2020 (10) TMI 102 - HC - Income Tax

Assessment u/s 14A r.w.r. 8D - Disallowance as exceeded by the exempted income earned by the Assessee - Non recording satisfaction by the Assessing Authority that the expenditure incurred to earn exempted income, as computed by the Assessee - whether Assessing Authority cannot even resort to computation of such disallowance under Rule 8D of the Rules? - HELD THAT - Obviously such disallowance has far exceeded the exempted income in the form of dividends even though computed at the rate of 0.5% of the average investment made by the Assessee. In our opinion, the same is not permissible at all, because this average disallowance as computed under Rule 8D could be disallowed only if Assessee had actually earned Dividend income in excess of such amount of disallowance, that too after recording reasons for rejecting the apportionment of expenditure so incurred or claim that no such expenditure was incurred to earn that much of Dividend income was validly rejected by the Assessing Authority. We do not find any such reasons even recorded by the Assessing Authority in the present case. We cannot approve even the larger disallowance proposed by the Assessee himself in the computation of disallowance under Rule 8D made by him. These facts are akin to the case of Pragati Krishna Gramin Bank 2018 (6) TMI 1283 - KARNATAKA HIGH COURT . Negative figure of disallowance cannot amount to hypothetical taxable income in the hands of the Assessee. Disallowance of expenditure incurred to earn exempted income has to be a smaller part of such income and should have a reasonable proportion to the exempted income earned by the Assessee in that year, which can be computed as per Rule 8D only after recording the satisfaction by the Assessing Authority that the apportionment of such disallowable expenditure u/s 14A made by the Assessee or his claim that no expenditure was incurred is validly rejected by the Assessing Authority by recording reasonable and cogent reasons conveyed to Assessee and after giving opportunity of hearing to the Assessee in this regard. Dispose of the present appeal by answering question of law in favour of the Assessee and against the Revenue and by holding that the disallowance under Rule 8D of the IT Rules read with Section 14A of the Act can never exceed the exempted income earned by the Assessee during the particular assessment year and further, without recording the satisfaction by the Assessing Authority that the apportionment of such disallowable expenditure made by the Assessee with respect to the exempted income is not acceptable for reasons to be assigned the Assessing Authority, he cannot resort to the computation method under Rule 8D of the Income Tax Rules, 1962.

Issues Involved:
1. Judicial discipline and application of judgments by subordinate courts and tribunals.
2. Interpretation and application of Section 14A of the Income Tax Act and Rule 8D of the Income Tax Rules.
3. CBDT Circular No. 5/2014 and its implications.
4. Disallowance of expenditure exceeding exempt income.
5. Recording of satisfaction by the Assessing Authority under Section 14A(2).

Issue-wise Detailed Analysis:

1. Judicial Discipline and Application of Judgments by Subordinate Courts and Tribunals:
The judgment highlights the lack of judicial discipline among subordinate courts and tribunals, which fail to properly apply the judgments of Constitutional Courts. This lack of adherence leads to continuous litigation on settled points of law, resulting in unnecessary expenditure and loss of time. The judgment criticizes the tribunals for taking illogical views without assigning reasons for disregarding applicable law.

2. Interpretation and Application of Section 14A of the Income Tax Act and Rule 8D of the Income Tax Rules:
The court reiterated that the disallowance of expenditure incurred to earn exempt income under Section 14A cannot exceed the exempt income itself. This principle, settled by various High Courts and the Supreme Court in Maxopp Investment Ltd. v. Commissioner of Income Tax, was ignored by the tribunal. The court emphasized that Rule 8D is a computation method and cannot be read in isolation from Section 14A. The disallowance must have a rational nexus with the actual expenditure incurred.

3. CBDT Circular No. 5/2014 and Its Implications:
The judgment discusses the CBDT Circular No. 5/2014, which the tribunal relied upon to justify disallowance even when no exempt income was earned. The court found this interpretation untenable, as it contradicts the principle that disallowance cannot exceed the exempt income. The court clarified that the Circular cannot override the statutory provisions and judicial precedents.

4. Disallowance of Expenditure Exceeding Exempt Income:
The court provided a detailed analysis of various cases where disallowance under Section 14A was restricted to the extent of exempt income. It cited judgments from different High Courts, including Karnataka, Delhi, and Bombay, which consistently held that disallowance beyond the exempt income is impermissible. The court emphasized that disallowance must be proportionate and reasonable, reflecting the actual expenditure incurred to earn the exempt income.

5. Recording of Satisfaction by the Assessing Authority Under Section 14A(2):
The judgment underscored the mandatory requirement for the Assessing Authority to record satisfaction that the expenditure claimed by the assessee is incorrect before invoking Rule 8D. This satisfaction must be based on cogent reasons and communicated to the assessee. The court criticized the tribunal for upholding disallowance without such satisfaction being recorded, rendering the disallowance invalid.

Conclusion:
The court concluded that the disallowance under Section 14A read with Rule 8D cannot exceed the exempt income earned by the assessee. It emphasized the need for the Assessing Authority to record satisfaction before applying Rule 8D. The appeal was disposed of in favor of the assessee, reiterating that disallowance must be proportionate to the exempt income and based on actual expenditure incurred. The judgment serves as a reminder of the importance of judicial discipline and adherence to established legal principles.

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