TaxTMI 
TaxTMI 
2026 (1) TMI 6
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....essment orders passed u/s. 143(3) of the Income Tax Act, 1961 [the Act] by the ACIT Central Circle 2(2), Bangalore dated 21.12.2016, 18.12.2017 & 25.12.2019 were partly allowed. 3. First we take up the appeal ITA No.719/Bang/2025 for AY 2014-15. The assessee company is engaged in the business of providing consultancy services to its group companies, filed its return of income on 30.9.2014 declaring total income of Rs. 2,73,60,930. The return was selected for scrutiny and notice u/s. 143(2) was issued on 7.9.2015. 4. During the assessment proceedings, the assessee company was found to have made investment in mutual funds and equity investments, income from which is not chargeable to tax and therefore assessee was given a shown cause notice that why disallowance of Rs. 97,11,407 should not be made u/s. 14A r.w. Rule 8D of the I.T. Rules. 5. The assessee submitted that it has earned exempt dividend income of Rs. 23,09,005 from its investment in mutual funds which is exempt u/s. 10(35) of the Act. The assessee also objected that no expenditure has been incurred by the asse and therefore it has not disallowed any sum u/s. 14A. 6. The AO held that on examination of the accoun....
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....D (2) of the Income Tax Rules. 11. The ld. counsel for the assessee submitted a paperbook wherein the financial statement of the assessee was submitted. It is the claim of the ld. counsel that when the assessee has submitted that it has not incurred any expenditure, when the accounts are available before the AO, without looking at the accounts of the assessee, the ld. AO has invoked the provisions of Rule 8D for making disallowance u/s. 14A. It was his claim that the initial query itself raised by the AO at the first instance was after computation of disallowance of Rs. 97,11,407 applying rule 8D u/s 14 A of the act and assessee was asked that why disallowance of above sum should not be made u/s. 14A r.w. Rule 8D of the I.T. Rules. He also referred to the Income & Expenditure A/c of the assessee stating that the dividend income is of Rs. 23,09,005 and there is no expenditure incurred to earn that dividend income. He submits that all the expenditure incurred by the assessee are for the management business consultancy services of the assessee. He further stated that on identical facts and circumstances of the case of sister concern of the assessee in Manipal Health Systems Pvt. Lt....
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.... be made under section 14A r.w. Rule 8D of the IT Rules." Therefore, prior to the examining the account or statement of the assessee or the claim of the assessee, the ld. AO worked out disallowance under Rule 8D r.w.s. 14A of the Act. 15. Section 14a OF The Act is as under :- [Expenditure incurred in relation to income not includible in total income^66. ^67 14A. ^68 [(1)] ^69[Notwithstanding anything to the contrary contained in this Act, for the purposes of] computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred ^70 by the assessee in relation to ^70 income which does not form part of the total income ^70 under this Act.] ^68 [(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed ^71, if the Assessing Officer, 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 income which does not form part of the total income under this Act. ....
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....in the books of account. Thus the AO has to examine that has the assessee put any expenditure in the Profit & Loss account which is incurred in relation to earning exempt income or the expenditure of such nature are more than what is claimed by the assessee. Then he must record such satisfaction in precise manner in the assessment order. After this process only, the ld. AO is empowered to compute the disallowance under Rule 8D. This is the mandate of the provision of the law. 17. The Hon'ble Supreme Court also in the case of Maxopp Investment Ltd. vs. Commissioner of Income Tax, New Delhi [2018] 91 taxmann.com 154 (SC)/[2018] 254 Taxman 325 (SC)/[2018] 402 ITR 640 (SC)/[2018] 301 CTR 489 (SC)[12-02-2018]has categorically held that recording of the satisfaction is a sine qua non before making any disallowance where it has been held as under :- "41. Having regard to the language of Section 14A (2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those ca....
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....hich does not form part of the total income under the Act, he shall determine the amount of expenditure in relation to such income in accordance with the provisions prescribed. The most fundamental requirement, therefore, is the Assessing Officer should record his dissatisfaction with the correctness of the claim of Assessee in respect of the expenditure and to arrive at such dissatisfaction, he should give cogent reasons. We find support for this view in a judgment of this Court in Pr. CIT (Central) v. JSW Energy Ltd. [2023] 153 taxmann.com 208/294 Taxman 407/ [2024] 460 ITR 496 (Bom.) 20. Therefore the general observation made by the AO that the company deploys manpower and resources which attract costs in the form of salaries, rent, audit fees, professional charges, etc. and therefore the claim of the assessee is not correct, cannot be said to be proper satisfaction. 21. Further the claim of the assessee is that it has not incurred any expenditure has also not been refuted by the ld. AO. When the complete Income & Expenditure statement is available before him, he is duty bound to have pointed out some expenditure which has been incurred for earning of exempt income to nega....
