TaxTMI 
TaxTMI 
2026 (7) TMI 40
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.... and section 14A of the Act. In appeal, the addition under section 40(a)(i) was deleted, while the disallowance under section 14A read with Rule 8D of the Income Tax Rules was partly sustained. 2. The assessee has challenged the sustained disallowance on the ground that the Assessing Officer did not record the satisfaction required under section 14A of the Act and, therefore, the disallowance confirmed under that provision is unsustainable in law. 3. The assessee is engaged in the business of real estate development, including the development of integrated office spaces and parks. It filed its return of income on 30 November 2016 declaring total income of Rs.37,23,81,900. 4. During the relevant year, the assessee earned dividend income of Rs.1,46,02,900 from investments in mutual funds. The Assessing Officer noted the assessee's share capital of approximately Rs.975 crore, total assets of approximately Rs.5,928 crore, finance costs of approximately Rs.160 crore, and interest income of approximately Rs.141 crore, and required the assessee to explain the basis of the disallowance made in relation to exempt income. The assessee stated that it had voluntarily disallowed Rs.7,3....
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.... assessee's claim that no expenditure was incurred is liable to be rejected for want of evidence. This is, therefore, a fit case for determining the expenditure incurred in relation to exempt income in accordance with Rule 8D. Rule 8D is prescribed for computing expenditure attributable to exempt income where such expenditure cannot be directly ascertained. Reliance is also placed on the decision of the Hon'ble Supreme Court in Maxopp Investment Ltd. v. CIT, 91 taxmann.com 154, which held that investments in shares of operating companies, even if made to acquire or retain controlling interest, are covered by section 14A where dividend income from such shares does not form part of total income. f. CBDT Circular No. 5/2014, issued under section 119 of the Income Tax Act, clarifies that Rule 8D read with section 14A provides for disallowance of expenditure even where the assessee has not earned any exempt income. 7. The Assessing Officer computed the disallowance under section 14A at Rs.9,18,80,082. After reducing the assessee's voluntary disallowance of Rs.7,30,100, the net disallowance was determined at Rs.9,11,49,982. 8. Before the Commissioner of Income Tax (Appeals....
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.... assessee's claim with reference to its accounts and record satisfaction as to the correctness of that claim before applying the prescribed method under the Income Tax Rules. The assessee argued that such satisfaction must be based on an objective analysis of the accounts. In the present case, the Assessing Officer was required to examine the voluntary disallowance made by the assessee to 5% of the exempt income and establish a nexus between the exempt income and the expenditure incurred. The assessee relied on the decision of the Hon'ble Supreme Court in Maxopp Investment Ltd. v. CIT, 402 ITR 640. It further submitted that the Assessing Officer had not carried out this exercise in accordance with law but had proceeded on assumptions and presumptions while computing the disallowance under Rule 8D. Therefore, the assessee contended that the Assessing Officer failed to record the valid satisfaction mandatorily required under section 14A (2) before invoking Rule 8D. 11. About the mandatory satisfaction required under section 14A (2) of the Act, the assessee submitted that the observations in the assessment order were general and mechanical. According to the assessee, the Assessing ....
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....well as its finance costs and interest income, and required the assessee to justify its claim that no expenditure was incurred in relation to the exempt income, except the estimated disallowance. The Assessing Officer rejected the assessee's method, holding that it was not supported by law, and invoked section 14A (2) read with Rule 8D to compute the disallowance. The claim that no expenditure had been incurred was also rejected for want of evidence. Accordingly, the disallowance was computed as stated above. In appeal, the Commissioner of Income Tax (Appeals) accepted only the assessee's contention that, for computing the disallowance, only investments yielding exempt income should be considered. 14. Section 14A of the Act provides that, notwithstanding anything contained contrary in the Act, expenditure incurred in relation to income not forming part of total income is not allowable as a deduction. Sub-section (2) empowers the Assessing Officer to determine such expenditure in accordance with the prescribed method. However, this power can be exercised only after the Assessing Officer has examined the assessee's accounts, records dissatisfaction with the correctness of the asse....
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....were not properly examined before applying Rule 8D, the order of the Commissioner of Income Tax (Appeals) sustaining the disallowance under section 14A is also unsustainable. 17. Thus, the Assessing Officer invoked section 14A (2) without properly examining the assessee's accounts or identifying the specific evidence that had not been produced. The rejection of the assessee's claim merely for want of evidence is, therefore, unsupported on any cogent basis. Consequently, the orders of the lower authorities cannot be sustained and are set aside. 18. In Maxopp Investment Ltd. v. Commissioner of Income Tax, New Delhi [2018] 91 taxmann.com 154 (SC) / 254 Taxman 325 (SC) / 402 ITR 640 (SC) / 301 CTR 489 (SC), the Hon'ble Supreme Court held that, having regard to section 14A(2) read with Rule 8D, the Assessing Officer must record satisfaction before applying the principle of apportionment. Where the assessee has made a Suo motu disallowance under section 14A and the Assessing Officer does not accept it, he must record reasons showing why the assessee's apportionment is incorrect. While doing so, the Assessing Officer must also examine the nature of the loans, if any, taken for acqui....