2025 (2) TMI 1435 - AT - Income Tax

Disallowance under Section 14A and Rule 8D challenged; tribunal restores assessee's self disallowance and limits MAT adjustments

Assessing officer did not record the mandated satisfaction 'having regard to the accounts' and ignored the assessee's scientific apportionment, so the suo ... Disallowance u/s 14A r.w.r. 8D - correctness of the claim of the assessee in respect of the expenditure, in relation to the exempt income - Mandation of recording satisfaction 'having regard to the accounts' - scientific basis adopted while arriving at the suo moto disallowance - Computation of book profit under section 115JB HELD THAT:- In the present case before us, AO has not taken into consideration the elaborate details and scientific basis adopted while arriving at the suo moto disallowance but has proceeded merely on his own presumptions to invoke section 14A r.w.r. 8D. Since no proper satisfaction has been recorded by the ld. Assessing Officer in terms of the provisions of section 14A(2) of the Act, “having regard to the accounts of the assessee”, about the correctness of the claim of the assessee in respect of expenditure incurred in relation to exempt income, we do not find any reason for upholding the disallowance made by the AO u/s 14A read with Rule 8D. We delete the disallowance made by the AO and direct to adopt the suo moto disallowance made by the assessee u/s 14A of the Act. Accordingly, ground taken by the assessee in this respect is allowed. We also find that in CIT v. M/s Asian Paints Ltd. [2019 (2) TMI 819 - BOMBAY HIGH COURT] while dismissing the appeal filed by the Revenue on a similar issue held that in the absence of recording of satisfaction in terms of section 14A(2) of the Act, invocation of Rule 8D is not permissible. Working out book profit u/s 115JB - Section 14A of the Act is a provision with fiction disallowing the deemed expenditure attributable to exempt income viz. incomes u/s. 10 of the Act. Section 115JB of the Act is also a provision with fiction payment of tax in respect of deemed income. Therefore, while computing the profit for the purpose of section 115JB of the Act, another provision with fiction cannot be superimposed. Hence, question of increasing book profit on account of disallowance under section 14A of the Act read with Rule 8D will notarise. Book profit has to be increased by expenses debited to Profit and Loss related to exempt income. In the present case, assessee had debited in profit and loss account, expenditure in relation to earning of exempt income which it had suo moto disallowed. The same may be added for working out book profit under section 115JB of the Act. Accordingly, ground taken by the assessee in this respect is allowed. Reliance is placed on the decision of Vireet Investment (P.) Ltd. [2017 (6) TMI 1124 - ITAT DELHI] wherein it is held that computation under clause (f) of Explanation 1 to section 115JB(2), is to be made without resorting to computation as contemplated u/s 14A read with Rule 8D. Assessee appeal allowed. Issues: (i) Whether the Assessing Officer could invoke Rule 8D of the Income-tax Rules, 1962 and compute disallowance under section 14A of the Income-tax Act, 1961 without recording satisfaction 'having regard to the accounts of the assessee' that the assessee's suo-moto disallowance was incorrect; (ii) Whether disallowance computed under section 14A read with Rule 8D can be carried into computation of book profit under section 115JB of the Income-tax Act, 1961.Issue (i): Whether Rule 8D/section 14A invocation without recording satisfaction is permissible.Analysis: Section 14A(2) and Rule 8D require the Assessing Officer to be not satisfied with the correctness of the assessee's claim 'having regard to the accounts of the assessee' before applying Rule 8D. The Assessing Officer must examine the methodology and accounts and record an objective satisfaction; mere disagreement or a conclusory statement is insufficient. In the present case the Assessing Officer disregarded the assessee's detailed suo-moto computation and applied Rule 8D without recording such satisfaction.Conclusion: Invocation of Rule 8D/section 14A without recording the requisite satisfaction is impermissible; the suo-moto disallowance made by the assessee is to be adopted. (In favour of the Assessee)Issue (ii): Whether disallowance under section 14A read with Rule 8D can be added in computing book profit under section 115JB.Analysis: Section 115JB and its Explanation operate as a separate code for computing book profits beginning with profit as per profit and loss account in accordance with Schedule III to the Companies Act. The adjustments specified in Explanation 1 to section 115JB(2) are limited and do not incorporate the mechanism of section 14A read with Rule 8D. Where the assessee has debited specific expenditure to profit and loss account and has itself made a suo-moto disallowance, that amount is the correct addition for book profit purposes rather than a Rule 8D computation.Conclusion: Disallowance computed under section 14A read with Rule 8D cannot be superimposed on book profit computation under section 115JB; only the actual expenditure debited to profit and loss (suo-moto disallowance) is to be added. (In favour of the Assessee)Final Conclusion: The appeal is allowed by deleting the disallowance determined by the Assessing Officer under section 14A read with Rule 8D and by directing adoption of the assessee's suo-moto disallowance for both normal assessment and for computing book profit under section 115JB.Ratio Decidendi: Before applying Rule 8D or determining disallowance under section 14A, the Assessing Officer must record an objective satisfaction, having regard to the accounts of the assessee, that the assessee's claim is incorrect; absent such recorded satisfaction Rule 8D cannot be invoked and book profit under section 115JB must be computed by adding actual expenditure debited to profit and loss as disallowed by the assessee.