TaxTMI 
TaxTMI 
2022 (7) TMI 1362
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.... u/s.10(34) of the Act, by invoking the provisions of Sec.14A of the Act r.w.r.8D(2)(iii) of the Income Tax Rules, 1962(hereinafter 'the Rules') amounting to Rs.37,17,04,365/- (which includes the suo moto disallowance made by the assessee amounting to Rs.10,66,916/-). The assessee first raised the grounds as regards to recording of satisfaction by the AO in terms of the provisions of Sec.14A(2) r.w.r.8D(1) of the Rules. For this, the assessee has raised the following grounds: 1. The order of the CIT(A) in I.TA. No.280 / 2019 / CIT(A) -15 dated 24.09.2020 is against law and facts of the case. 2. The CIT(A) erred in confirming part of the disallowance made u/s.14A r.w Rule 8D. 3. The CIT(A) erred in not appreciating the fact that the entire dividend income was credit to the appellant's bank account under ECS. 4. The CIT(A) erred in not appreciating the fact that the investments were made not with an intention of earning exempt income but as a matter of commercial expediency and investments in subsidiary companies were made for strategic purposes. 5. The CIT(A) erred in not appreciating the fact that the appellant is a core investment c....
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....m of Rs.10,66,916/- and Rs.37,06,37,449/- respectively. The AO disallowed total amount of Rs.37,06,37,449/- excluding the suo moto disallowance made by the assessee of Rs.10,66,916/-. Aggrieved, the assessee preferred an appeal before the Ld.CIT(A). 4. The Ld.CIT(A) noted that the AO has discussed the details, back ground and particulars of the assessee's investment and other details in this regard and according to him, his satisfaction for necessity to examine the assessee's case and bring in it within the scope of the examination for applying provisions of Sec.14A r.w.r.8D of the Rules, is discernible. The Ld.CIT(A) rejected the issue of satisfaction by observing in Para No.5.1.3 as under: ".....5.1.3 The Appellant contended that AO did not record his satisfaction for applying Rule 8D for computation of disallowance. However, the A.O, in the assessment order, discussed in details the background of the case and particulars of Appellant's investment and other details in this regard. From this, his satisfaction for necessity to examine Appellant's case and bring-in it within the scope of examination for applying provisions of sec. 14A r.w.r 8D is discernible. Hen....
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....see then took us through Para No.5.4 which deals with the issue of investment made by the assessee for acquiring shares of subsidiaries companies with an intention to consolidate its long term strategic investment or to meet solvency requirement. The Ld.Counsel for the assessee finally stated vide Para No.5.6, the AO simpliciter noted that even the disallowance of expenses relatable to exempt income need to be added even under the provisions of Sec.115JB of the Act i.e. to the book profit in terms of Explanation-1(f) of the Act. The AO in Para No.5.6 computed the disallowance by resorting to the formula provided under Rule 8D as under: 5.6 Disallowance has been made as per the introduction of Rule 8D by the Income Tax (Fifth Amendment) Rules 2008 vide Notification No.25/2008 dated 24.03.2008 and since the disallowance relates to expenditure on income exempt u/s 10, the same needs to be added to Book Profit u/s 115JB in terms* of explanation 1 (f). In view of the above facts, disallowance u/s 14A is made by applying rule 8D which is computed as under: Rule 8D Disallowance 1. the amount of expenditure directly relating to income which does not form....
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....are not allowable and which are those expenses. In terms of the above, the Ld.Counsel for the assessee stated that there is no satisfaction recorded by the AO and once, there is no satisfaction recorded as regards to the correctness of claim made by the assessee qua accounts of the assessee, the disallowance made is to be deleted as the same is bad in law. 9. On the other hand, the ld.CIT-DR, Dr.S.Palani Kumar took us through Para No.5.1 of the assessment order and Para No.5.6 (which we already re-produced herein above Para Nos.7) and stated that the issue is squarely covered by the decision of the Hon'ble Delhi High Court in the case of Indiabulls Financial Services Ltd. v. DCIT reported in [2016] 76 taxmann.com 268 (Delhi), wherein, the Hon'ble Delhi High Court held that, according to him, where the AO after carrying out elaborate analysis and following steps enacted in statute, had determined amount of expenditure incurred for earning tax exempt income, merely because he did not expressly recorded his dissatisfaction about assessee's calculation, his conclusion could not be rejected and this issue is decided in favour of the Revenue. The ld.CIT-DR stated that the AO has recor....
