2018 (12) TMI 1920 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - Mandation of recording satisfaction - HELD THAT - Whether it is obligatory on the part of the A.O to record his satisfaction as to why the claim of the assessee in respect of the expenses incurred for earning of the exempt dividend income was not to be accepted is no more res integra and has been settled by the Hon ble Supreme Court in the case of Godrej Boyce Manufacturing Company Ltd. Vs. DCIT Anr. 2017 (5) TMI 403 - SUPREME COURT The Hon ble Apex Court in its aforesaid order had observed that it is obligatory on the part of the A.O to record his satisfaction that having regard to the accounts of the assessee as placed before him it was not possible to generate the reasonable satisfaction with regard to the correctness of the claim of the assessee - It was observed by the Hon ble Apex Court that it was only after the A.O had recorded his dissatisfaction as regards the correctness of the claim of the assessee that the provisions of Sec.14A(2) and (3) r.w. Rule 8D could be invoked. Claim of the assessee as regards the expenditure incurred in relation to income which does not form part of the total income under the I.T Act was rejected by the A.O in the assesses own case for the immediately preceding year viz. A.Y. 2011-12. However on appeal the Tribunal had vacated the disallowance that was made by the A.O under Sec. 14A r.w. Rule 8D de hors recording of such satisfaction on his part by relying on the judgment of the Hon ble Supreme Court in the case of Godrej Boyce Manufacturing Company Ltd. Vs. DCIT Anr. supra - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961, as per Rule 8D of the Income Tax Rules.
2. Recording of satisfaction by the Assessing Officer (A.O) regarding the correctness of the assessee's claim.
3. Strategic investments and their exclusion from disallowance.
4. Gross vs. net amount of interest for computation.
5. Exclusion of investments yielding taxed dividends.
6. Applicability of Rule 8D for computing book profit under Section 115JB.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act, 1961, as per Rule 8D of the Income Tax Rules:
The assessee contested the disallowance of ?42,15,470/- made by the A.O under Section 14A r.w. Rule 8D. The A.O observed that the assessee had received dividend income of ?1,23,43,470/- and had suo moto disallowed ?441/- for earning the exempt dividend income. The A.O computed the disallowance at ?42,15,911/- after correcting the interest expenditure from ?1.60 crore to ?1.63 crore.

2. Recording of satisfaction by the Assessing Officer (A.O) regarding the correctness of the assessee's claim:
The assessee argued that the A.O failed to record his satisfaction regarding the incorrectness of the assessee's claim of ?441/- for earning exempt income. The CIT(A) upheld the A.O's disallowance, stating that the invocation of Section 14A(2) itself indicated the A.O's dissatisfaction. However, the Tribunal found that the A.O did not record the required satisfaction, which is a statutory requirement as per the Supreme Court's ruling in Godrej & Boyce Manufacturing Company Ltd. Vs. DCIT & Anr. (2017) 394 ITR 449 (SC). The Tribunal vacated the disallowance on this ground.

3. Strategic investments and their exclusion from disallowance:
The assessee contended that investments in group companies were for strategic purposes and not for earning exempt income. The CIT(A) rejected this argument, and the Tribunal did not specifically address this issue due to the primary ground of lack of satisfaction recording being sufficient to vacate the disallowance.

4. Gross vs. net amount of interest for computation:
The assessee argued that the A.O should have considered the net amount of interest (?1,60,29,200/-) instead of the gross amount (?1,63,69,647/-) for computing the disallowance. This issue was rendered academic as the Tribunal vacated the disallowance on the primary ground of lack of satisfaction recording.

5. Exclusion of investments yielding taxed dividends:
The assessee argued that investments yielding dividends that suffered tax under Section 115-O should be excluded from disallowance. This issue was also rendered academic due to the Tribunal's decision to vacate the disallowance on the primary ground.

6. Applicability of Rule 8D for computing book profit under Section 115JB:
The assessee contended that Rule 8D should not apply for computing disallowance related to exempt income while computing book profit under Section 115JB. The CIT(A) rejected this argument, but the Tribunal did not address it due to the primary ground being sufficient to vacate the disallowance.

Conclusion:
The Tribunal vacated the disallowance of ?42,15,470/- made by the A.O under Section 14A r.w. Rule 8D due to the failure of the A.O to record his satisfaction regarding the incorrectness of the assessee's claim, as mandated by the Supreme Court's ruling in Godrej & Boyce Manufacturing Company Ltd. Vs. DCIT & Anr. (2017) 394 ITR 449 (SC). Other grounds raised by the assessee were rendered academic and were not adjudicated. The appeal of the assessee was allowed.