TaxTMI 
TaxTMI 
2026 (8) TMI 1649
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....ani, Authorised Signatory and Finance Head, India, of the assessee-company. 2.2. It is stated in the petition and the supporting affidavit that the impugned order was passed by the learned CIT(A) on 15.10.2025. The Managing Director of the assessee-company was travelling out of station and, consequently, there was a delay in execution of the requisite authorisation in favour of Shri Sandeep Gaglani for filing the present appeal. The assessee has stated that the delay was neither intentional nor deliberate and that it occurred for the reasons set out in the petition and the affidavit. The assessee has accordingly prayed that the delay be condoned and the appeal be admitted for adjudication on merits. 2.3. We have considered the explanation furnished by the assessee and perused the petition as well as the supporting affidavit. The delay is not inordinate, and the explanation furnished by the assessee does not indicate any deliberate inaction or want of bona fides. Refusal to condone the delay would result in the assessee being denied an adjudication of its grievance on merits. Having regard to the entirety of the circumstances and in the interest of substantial justice, we are ....
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....nt proceedings, the assessee explained that Kotak Wealth Management had been entrusted with the management of its investment portfolio. According to the assessee, it had not incurred any direct expenditure or paid any interest for making the investments and earning the exempt income. However, considering the time spent by its accounts executive and Head-Finance in attending to communications, paperwork and accounting relating to the investments, the assessee identified salary expenditure of Rs. 3,48,550/- as attributable to the investment activity and disallowed the same under section 14A of the Act. 4.4. The Assessing Officer did not accept the computation furnished by the assessee. In paragraph 5.3(i) of the assessment order, the Assessing Officer observed that the assessee did not maintain separate bank accounts for its investment and business transactions and that the accounts relating to expenditure and investment were maintained jointly. According to the Assessing Officer, there was a merger of the flow of funds, inter-bank transfers and intermingling of funds used for investments and expenditure. The Assessing Officer further observed that the assessee had not established....
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....ordingly contended that no further disallowance was warranted. 6. The learned CIT(A) did not accept the contentions of the assessee. The learned CIT(A) held that the Assessing Officer had recorded objective dissatisfaction by referring to the maintenance of common books and bank accounts, the intermingling of funds, the large number of transactions and the total interest expenditure of Rs. 10,83,361/- debited to the profit and loss account. 7. The learned CIT(A) further held that the assessee had failed to establish, through a specific fund-flow statement or other cogent material, that the investments yielding exempt income had been made exclusively out of non-interest-bearing funds. The contention that the interest expenditure on borrowings was only Rs. 4,726/- was rejected on the ground that the relevant amount considered by the Assessing Officer was the total interest expenditure of Rs. 10,83,361/- debited to the profit and loss account. The learned CIT(A) accordingly upheld the application of Rule 8D and confirmed the additional disallowance of Rs. 40,75,955/-. The appeal of the assessee was consequently rejected. 8. During the course of hearing before us the learned A....
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....ead, India Rs.47,71,229/- 5% Rs.2,38,561/- Accounts Executive Rs.9,49,442/- 10% Rs.94,944/- Proportionate salary expenditure Rs.3,33,505/- Communication expenses Rs.5,000/- Total expenditure as per working Rs.3,38,505/- Suo motu disallowance made under section 14A Rs.3,48,550/- 12. On this basis, the learned AR submitted that the suo motu disallowance of Rs. 3,48,550/- was reasonable and sufficient to cover the expenditure that could possibly be attributed to the earning of exempt income. There was, therefore, no justification for making any further disallowance. 13. As regards the interest expenditure of Rs. 10,83,361/- referred to by the Assessing Officer, the learned AR submitted that the said amount comprised the following: Nature of interest expenditure Amount Interest under sections 234A, 234B and 234C Rs.46,410/- Interest on delayed payments to MSME suppliers Rs.10,32,225/- Interest on bank cash-credit facility Rs.4,726/- Total Rs.10,83,361/- 14. The learned AR submitted that the interest of Rs. 46,410/- under sec....
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....terial furnished by the assessee had not been properly examined and that Rule 8D had been invoked mechanically. 18. Adverting to section 14A(2), the learned AR submitted that the Assessing Officer could resort to the prescribed method under Rule 8D only after examining the accounts of the assessee and recording an objective dissatisfaction as to the correctness of the claim made by the assessee. The dissatisfaction must be supported by cogent reasons and must identify the particular inaccuracy in the assessee's computation or allocation of expenditure. General observations regarding common bank accounts, intermingling of funds and the absence of separate accounts could not satisfy this statutory requirement. 19. The learned AR submitted that the Assessing Officer had not pointed out any specific defect in the basis adopted by the assessee for quantifying the suo motu disallowance of Rs. 3,48,550/-. The Assessing Officer had also not demonstrated that any particular expenditure debited to the profit and loss account had been incurred in relation to the exempt income. In the absence of such examination and objective dissatisfaction, the invocation of Rule 8D and the consequenti....
