. Relying on the law expounded by the Supreme Court in Godrej & Boyce (noted in the order), the Tribunal held that subsections (2) and (3) of section 14A read with Rule 8D become applicable only after the Assessing Officer records satisfaction that the claim of the assessee (that no expenditure was incurred in relation to exempt income) cannot be accepted. In the absence of such recorded satisfaction or any reasoned basis to depart from prior consistent findings, the mechanical application of Rule 8D to make large disallowances was impermissible. The Tribunal further followed a coordinate-bench decision in the assessee's own earlier years on identical facts and allowed the appeal, directing recomputation of income except for the assessee's own suo-moto (revised) disallowance which was adjusted as recorded. [Paras 5, 13]Assessee's appeal allowed on this issue; disallowance under section 14A/Rule 8D set aside for lack of AO's recorded satisfaction and income to be recomputed accordingly (subject to the assessee's revised suo-moto figure).Disallowance under section 14A not to be included in book profit for section 115JB - Whether a disallowance under section 14A read with Rule 8D is to be added while computing book profit under section 115JB. - HELD THAT: - The Tribunal held that disallowances made under section 14A read with Rule 8D cannot be added back in computing book profit for the purpose of section 115JB. The Tribunal placed reliance on the decision of the jurisdictional High Court (CIT v. M/s. Bengal Finance & Investments Pvt. Ltd.) which held that section 115JB constitutes a self-contained code and does not require inclusion of a section 14A disallowance in adjusted book profit. Applying that principle, the Tribunal reversed the authorities below and allowed the assessee's ground on this point. [Paras 6]Assessee's ground allowed; disallowance under section 14A/Rule 8D shall not be considered for computing book profit under section 115JB.Final Conclusion: The Tribunal allowed the appeal: the disallowance made under section 14A by applying Rule 8D was set aside for lack of recorded satisfaction by the AO and the income to be recomputed accordingly; additionally, such disallowance shall not be added back in computing book profit under section 115JB. Issues Involved:1. Disallowance under Section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules.2. Non-recording of dissatisfaction by the Assessing Officer (AO) regarding the assessee's claim of no expenditure incurred in relation to exempt income.3. Rejection of the assessee's scientific working of disallowance under Section 14A.4. Consideration of stock-in-trade for disallowance under Rule 8D.5. Inclusion of investments not generating exempt income in disallowance computation under Rule 8D(2)(iii).6. Addition of disallowance under Section 14A while computing book profit under Section 115JB of the Act.Issue-wise Detailed Analysis:1. Disallowance under Section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules:The core issue revolves around the disallowance of Rs. 23,08,920/- under Section 14A, which the AO computed by applying Rule 8D. The assessee had suo-moto disallowed Rs. 2,58,264/-, but the AO was not satisfied and made a gross disallowance of Rs. 26,05,735/-. The CIT(A) upheld the AO's disallowance, reducing it to Rs. 23,47,471/-.2. Non-recording of dissatisfaction by the Assessing Officer (AO) regarding the assessee's claim of no expenditure incurred in relation to exempt income:The AO did not record any dissatisfaction with the assessee's claim that no expenditure was incurred in relation to exempt income, which is a prerequisite for invoking Rule 8D as per Section 14A(2) and 14A(3). The Tribunal noted that the AO failed to establish a nexus between the exempt income and the related expenditure.3. Rejection of the assessee's scientific working of disallowance under Section 14A:The CIT(A) rejected the assessee's scientific working of disallowance on the grounds that it was cryptic and not self-explanatory. However, the Tribunal found that the AO did not provide a satisfactory basis for rejecting the assessee's computation and relied on previous ITAT orders in similar cases where relief was granted to the assessee.4. Consideration of stock-in-trade for disallowance under Rule 8D:The assessee argued that stock-in-trade should not be considered for disallowance under Rule 8D. The Tribunal agreed, noting that the AO did not point out any specific nexus between the stock-in-trade and the exempt income.5. Inclusion of investments not generating exempt income in disallowance computation under Rule 8D(2)(iii):The AO included investments not generating exempt income while computing disallowance under Rule 8D(2)(iii). The Tribunal found this inclusion inappropriate, as there was no evidence that such investments were related to earning exempt income.6. Addition of disallowance under Section 14A while computing book profit under Section 115JB of the Act:The CIT(A) upheld the AO's action of adding the disallowance made under Section 14A read with Rule 8D while computing book profit under Section 115JB. The Tribunal, relying on the Bombay High Court judgment in CIT vs. M/s. Bengal Finance & Investments Pvt. Ltd., reversed this decision, stating that disallowance under Section 14A cannot be added to book profit for the purposes of Section 115JB.Conclusion:The Tribunal allowed the appeal filed by the assessee, directing the AO to delete the disallowance of Rs. 23,08,920/- under Section 14A, except for the suo-moto disallowance of Rs. 2,58,264/-. It also ruled that the disallowance under Section 14A should not be considered while computing book profit under Section 115JB. The Tribunal's decision was based on the lack of satisfaction recorded by the AO, the inappropriate inclusion of stock-in-trade and non-income generating investments, and adherence to judicial precedents.