2022 (2) TMI 493 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - Mandation of recording proper satisfaction regarding incorrectness of the claim of the assessee - second round of litigation - HELD THAT - There is no dispute with regard to the fact that Rule 8D of Income Tax Rules, 1962 ( the Rules ) is not applicable for the Assessment Year under appeal. We find that Ld.CIT(A) erroneously affirmed the action of the Assessing Officer regarding disallowance of administrative expenses applying the Rule 8D of the Rules. This approach of authority below is not justified. So far interest expenditure is concerned, the Ld.CIT(A) has given finding on fact that from the details submitted, it was seen that the opening and closing funds available, with the appellant assessee far exceeded the total average investment of ₹ 807.7 crores. This finding on fact is not assailed by the Revenue. However, the disallowance regarding administrative expenditure is under challenge before this Tribunal. Undisputedly, the Assessing Officer made disallowance by applying Rule 8D of the Rules, this Rule came into vogue with effect from Assessment Year 2008-09. Hence, the Assessing Officer erred in law by applying the Rule 8D of the Rules for disallowance. Therefore, looking to the quantum of investment, business of the assessee and material placed before us, we are of the considered view that it would sub-serve the interest of justice if the disallowance is restricted to a sum of ₹ 2,50,00,000/-. As it cannot be presumed that for handling, overseeing and making investment, no expenditure could be incurred. The assessee has failed to demonstrate how much administrative expenditure was incurred qua the investment that earned tax free income. Therefore, a fair estimation is made for such disallowance. The grounds raised by the assessee are partly allowed.

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Recording of satisfaction by the Assessing Officer regarding the incorrectness of the claim.
3. Jurisdiction of the Assessing Officer in enhancing disallowance.
4. Inclusion of investments not yielding exempt income in the disallowance computation.
5. Double disallowance under Section 14A.
6. Interest charged under Section 234C of the Act.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act, 1961:
The central issue in the appeal is the disallowance under Section 14A, which pertains to expenditure incurred in relation to income not forming part of the total income. The Tribunal had previously remitted the matter to the Assessing Officer (AO) to re-examine the disallowance in light of the Delhi High Court's judgment in Maxopp Investment Ltd. The AO, in the reassessment, made a disallowance of ?5,66,45,019, which the CIT(A) reduced to ?4,84,62,000 by excluding interest expenditure but sustaining administrative expenses disallowance.

2. Recording of satisfaction by the Assessing Officer:
The assessee argued that the AO did not record proper satisfaction regarding the incorrectness of the claim under Section 14A. The law mandates that the AO must record satisfaction, having regard to the assessee's accounts, about the correctness of the claim. The Tribunal found that the AO erroneously applied Rule 8D, which was not applicable for the assessment year in question (2007-08), and did not properly record satisfaction as required by law.

3. Jurisdiction of the Assessing Officer in enhancing disallowance:
The assessee contended that the AO exceeded his jurisdiction by enhancing the disallowance in the reassessment order beyond what was made in the original assessment. The Tribunal noted that the AO's application of Rule 8D was erroneous for the assessment year in question, thus indirectly addressing the jurisdictional overreach.

4. Inclusion of investments not yielding exempt income in the disallowance computation:
The CIT(A) and AO included investments that did not yield exempt income during the relevant year in the disallowance computation. The Tribunal found this approach unjustified, as Rule 8D was not applicable, and a reasonable basis for disallowance should be adopted instead.

5. Double disallowance under Section 14A:
The assessee argued that the disallowance under Section 14A resulted in double disallowance, as it had already been made in the original assessment order. The Tribunal's decision to restrict the disallowance to ?2,50,00,000 implicitly addressed this issue by ensuring a fair estimation rather than a duplicative or excessive disallowance.

6. Interest charged under Section 234C of the Act:
The CIT(A) did not delete the interest charged under Section 234C, which pertains to interest for deferment of advance tax. The Tribunal did not specifically address this issue in its detailed analysis, focusing primarily on the disallowance under Section 14A.

Conclusion:
The Tribunal concluded that the AO and CIT(A) erred in applying Rule 8D for the assessment year 2007-08. It restricted the disallowance to ?2,50,00,000, considering the quantum of investment and the business nature of the assessee. The appeal was partly allowed, providing a fair estimation of administrative expenses related to tax-free income. The order was pronounced on 10th February 2022.

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