2024 (6) TMI 1537 - AT - Income Tax

Suo motu expense disallowance for exempt income: AO must record s.14A satisfaction before applying Rule 8D; disallowance deleted

Disallowance under s.14A r.w. Rule 8D was examined where the taxpayer had made a suo motu disallowance towards exempt income. The Tribunal held that the ... Disallowance u/s 14A r.w. Rule 8D - expenses incurred on earning exempt income - assessee suo moto made addition - HELD THAT:- Perusal of the assessment order would show that the AO has not recorded his satisfaction having regard to the accounts of the assessee. He has applied Rule 8D to the case of the assessee as in his view if section 14A is attracted, the disallowance has to be made as per Rule 8D. However, this is not so. AO has to be satisfied with the correctness of the claim of the assessee having regard to the assessee’s account. As in the case of Taikisha Engineering India Ltd. [2014 (12) TMI 482 - DELHI HIGH COURT] has held that it is only when voluntary disallowance made by assessee u/s 14A is found to be unsatisfactory on examination of accounts, that AO is entitled and authorized to compute deduction under Rule 8D. Similar view has been taken in the case of Reliance Capital Asset Management Ltd. [2017 (10) TMI 177 - BOMBAY HIGH COURT] We are therefore inclined to accept the claim of the Ld. AR that the Ld. AO has not recorded satisfaction as per mandate of law provided under sub-section (2) of section 14A of the Act. Accordingly, the submission of the Ld. DR in this regard is rejected. No substance in the contention of the Ld. DR that the details of employees handling the investments of the company were not furnished. We notice that in its note assessee has stated that the company had identified the expenses which are attributed to the activities of the investments in mutual funds. It was pointed that the company has a separate Treasury Department operated by four qualified employees under the guidance of Chief Financial Officer. Considering that certain administrative expenses may be related to exempt income, the assessee disallowed gross salary of employees working in Treasury Department and general administrative expenses. The suggestion of the Ld. DR to send back the matter to the Ld. AO is without any merit as, in our opinion, no useful purpose would be served by doing so. The claim of the assessee that in the preceding year suo-moto disallowance made by the assessee has been accepted, has not been refuted by the Revenue. We, therefore, hold that the impugned disallowance u/s 14A of the Act r.w. Rule 8D is not warranted in the case of assessee. It is hereby deleted. Appeal of assessee allowed. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether the Assessing Officer validly invoked section 14A(2) and applied Rule 8D for making an additional disallowance over and above the assessee's suo motu disallowance, in the absence of recorded satisfaction 'having regard to the accounts'. (ii) Whether, on the facts found (including identification of treasury-related salary and limited administrative expenses already disallowed), any further disallowance under section 14A read with Rule 8D was warranted. 2. ISSUE-WISE DETAILED ANALYSIS Issue (i): Validity of invoking section 14A(2) and applying Rule 8D without requisite satisfaction Legal framework: The Court examined section 14A(2) and held that the prescribed method under Rule 8D can be applied only if the Assessing Officer, having regard to the accounts, is not satisfied with the correctness of the assessee's claim regarding expenditure relating to exempt income. Rule 8D is thus conditional upon fulfillment of this statutory precondition. Interpretation and reasoning: On a reading of the assessment order, the Court found that the Assessing Officer did not record satisfaction in the manner required by section 14A(2). The Court held that the Assessing Officer proceeded on an erroneous premise that once section 14A is attracted, disallowance must mechanically follow Rule 8D. The Court rejected this approach and held that examination of accounts and a proper satisfaction-note are a condition precedent to Rule 8D computation. Conclusion: Since the requisite satisfaction 'having regard to the accounts' was not recorded, application of Rule 8D and the resulting additional disallowance was held to be unjustified. Issue (ii): Whether any further disallowance was warranted beyond the assessee's suo motu disallowance Interpretation and reasoning: The assessee had already made a suo motu disallowance comprising identified treasury department salary for four employees and a quantified portion of general administrative expenses. The Court found no substance in the Revenue's contention that employee-related details were not furnished, noting the assessee's explanation that a separate treasury function handled investments and the salary cost had been attributed and disallowed. The Court also noted the assessee's unrebutted factual assertions that investments yielding exempt income were from internal accruals/surplus funds, interest-bearing borrowings were used for business purposes, and neither the Assessing Officer nor the appellate authority made any adverse comment on these factual explanations. The Court further found that remand to the Assessing Officer would serve no useful purpose in the circumstances. Conclusion: In light of the absence of the statutory satisfaction required for Rule 8D, and considering that the assessee had already made a reasoned and identified disallowance of expenditure potentially relatable to exempt income, the additional disallowance computed under Rule 8D was held to be not warranted and was deleted.