2022 (3) TMI 1659 - AT - Income Tax

Disallowance under Section 14A read with Rule 8D unsustainable without AO's recorded satisfaction on assessee's accounts

ITAT MUMBAI held that disallowance under s.14A read with Rule 8D is unsustainable where the AO has not recorded the requisite satisfaction under s.14A ... Addition u/s. 14A r.w.r.8D - Mandation of recording satisfaction - as argued satisfaction with regard to the accounts of the assessee as envisaged u/s. 14A has not been recorded by the AO - HELD THAT:- The Hon’ble Bombay High Court in the case of PCIT vs. Bombay Stock Exchange [2019 (11) TMI 105 - BOMBAY HIGH COURT] held that prior to working of disallowance u/s. 14A of the Act by applying Rule-8D, the Assessing Officer should record a conclusion that he is not satisfied with the suo-motu disallowance offered by the assessee Disallowance computed by the AO u/s 14A r.w.r.8D of the Act is not sustainable in the absence of satisfaction as envisaged u/s.14A . Hence, assessee succeeds on additional grounds raised in the appeal. ISSUES PRESENTED AND CONSIDERED 1. Whether the Assessing Officer recorded the requisite satisfaction, having regard to the assessee's accounts, before invoking section 14A read with Rule 8D to make disallowance for expenditure relating to exempt income. 2. Whether an additional ground of appeal raising a pure question of law (challenge to invocation of section 14A without recording satisfaction) may be admitted and adjudicated without additional evidence. 3. Whether the disallowance computed under section 14A read with Rule 8D is sustainable in absence of the Assessing Officer's recorded satisfaction as contemplated by section 14A. ISSUE-WISE DETAILED ANALYSIS Issue 1: Requirement of recording satisfaction by the Assessing Officer before invoking s.14A r.w. Rule 8D Legal framework: Section 14A disallows expenditure incurred in relation to income not includible in total income. Rule 8D prescribes a method of computing such disallowance. The statutory scheme contemplates that the Assessing Officer, having regard to the accounts of the assessee, must form and record a satisfaction (or non-satisfaction) about the correctness of the assessee's claim (including any suo-motu disallowance or the absence thereof) before applying Rule 8D. Precedent treatment: The Court relied on authoritative precedents holding that application of s.14A/Rule 8D is not automatic and that the AO must justify the proximate relationship between expenditure and exempt income by reference to the assessee's accounts (citations from higher courts reproduced in the judgment). Decisions cited indicate that the AO must record non-satisfaction on an objective basis before invoking Rule 8D; another decision emphasized that no particular format is required for recording satisfaction but it must be discernible from the assessment order. Interpretation and reasoning: The Tribunal examined the assessment order and found that the AO reproduced the assessee's submissions, rejected them, and applied Rule 8D without any reference to the assessee's accounts or a discernible satisfaction derived from those accounts. The Tribunal reasoned that while no prescribed form for satisfaction exists, the statutory satisfaction must be 'distinctly decipherable' from the assessment order and must be arrived at having regard to the accounts and objective criteria; mere conclusory rejection is insufficient. Ratio vs. Obiter: Ratio - The statutory requirement that the AO must record satisfaction, discernible from the order and based on the assessee's accounts, before applying s.14A r.w. Rule 8D. Obiter - Observations on the precise content or style of reasons that would always suffice, beyond the requirement of discernibility. Conclusion: The Tribunal concluded that the AO did not record the requisite satisfaction with reference to the accounts; therefore the statutory precondition for invoking s.14A r.w. Rule 8D was not satisfied. Issue 2: Admissibility of additional grounds raising pure questions of law without further evidence Legal framework: Procedural principles permit admission of additional grounds of appeal that raise pure questions of law and can be adjudicated on the record without the need for additional evidence. Precedent treatment: The Tribunal accepted the proposition supported by precedents that additional grounds raising legal issues where no new facts are required should be admitted and adjudicated on existing record. Interpretation and reasoning: The Tribunal considered the additional grounds challenging the AO's failure to record satisfaction as purely legal and capable of resolution on documents already on record. The Tribunal therefore admitted and decided those additional grounds without requiring new evidence. Ratio vs. Obiter: Ratio - Additional grounds that raise pure legal questions and do not require new facts or evidence can be admitted and adjudicated on existing record. Obiter - None significant beyond application to the facts. Conclusion: The Tribunal admitted the additional grounds and proceeded to adjudicate them on merits without calling for additional evidence. Issue 3: Sustainability of s.14A/Rule 8D disallowance where AO's satisfaction is not recorded Legal framework: Once the statutory satisfaction requirement under s.14A is fulfilled, Rule 8D may be applied to compute disallowance. Absent such satisfaction, application of Rule 8D and resulting disallowance are vulnerable. Precedent treatment: The Tribunal relied on case law establishing that the onus lies on Revenue to demonstrate a proximate relationship between expenditure and exempt income and that Rule 8D can be invoked only after AO's recorded non-satisfaction; conversely, jurisprudence also recognizes that no particular formula is required for recording satisfaction provided it is discernible from the assessment order. Interpretation and reasoning: Applying the legal framework and precedents to the facts - where the assessee earned exempt income (share of partnership profits), made no suo-motu disallowance and claimed that no expenditure related to exempt income was incurred, the AO failed to record a discernible satisfaction based on the accounts before applying Rule 8D. The Tribunal emphasized that a proximate relationship between expenditure and exempt income must be established by the Revenue and that surmise or conjecture is insufficient. Ratio vs. Obiter: Ratio - Disallowance under s.14A r.w. Rule 8D is unsustainable if the AO has not recorded, with reference to the assessee's accounts, the requisite satisfaction or non-satisfaction; the AO's record of reasons must make the satisfaction discernible. Obiter - General remarks on the nature of acceptable reasons where satisfaction is recorded. Conclusion: The Tribunal held the s.14A r.w. Rule 8D disallowance to be not sustainable in the absence of the AO's recorded satisfaction; consequently, the additional grounds were allowed and the related appeal grounds rendered infructuous. Cross-references See Issue 1 and Issue 3: The legal requirement analyzed in Issue 1 directly determines the conclusion in Issue 3 that the s.14A/Rule 8D disallowance cannot stand without the AO's discernible satisfaction based on the assessee's accounts.