2020 (5) TMI 627 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - CIT(A) upheld rejection of suo motu disallowance offered by the assessee but gave some partial relief on the computation part - as pointed out by the assessee that at best entire expenses of project and investment department could be treated as expenditure incurred by the assessee in relation to income which does not form part of the total income - HELD THAT - AO cannot reject the suo motu disallowance offered by the assessee on the ground that such a disallowance under rule 8D will be more; that s putting cart before the horse. Quite to the contrary, an AO can resort to rule 8D only when, as per the prescription of Section 14A(2) the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act . That satisfaction, as required, u/s14A(2), for invoking rule 8D, cannot be on the basis of mechanism of rule 8D itself; it has to be independent of rule 8D. AO has noted the explanation of the assessee and proceeded to disregarded the same on the basis of working of rule 8D(2)(i) and 8D(2)(iii). There is no other, and in fact no, reason for rejection of the computation of disallowance by the assessee. On the fact of this case, there is not even a whisper of the reason, barring reference to rule 8D(2)(i), for rejecting the suo motu disallowance offered by the assessee. On these facts, and for the detailed reasons set out above, the Assessing Officer was in error in invoking rule 8D(2). We, therefore, deem it fit and proper to direct the Assessing Officer to delete the impugned additional disallowance under section 14A read with rule 8D, and to thereby accept the suo motu disallowance offered by the assessee. Once we hold so, all other issues raised in these appeals become wholly academic and infructuous, and there is no need to adjudicate on the same. Pronouncement of orders within 90 days - Covid-19 epidemic - Worldwide lockdown - HELD THAT - We are of the considered view that rather than taking a pedantic view of the rule requiring pronouncement of orders within 90 days, disregarding the important fact that the entire country was in lockdown, we should compute the period of 90 days by excluding at least the period during which the lockdown was in force. We must factor ground realities in mind while interpreting the time limit for the pronouncement of the order. Law is not brooding omnipotence in the sky. It is a pragmatic tool of the social order. The tenets of law being enacted on the basis of pragmatism, and that is how the law is required to interpreted. We are of the considered view that rather than taking a pedantic view of the rule requiring pronouncement of orders within 90 days, disregarding the important fact that the entire country was in lockdown, we should compute the period of 90 days by excluding at least the period during which the lockdown was in force. We must factor ground realities in mind while interpreting the time limit for the pronouncement of the order. Law is not brooding omnipotence in the sky. It is a pragmatic tool of the social order. The tenets of law being enacted on the basis of pragmatism, and that is how the law is required to interpreted.

Issues Involved:
1. Disallowance under Rule 8D(2)(i) and Rule 8D(2)(iii) of the Income Tax Rules.
2. Computation of Book Profit under Section 115JB of the Income Tax Act.
3. Exclusion of strategic investments for computing disallowance under Section 14A read with Rule 8D(2)(iii).
4. Procedural delay in pronouncement of the order due to COVID-19 lockdown.

Issue-wise Detailed Analysis:

1. Disallowance under Rule 8D(2)(i) and Rule 8D(2)(iii) of the Income Tax Rules:
The assessee challenged the disallowance made by the Assessing Officer (AO) under Rule 8D(2)(i) and Rule 8D(2)(iii) of the Income Tax Rules. The AO had disallowed ?2,86,45,152 as direct expenditure related to the Project and Investment Department and further disallowed 0.5% of the average investments held by the assessee, amounting to ?11,06,68,000 under Rule 8D(2)(iii). The CIT(A) upheld the rejection of the assessee's suo motu disallowance but granted partial relief. The Tribunal found that the AO had not provided specific reasons for rejecting the assessee's computation and had merely relied on Rule 8D. It was held that the AO's satisfaction under Section 14A(2) must be independent of Rule 8D, and the AO had erred in invoking Rule 8D(2). The Tribunal directed the AO to accept the assessee's suo motu disallowance of ?6,18,69,000 and delete the additional disallowance.

2. Computation of Book Profit under Section 115JB of the Income Tax Act:
The assessee contended that the expenditure incurred by the Project and Investment Department should not be considered in computing Book Profit under Section 115JB, as the AO had not established that such expenditure represented direct expenditure. The Tribunal did not specifically address this issue in detail, as the primary issue of disallowance under Section 14A was resolved in favor of the assessee, rendering other issues academic and infructuous.

3. Exclusion of Strategic Investments for Computing Disallowance under Section 14A read with Rule 8D(2)(iii):
The AO was aggrieved by the CIT(A)'s direction to exclude strategic investments from the total investment for computing disallowance under Section 14A read with Rule 8D(2)(iii). The Tribunal, however, reiterated its earlier findings that the AO had erred in invoking Rule 8D(2) without independently satisfying the conditions under Section 14A(2). Therefore, the Tribunal directed the AO to delete the additional disallowance and accept the assessee's suo motu disallowance, making this issue academic and infructuous.

4. Procedural Delay in Pronouncement of the Order Due to COVID-19 Lockdown:
The Tribunal acknowledged the delay in pronouncing the order beyond the 90-day period due to the COVID-19 lockdown. It referred to Rule 34(5) of the Income Tax Appellate Tribunal Rules, 1963, which allows for extensions in exceptional and extraordinary circumstances. The Tribunal noted the unprecedented disruption caused by the pandemic and the nationwide lockdown, which justified the delay. It cited relevant judicial precedents and government notifications recognizing the COVID-19 situation as a natural calamity and force majeure event. The Tribunal concluded that the period of lockdown should be excluded from the 90-day time limit for pronouncement of orders, thus validating the delay.

Conclusion:
The appeals filed by the assessee for the assessment years 2013-14 and 2014-15 were allowed, and the appeals filed by the Assessing Officer were dismissed as infructuous. The Tribunal directed the AO to accept the assessee's suo motu disallowance and delete the additional disallowance under Section 14A read with Rule 8D. The procedural delay in pronouncement of the order due to the COVID-19 lockdown was justified and validated.

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