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....lly worded as it was for AY 2014-15, therefore the arguments also remain the same. 30. We have carefully considered the rival contentions and for the reasons given by us in detail for AY 2014-15, we also do not find any reason to sustain the above disallowance in absence of satisfaction recorded by the ld. AO. Accordingly the disallowance made by the AO and confirmed by the ld. CIT(A) is directed to be deleted. In the result, ground Nos.1 & 2 of the appeal are allowed. 31. In the result, ITA No.720/Bang/2025 is allowed. ITA No.721/Bang/2025 32. This appeal is filed by the assessee for Ay 2017-18 against the order passed by the CIT(Appeals)-15, Bengaluru [ld. CIT(A)] dated 31.1.2025 wherein the disallowance made by the AO u/s. 14A of the Act of Rs. 2,44,08,806 as per assessment order passed u/s. 143(3) of the Act dated 25.12.2019 by the ACIT, Circle 2(2), Bangalore [ld. AO] was confirmed. 33. The assessee is in appeal raising ground that the ld. AO has not recorded the satisfaction for invoking the applicability of section 14A r.w. Rule 8D. 34. Briefly stated the facts are that the assessee filed its return of income on 30.10.2017 at a total income of Rs. 54,73,57,....
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.... judicial precedents including the decision of Hon'ble jurisdictional High Court in the case of Hindustan Aeronautics Ltd[ supra] 38. The ld. DR vehemently supported the order of the ld. AO and stated that the assessee has not computed the disallowance before the AO, the ld. AO has computed the same disallowance while working out the taxable income. It was further stated that proper satisfaction has been recorded by the ld. AO. 39. We have carefully considered the rival contentions and perused the orders of the ld. lower authorities. For AYs 2014-15 & 2015-16, we have held that no satisfaction is recorded by the ld. AO about the correctness of the claim of assessee that it has not incurred any expenditure for earning exempt income. The ld. AO has merely stated that assessee has not maintained books of account in the manner from which expenditure incurred for earning exempt income can be worked out. It is a fact that assessee has maintained proper books of account in terms of the Companies Act, 1956. There is no error pointed out by the ld. AO that the books of account maintained by the assessee is not reliable, except making disallowance u/s. 14A to the returned income of the....
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....n 22/9/2019 and further notice under section 142 (1) of the act was also issued along with the questionnaire dated 30/12/2020. 44. During the course of assessment proceedings it was found that assessee has received dividend income of Rs. 85 lakhs and claimed the same as exempt. The assessee has disallowed a sum of Rs. 460,000 under section 14 A of the act as expenses relatable to earning exempt income. 45. During the course of assessment proceedings the learned assessing officer asked the assessee to furnish the working of disallowance under section 14 A as per rule 8D of the income tax rules. The assessee company submitted a written submission along with the computation wherein the assessee stated that for the purpose of computing the average value of investment, the strategic investment securities and stock in trade and other such investment from which no exempt income is earned during the year, are excluded. The Ld. AO did not accept the disallowance u/s A made by the assessee of Rs 4.60 Lakhs. 1The learned assessing officer found that the working provided by the assessee under section 14 A is not correct and therefore the disallowance under section 14 A read with rule 8D ....
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.... in the business of distance learning and education services. It filed return of income on 30.11.2017 at a total loss of Rs. 39,25,92,840. Return of income was picked up for scrutiny and notices u/s. 143(2) as well as 142(1) of the Act were issued. 54. During the course of assessment proceedings, the ld. AO noted that assessee company has made investment in mutual funds and equity instruments in Indian companies income from which is not chargeable to tax. Accordingly assessee has earned tax exempt dividend of Rs. 28,72,601 and claimed exemption u/s. 10(35) of the Act. The ld. AO asked the assessee that why disallowance should not be made u/s. 14A r.w. Rule 8D of the I.T. Rules. The assessee in its reply dated 24.12.2019 submitted that assessee has incurred only Rs. 1,725 as Demat charges and no further expenditure has been incurred. It was further stated that the even the Demat expenses is for maintenance of investment in Demat form and not for earning any exempt income. Thus the claim of the assessee is that except sum of Rs. 1,725, no further expenditure has been incurred. The ld. AO asked the assessee to provide the average value of investments which was provided by the asses....
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.... is incurred. When the assessee was asked to produce information about the average monthly investment, it also gave details about those investment on the dividend income that has been earned by the assessee. However, the ld. AO stated that assessee has not maintained books of account in a manner in which the expenditure related to exempt income can be worked out. The company deploys manpower & resources, therefore there are expenditure incurred on rent, other expenditure etc. He further stated that there is a common pool of funds from which the investments are made. Thereafter the AO made disallowance u/s. 14A of the Act by employing the method provided under Rule 8D. 61. Such disallowance was upheld by the ld. CIT(A), but was restricted to the extent of exempt income. 62. We find that according to the provisions of section 14A(2) of the act, the ld. AO must examine the correctness of the claim of the assessee having regard to the books of account and thereafter record a satisfaction, then only the power of applying the provisions of Rule 8D can be relied upon. In the present case, there is no reference as to how the expenditure shown by the assessee of Rs. 1,725 is not the o....