2024 (5) TMI 959 - AT - Income Tax

Section 14A disallowance requires objective satisfaction with specific expenditure-investment linkage before rejecting assessee's suo moto claim

M/s. Indiabulls Real Estate Ltd. Versus DCIT, Central Circle-12 (1), New Delhi

The ITAT Delhi held that section 14A read with Rule 8D requires the AO to record objective satisfaction with specific linkage between expenditure and ... Disallowance u/s 14A r.w.r. 8D - mandation of recording satisfaction - Suo moto disallowance made by the assessee - Scope of computation mechanism provided in Rule 8D(2) - disallowance was reduced by the CIT(A) by considering only those investments which had actually yielded exempt income to the assessee as against the total investments considered by the AO - HELD THAT:- As law mandated in section 14A(2) of the Act and Rule 8D(1) of the Rules requires the AO to record an objective satisfaction having regard to the accounts of the assessee with specific linkage of the expenditure debited by the assessee with the investment activity. The satisfaction for rejecting the assessee’s disallowance should be made in an objective manner with cogent reasons. We find that the very same observations were made by the AO for AY 2012-13 [2020 (5) TMI 84 - ITAT DELHI] also, and the tribunal on appeal preferred by the revenue had deleted the disallowance wherein as held as mandated that, if the AO having regard to the accounts of the assessee is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to which does not form part of the total income under the Act, then the AO shall determine the amount of expenditure incurred in relation to such income. The Act also mandates that such re-computation also applies in relation to a case where the assessee claims that no expenditure has been incurred by him in relation to the income which does not form part of the total income. Decided in favour of assessee. Issues Involved:- Justification of disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules.Detailed Analysis:1. Background and Parties Involved:The appeal in ITA No. 5954/Del/2019 for AY 2013-14 arises from the order of the Commissioner of Income Tax (Appeals)-22, New Delhi, against the assessment order passed under Section 143(3) of the Income-tax Act, 1961 by the Assessing Officer (AO), DCIT, Circle-12(1), New Delhi.2. Core Issue:The primary issue to be decided is whether the Commissioner of Income Tax (Appeals) [CIT(A)] was justified in restricting the disallowances made under Section 14A of the Act read with Rule 8D of the Income Tax Rules.3. Assessee's Activities and Suo Moto Disallowance:The assessee, engaged in various business activities including project management and investment advisory, claimed exempt income of Rs. 76,58,05,673/- in the form of dividends. The assessee made a suo moto disallowance of Rs. 7,46,680/- under Section 14A as expenses incurred for earning exempt income, detailed as follows:- Salary cost of employees: Rs. 373,340/-- Other administrative expenses: Rs. 373,340/-4. Assessing Officer's (AO) Disallowance:The AO ignored the assessee's suo moto disallowance and applied Rule 8D(2)(iii) to compute a disallowance of Rs. 5,16,73,689/-. After adjusting the assessee's suo moto disallowance, the AO made a net disallowance of Rs. 5,09,27,009/-. The CIT(A) reduced this disallowance to Rs. 1,18,44,320/- by considering only those investments that actually yielded exempt income.5. AO's Rationale and Satisfaction:The AO observed that the assessee did not furnish a rationale for the suo moto disallowance of Rs. 7,46,680/- and noted that no separate staff or workstation was maintained for investment activities. The AO emphasized that investment activities involve well-coordinated management decisions and thus, indirect expenses are embedded in the investment activities.6. Assessee's Argument Before CIT(A):The assessee contended that the AO did not record objective satisfaction regarding the incorrectness of the suo moto disallowance as required under Section 14A(2). The CIT(A) dismissed this plea, noting that similar disallowance was made in AY 2012-13 but was deleted by the CIT(A) due to lack of proper satisfaction recorded by the AO.7. Tribunal's Analysis and Decision:The Tribunal observed that the AO must record an objective satisfaction with specific linkage to the expenditure debited by the assessee with the investment activity. The Tribunal referred to its decision in the assessee's case for AY 2012-13, where it was held that the AO did not record proper satisfaction before invoking Rule 8D. The Tribunal emphasized that the AO needs to record satisfaction that the assessee's suo moto disallowance was not correct before applying the apportionment theory under Section 14A(2).8. Precedents and Judicial Pronouncements:The Tribunal considered various judicial pronouncements, including:- Maxopp Investment Ltd. vs CIT: The Supreme Court held that the dominant purpose test is not relevant for Section 14A, and the AO must record satisfaction before rejecting the assessee's disallowance.- Indiabulls Financial Services Ltd. vs DCIT: The Delhi High Court held that the AO's conclusion cannot be rejected merely because he did not expressly record dissatisfaction about the assessee's calculation.- Other cases: The Tribunal also considered other relevant cases supporting the necessity of recording satisfaction by the AO.9. Conclusion:The Tribunal found that the AO did not record the required satisfaction as mandated under Section 14A(2) before invoking Rule 8D. As the facts and circumstances for AY 2012-13 were identical to the current year, the Tribunal applied its previous decision and directed the deletion of the disallowance.Final Judgment:The appeal of the assessee was allowed, and the disallowance under Section 14A was directed to be deleted. The order was pronounced in the open court on 17/05/2024.