2020 (4) TMI 52 - AT - Income Tax

Disallowance u/s 14A - Non recording of satisfaction - suo moto disallowance by assessee - as submitted by the assessee that no part of the interest bearing funds were utilised for the purpose of making investments in the exempt income yielding shares, also by it that a fair disallowance of the proportionate administrative expenses were already offered in the return of income - HELD THAT - As decided in GODREJ BOYCE MANUFACTURING COMPANY LIMITED VERSUS DY. COMMISSIONER OF INCOME-TAX ANR. 2017 (5) TMI 403 - SUPREME COURT it is only after recording of such satisfaction that the A.O can take recourse to the provisions of Sec.14A(2) and (3) r.w Rule 8D of the Rules. Although, we are in agreement with the claim of the ld. A.R that in the absence of recording of the requisite satisfaction as regards the correctness of an assesse s claim of disallowance under Sec.14A, the A.O is divested of his jurisdiction to dislodge the suo-moto disallowance made by the assessee under Sec. 14A of the Act, but then, we find that there is no such infraction of the said statutory requirement by the A.O in the case before us. As is discernible from the assessment order, the A.O had after necessary deliberations observed that with reference to the accounts of the assessee, he was not satisfied with the correctness of its claim as regards the expenses which were attributed to earning of the income not forming part of the assesse s total income. Accordingly, we are of the considered view that the statutory requirement of arriving at a satisfaction by the A.O, as regards the correctness of the assesse s claim of disallowance under Sec. 14A can safely be held to have been satisfied on his part. As such, we are unable to persuade ourselves to subscribe to the claim of the ld. A.R that the A.O had without arriving at a satisfaction as regards the incorrectness of the claim of the disallowance under Sec. 14A of the assessee, disallowed the same by taking recourse to the provisions of Sec. 14A(2) and (3) r.w. Rule 8D. We find substantial force in the claim of the ld. A.R that for the purpose of computing the disallowance under Sec. 14A r.w. Rule 8D(2)(iii) only those investments are to be considered for the purpose of computing the average value of such investments which had yielded exempt income during the year under consideration. It is the claim of the ld. A.R that the A.O while computing the disallowance under Sec. 14A r.w Rule 8D(2)(iii) had worked out the average value of the investments that also included certain investments which had not yielded any exempt income during the year under consideration. There is substantial force in the aforesaid claim of the ld. A.R that the investments which had not yielded any exempt income during the year under consideration ought to have been excluded for the purpose of computing the average value of the investments while computing the disallowance under Rule 8D(2)(iii). Our aforesaid view is fortified by the order of the Special bench of the ITAT, Delhi in the case of ACIT Vs. Vireet Investments Pvt. ltd. 2017 (6) TMI 1124 - ITAT DELHI Accordingly, we restrict the disallowance under Sec. 14A r.w.Rule 8D(2)(iii) to the aforesaid amount of ₹ 2,13,730/-. As such, the disallowance under Sec. 14A r.w Rule 8D is restricted to an amount of ₹ 2,31,984/- viz. (i) U/rule 8D(2)(i) ₹ 18,254/-; and (ii) U/rule 8D(2)(iii) ₹ 2,13,730/-. Addition of the disallowance worked out under Sec. 14A r.w.Rule 8D for the purpose of computing the book profit under Sec.115JB - HELD THAT - A.O for the purpose of computing the book profit under Sec. 115JB had made an addition of the disallowance of ₹ 10,94,782/- that was worked out by him under Sec. 14A r.w Rule 8D. We are unable to persuade ourselves to subscribe to the computing of the book profit under Sec. 115JB by the A.O. As per the order of the Special bench of ITAT, Delhi in the case of ACIT Vs. Vireet Investments Pvt. ltd. 2017 (6) TMI 1124 - ITAT DELHI the computation under clause (f) of Explanation 1 to Sec. 115JB (2) is to be made without resorting to the computation as contemplated under Sec. 14A r.w Rule 8D. Accordingly, on the basis of our aforesaid observations we vacate the addition made by the A.O under Sec. 14A r.w Rule 8D for the purpose of computing the book profit under Sec. 115JB of the Act. Order passed CIT(A) is modified in terms of our aforesaid observations.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules, 1962.
2. Inclusion of disallowance under Section 14A in the computation of book profit under Section 115JB of the Income Tax Act, 1961.

Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:

The primary issue revolves around the disallowance made by the Assessing Officer (A.O) under Section 14A read with Rule 8D of the Income Tax Rules, 1962. The assessee had declared a suo-motto disallowance of ?50,143/- for earning exempt dividend income of ?15,22,953/-. However, the A.O was not satisfied with this disallowance and re-calculated it to ?10,94,782/- using the methodology in Rule 8D, leading to an additional disallowance of ?10,44,639/-.

The assessee contended that the A.O had not recorded any reason for dissatisfaction with the suo-motto disallowance, which is a statutory requirement as per the Supreme Court rulings in Godrej & Boyce Manufacturing Company Limited Vs. DCIT (2017) and Maxopp Investment Ltd. Vs. CIT (2018). However, the tribunal found that the A.O had indeed recorded his dissatisfaction based on the accounts presented, thus satisfying the statutory requirement.

The tribunal also addressed the assessee's contention that only those investments which had yielded exempt income during the year should be considered for computing the "average value" of investments under Rule 8D(2)(iii). The tribunal agreed with this view, referencing the Special Bench decision in ACIT Vs. Vireet Investments Pvt. Ltd. (165 ITD 27). Consequently, the tribunal restricted the disallowance to ?2,31,984/- (?18,254/- under Rule 8D(2)(i) and ?2,13,730/- under Rule 8D(2)(iii)).

2. Inclusion of Disallowance under Section 14A in the Computation of Book Profit under Section 115JB:

The second issue pertained to the addition of the disallowance under Section 14A to the book profit computed under Section 115JB. The A.O had added the disallowance of ?10,94,782/- for this purpose. The tribunal, referencing the Special Bench decision in ACIT Vs. Vireet Investments Pvt. Ltd. (165 ITD 27), held that the computation under clause (f) of Explanation 1 to Section 115JB(2) should be made without resorting to the computation under Section 14A read with Rule 8D. Therefore, the tribunal vacated the addition made by the A.O for computing the book profit under Section 115JB.

Conclusion:

The appeal was partly allowed. The tribunal upheld the A.O's jurisdiction to rework the disallowance under Section 14A but restricted the disallowance amount to ?2,31,984/-. Additionally, the tribunal vacated the addition of the disallowance under Section 14A to the book profit for the purpose of Section 115JB. The order of the CIT(A) was modified accordingly.