2020 (2) TMI 1269 - AT - Income Tax

Improper application of Rule 8D leads to excessive disallowance under Section 14A

The Tribunal found that the Assessing Officer (AO) failed to properly examine the accounts and nature of expenses before invoking Rule 8D for disallowance ... Disallowance u/s 14A r.w.r. 8D - HELD THAT:- Section 14A (2) provides that the AO while determining the amount of expenditure incurred in relation to the exempt income, first of all, should examine the claim of the assessee having regard to the accounts maintained by the assessee and then he has to satisfy himself with the correctness of the claim of the assessee in respect of expenditure incurred in relation to the exempt income. If the assessee having regard to the accounts and nature of expenses debited points out that these expenditures are not connected or attributable to earning of exempt income, then same cannot be roped in for the purpose of disallowance under this section unless Assessing Officer finds something contrary. When the assessee has given a very detailed working, then without pointing out any defect, the AO in a very general manner has held that there is direct and proximate nexus between the expenditure and the exempt income. The satisfaction of the AO should not be mechanical but should prima facie indicate his application of mind on the accounts maintained by the assessee and the nature of expenditure debited vis-à-vis its co-relation with the earning of the exempt income. It is a well settled proposition in GODREJ & BOYCE MANUFACTURING COMPANY [2017 (5) TMI 403 - SUPREME COURT] that satisfaction of the AO is mandatory before resorting to disallowance. Here in this case, as pointed out earlier there is no requisite satisfaction by the AO and he has mechanically applied rule 8D. Manner in which disallowance under Rule 8D(iii) has been made by the Assessing Officer is not called for and, accordingly, the disallowance made by the AO over and above the suo moto disallowance made by the assessee is deleted. Appeal of the assessee is allowed. Issues Involved:1. Invocation of Rule 8D for computing disallowance under Section 14A without recording satisfaction.2. Consistency in the methodology of suo moto disallowance under Section 14A.3. Addition of Rs. 2,26,13,434/- under Section 14A read with Rule 8D(2)(iii).4. Mechanical application of Rule 8D(2)(iii) resulting in excessive disallowance.5. Investment in subsidiary companies and its impact on disallowance under Section 14A.6. Withdrawal of interest under Section 244A.7. Initiation of penalty proceedings under Section 271(1)(c).Detailed Analysis:1. Invocation of Rule 8D for Computing Disallowance under Section 14A Without Recording Satisfaction:The assessee argued that the Assessing Officer (AO) invoked Rule 8D without recording satisfaction regarding the suo moto disallowance made by the assessee, as mandated by Section 14A. The AO must first examine the claim of the assessee and then satisfy himself with the correctness of the claim before invoking Rule 8D. The Tribunal found that the AO mechanically applied Rule 8D without properly examining the accounts and the nature of expenses debited, thus failing to meet the satisfaction requirement.2. Consistency in the Methodology of Suo Moto Disallowance under Section 14A:The assessee consistently followed the same computational methodology for suo moto disallowance under Section 14A from AY 2008-09 to 2011-12. This methodology was accepted by the Department in earlier years without any adverse inference. The Tribunal noted that such consistency should be considered, and any deviation by the AO should be justified with proper reasoning.3. Addition of Rs. 2,26,13,434/- under Section 14A Read with Rule 8D(2)(iii):The AO calculated the disallowance as per Rule 8D(2) at Rs. 19,21,82,442/-, whereas the assessee had already made a suo moto disallowance of Rs. 16,95,69,008/-. The difference amount of Rs. 2,26,13,434/- was added by the AO. The Tribunal found that the AO's computation was mechanical and did not consider the detailed working provided by the assessee.4. Mechanical Application of Rule 8D(2)(iii) Resulting in Excessive Disallowance:The assessee argued that the AO mechanically applied Rule 8D(2)(iii), resulting in disallowances exceeding the non-operational/administrative expenses claimed. The Tribunal observed that the AO failed to consider the nature of expenses and their relevance to earning exempt income. The AO's mechanical application of Rule 8D(2)(iii) was found to be unjustified.5. Investment in Subsidiary Companies and Its Impact on Disallowance under Section 14A:The assessee, being an investment company, made investments in subsidiary and joint venture companies to hold business interests rather than to earn exempt income. Most investments did not yield exempt income. The Tribunal noted that the AO should have considered the nature of these investments and their purpose before making disallowances under Section 14A.6. Withdrawal of Interest under Section 244A:The assessee contended that the AO erred in withdrawing interest under Section 244A. However, this issue was not specifically adjudicated upon by the Tribunal in the judgment.7. Initiation of Penalty Proceedings under Section 271(1)(c):The assessee argued that the AO grossly erred in initiating penalty proceedings under Section 271(1)(c) on the grounds of furnishing inaccurate particulars of income. The Tribunal did not specifically address this issue in the judgment.Conclusion:The Tribunal concluded that the AO's disallowance under Rule 8D(2)(iii) was not justified due to the lack of proper satisfaction and mechanical application of the rule. The disallowance made by the AO over and above the suo moto disallowance made by the assessee was deleted. The appeal of the assessee was allowed. Other grounds were general in nature and were not adjudicated upon.