2019 (1) TMI 602 - HC - Income Tax

Addition u/s 14A r.w.r 8D - Held that - Rule 8D is in the nature of best judgment determination. This Rule would apply where the AO first records his satisfaction that disallowance, if any, made by the Assessee is not correct and is not in accordance with the mandate of Section 14A of the Act. In absence of formation of satisfaction, the AO cannot apply Rule 8D of the Rules. In the present case, the AO has treated Rule 8D as mandatory which would apply to all cases where exempt income is earned. An order passed by AO is, therefore, not in terms of the mandate of Section 14A(2) of the Act.

Summary

Issues Involved:
1. Addition of ?3.46 crores on account of golf club membership fee.
2. Disallowance of ?80.66 crores under Section 14A of the Income Tax Act, 1961 by applying Rule 8D of the Income Tax Rules, 1962.

Issue-wise Detailed Analysis:

1. Addition of ?3.46 Crores on Account of Golf Club Membership Fee:
The first issue pertains to the addition of ?3.46 crores on account of golf club membership fee. The Counsel for the appellant-Revenue accepted that this issue is covered against them based on a previous decision dated 30.03.2012 in ITA No.180/2012 in the case of DLF Commercial Developers Ltd., which was upheld by the dismissal of an SLP against the said decision. Consequently, no substantial question of law arises from the disallowance of ?3.46 crores made by the Assessing Officer (AO) on account of golf club membership fee.

2. Disallowance of ?80.66 Crores Under Section 14A by Applying Rule 8D:
The second issue revolves around the disallowance of more than ?80.66 crores made by the AO under Section 14A of the Act by applying Rule 8D of the Income Tax Rules, 1962. The AO observed that the assessee had invested in equity shares but did not attribute any expenses incurred for such investments. The AO applied Rule 8D and computed a disallowance of ?80,74,94,000/-, from which ?8,21,883/- already disallowed by the assessee was deducted, resulting in a net disallowance of ?80,66,72,117/-.

The Commissioner of Income Tax (Appeals) partly allowed the appeal, holding that the assessee had sufficient interest-free funds to make the investments and that the investments were made for bona fide business purposes rather than for earning exempt income. The CIT (Appeals) deleted the addition under clause (ii) of Rule 8D(2) but upheld the addition of ?1128.93 lacs under clause (iii) of Rule 8D(2), reasoning that the assessee must have incurred administrative costs for earning the exempt income.

Both the Revenue and the respondent-assessee filed cross-appeals. The Tribunal accepted the respondent-assessee's appeal and dismissed the Revenue's appeal, relying on decisions from the Bombay High Court, the Supreme Court, and the Delhi High Court.

The High Court noted that the Supreme Court in Maxopp Investment Ltd. vs. CIT and Godrej & Boyce Manufacturing Company Ltd. vs. DCIT had held that Rule 8D is a best judgment determination that applies only when the AO records satisfaction that the assessee's disallowance is not correct. In this case, the AO did not record such satisfaction and treated Rule 8D as mandatory, which was not in line with Section 14A(2) of the Act. Consequently, the High Court found no substantial question of law arising from the second issue and dismissed the appeal without costs.

However, before signing the order, the High Court noticed the observations made by the CIT (Appeals) in para 7.3 regarding indirect expenses related to investment activities. The Court issued a notice to examine whether the CIT (Appeals) could have recorded satisfaction under subsection (2) of Section 14A, an issue not previously examined. The notice was returnable on 19th March 2019 and was accepted by the respondent's counsel.

Conclusion:
The appeal was dismissed regarding the addition of ?3.46 crores on account of golf club membership fee and the disallowance of ?80.66 crores under Section 14A. However, the High Court issued a notice to examine the CIT (Appeals)'s authority to record satisfaction under Section 14A(2).