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.... of apportionment as enumerated in the case law cited supra? Chandan Kumar Corp. Circle-6(1), Chennai 11. The Ld.Counsel for the assessee produced copies of the assessee's reply vide letter dated 28.12.2019, whereby the assessee filed entire details of expenses before the AO along with investments made which are enclosed in assessee's Paper Book at Page Nos.37-41 and also filed computation of income at Pages Nos.1-33, he referred to particular Page No.3, where disallowance of expenditure u/s.37 and particularly relatable to exempt income disallowed u/s.14A is Rs.10,66,916/-. The Ld.Counsel for the assessee brought to our notice that all these details were before the AO and even the AO called for the books of accounts which were produced during the course of scrutiny assessment proceedings and this fact is noted by the AO in Para No.3 which reads as under: 3. The submissions of the assessee company have been duly considered. On the basis of submissions of the assessee paid on verification of books of accounts and in view of the facts & circumstances of the case, the assessment is completed as under: 12. We noted that the assessee has made disallowance of expense....
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....ure in relation to such income in accordance with the provision of sub-rule (2)....". 15. On perusal of the provisions of Sec.14A of the Act, more specifically sub-section 2 & 3 makes it clear that if the AO is not satisfied with the correctness of the claim of the assessee, then the AO shall determine the amount of expenditure incurred in relation to such income, which does not form part of total income under this Act. We noted that for the purpose of computation of disallowance a formal method is prescribed u/r.8D(2)(i) the direct expenses, (ii) the interest disallowance and (iii) the administrative expenses i.e.0.5% of average value of investments. The provisions of Sec.14A(3) specifies the applicability of the provisions of Sec.14A(2) of the Act, where the assessee makes a claim that there is no expenditure incurred, but the provisions of Sec.14A(2) makes it clear that where the assessee makes disallowance u/s.14A of the Act, in its computation of total income while filing return of income, then after satisfying the conditions mentioned the AO should be satisfied having regard to the Accounts of the assessee with the correctness of the claim of the assessee in respect of suc....
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....st that the AO should pay such lip service regardless of the substantial compliance with the provisions would, in fact, destroy the mandate of Section 14A....". 18. Further, the reliance placed by Ld.Counsel for the assessee on the decision of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra), the Hon'ble Bombay High Court has considered the issue recording of satisfaction as under: "....33. Under sub-section (2), the Assessing Officer is required to determine the amount of expenditure incurred by an assessee in relation to such income which does not form part of the total income under the Act in accordance with such method as may be prescribed. The method, having regard to the meaning of the expression 'prescribed' in Section 2(33), must be prescribed by rules made under the Act. What merits emphasis is that the jurisdiction of the Assessing Officer to determine the expenditure incurred in relation to such income which does not form part of the total income, in accordance with the prescribed method, arises if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of the expenditure whi....
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....re incurred in relation to income which does not form part of the total income had been provided. As a result, there was a considerable dispute between tax payers and the Revenue on the method of determining such expenditure. In this background, sub section (2) was inserted so as to make it mandatory for the Assessing Officer to determine the amount of expenditure incurred in relation to income which does not form part of the total income in accordance with the method that may be prescribed. The circular, however, reiterates that the Assessing Officer has to follow the prescribed method if he is not satisfied with the correctness of the claim of the assessee having regard to the accounts of the assessee...". 19. Even, the Hon'ble jurisdictional High Court in the case of Marg Ltd. v. CIT reported in [2020] 120 taxmann.com 84 (Madras), had considered the issue on satisfaction and held that the disallowance u/r.8D of the Rules r.w.s.14A of the Act, can be computed only after recording satisfaction by the AO in terms of provisions of Sec.14A r.w.r.8D of the Rules. The Hon'ble jurisdictional High Court held in Para Nos.21 & 22 are as under: 21. We cannot approve even the lar....
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....nd has not rejected the disallowance suo moto offered by the assessee. Hence, according to us, the mandate given by the provisions of Sec.14A(2) and Rule 8D(2) of the Rules, as regards to recording of satisfaction by the AO qua correctness of the accounts of the assessee for the expenditure claimed qua exempt income is absent and hence, on this very issue, we reverse the order of the lower authorities and allow this jurisdictional issue in favour of the assessee. 21. The assessee has raised alternative ground in merits also. Since, we have adjudicated the issue on jurisdiction i.e. recording of satisfaction by the AO and allow the assessee's ground on jurisdiction, we need not go into the merits of the case. 22. In the result, the appeal filed by the assessee is allowed partly. ITA No.942/Chny/2020 23. This appeal by the assessee arising out of order of the Commissioner of Income Tax(Appeals)-15 dated 24.09.2020. Assessment was framed by ACIT, Corporate Circle-6(1), Chennai, for the AY 2017-18, u/s.143(3) of the Act, vide order dated 31.12.2019. 24. Brief facts of the case are that the assessee has earned dividend income of Rs.56,15,64,867/- from the investments made....