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....er section 14A read with Rule 8D. On this basis, the learned DR submitted that the statutory requirement of recording dissatisfaction stood satisfied and that the additional disallowance confirmed by the learned CIT(A) did not call for interference. 24. We have considered the rival submissions and perused the material available on record. It is undisputed that the assessee earned exempt dividend income of Rs. 1,17,29,599/- from investments in mutual funds and made a suo motu disallowance of Rs. 3,48,550/- under section 14A of the Act. The assessee did not take the position that no expenditure whatsoever had been incurred in relation to the exempt income. It identified the proportionate salary cost of the Finance Head, India, and the Accounts Executive, together with communication expenditure, as expenditure attributable to the investment activity. The working placed before the authorities below quantified the proportionate salary expenditure at Rs. 3,33,505/- and communication expenditure at Rs. 5,000/-, aggregating to Rs. 3,38,505/-. The assessee nevertheless disallowed a higher amount of Rs. 3,48,550/-. Thus, the Assessing Officer was not confronted with a bare or unsupported ....
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....of rule 8D of the Rules in order to compute the disallowance u/s 14A of the Act is neither automatic and nor is triggered merely because assessee has earned an exempt income." In Asian Paints Ltd., the Coordinate Bench, in paragraph 12, observed that "the satisfaction as required to be recorded under the provisions of section 14A of the Act is not limited to merely disagreeing with the submission of the assessee and requires that the AO should also provide the basis for reaching such a conclusion, after having regard to the accounts of the assessee." The learned CIT(A), however, referred to Maxopp Investment Ltd. only for the general applicability of section 14A and the principle of apportionment. The requirement stated in paragraph 41 of that decision, as also the ratios of the other decisions cited by the assessee, was neither dealt with nor distinguished. 28. Before us, the learned AR placed further reliance upon certain decisions which we proceed to examine. 29. In Sociedade De Fomento Industrial (P.) Ltd. (supra), the assessee had invested in mutual funds and asserted that the investments had been made out of surplus funds. The Revenue sought to infer that borrowed funds....
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.... earning the said income." The Assessee explained that the disallowance had been determined on the basis of cost of finance department in the ratio of exempt income to total turnover. On that basis the disallowance in AY 2005-06 was upheld by CIT (A) at Rs. 1 lakh. The disallowance for this AY was worked out as Rs. 1,42,404/- and since the Assessee had already made a disallowance of Rs. 3 Lacs, no further disallowance was called for. 35. In order to disallow this expense the AO had to first record, on examining the accounts, that he was not satisfied with the correctness of the Assessee's claim of Rs. 3 lakhs being the administrative expenses. This was mandatorily necessitated by Section 14 A (2) of the Act read with Rule 8D (1) (a) of the Rules. 37. In the considered view of this Court, the above observations of the AO in the assessment order are of a broad general nature not with particular reference to the facts of the case on hand. 38. The Court is also unable to agree with Mr. Singh that on this aspect there are concurrent findings of both the CIT (A) as well as the ITAT. The CIT (A) disallowed the exempt expenses by merely repeating what the AO ....
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....ble Karnataka High Court found that the Assessing Officer had neither determined the expenditure nor recorded reasons concerning the correctness of the assessee's claim. The operative part of paragraph 5 reads as under: "Thus, from perusal of the order passed by the Assessing Officer, it is evident that the Assessing Officer has not determined the amounts of the expenditure and has not recorded any reasons with regard to correctness of the claim made by the assessee in respect of such expenditure, in relation to the income which does not form part of the total income of the assessee. The Assessing Officer before embarking upon determination of the amount of expenditure incurred in the light of the exempted income, has to record a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. The aforesaid mandatory requirement has not been fulfilled by the Assessing Officer before disallowing the assessee under section 14A of the Act." 34. The decision in Reliance Industrial Investments and Holdings Ltd. (supra) is the closest with reference to the Rule applicable for the year under consideration. That decision con....
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....d upon before us is that the existence of exempt income or the fact that the suo motu disallowance does not correspond to the amount produced by the formula under Rule 8D does not, by itself, permit the Assessing Officer to apply that formula. He must first examine the assessee's accounts and the stated basis of the disallowance, identify the expenditure or defect omitted from the computation, and record an objective dissatisfaction supported by reasons. General observations concerning the management of investments, common accounts or the possibility of expenditure do not meet this requirement. 36. Tested on the above principles, the observations in paragraph 5.3(i) of the assessment order do not constitute the satisfaction contemplated under section 14A(2). The observations that the assessee did not maintain separate bank accounts, that investment and business funds were intermingled and that the assessee had not established a direct nexus between the investments and surplus funds concern the source of the investments. They do not examine the correctness of the assessee's computation of Rs. 3,48,550/- based upon proportionate employee cost and communication expenditure.....
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....s case qualified for disallowance under section 14A read with Rule 8D is merely a conclusion regarding the general applicability of the provision. It is not a reasoned dissatisfaction with the correctness of the assessee's computation having regard to its accounts. 40. The learned CIT(A) treated the maintenance of common books and bank accounts, the intermingling of funds, the number of transactions and the debit of total interest expenditure of Rs. 10,83,361/- as sufficient satisfaction. In doing so, the learned CIT(A) merely endorsed the general observations of the Assessing Officer without examining whether they demonstrated any defect in the salary-based computation furnished by the assessee. The authorities cited before the learned CIT(A) were not dealt with in the context in which they had been relied upon, and the subsequent binding decision in Tata Capital Ltd. was neither followed nor distinguished. 41. We also note that Rule 8D(2) was substituted by the Income-tax (Fourteenth Amendment) Rules, 2016, with effect from 02.06.2016. For A.Y. 2020-21, the applicable Rule provided for the aggregate of direct expenditure under clause (i) and one per cent of the annual a....