2022 (4) TMI 868 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - Mandation of recording satisfaction - voluntary disallowance made u/s 14A - CIT(A) directed the AO to exclude the investments made by the assessee in subsidiary companies after proper verification from the calculations in the Rule 8D(2) r.w. section 14A in computing the regular income - HELD THAT - AO has not recorded any satisfaction as to how the disallowance voluntarily made by the assessee is not correct and moreover AO has not given any findings in the assessment order with regard to the correctness in respect of expenditure incurred to earn exempt income. DR could not controvert the decision of the Hon ble Supreme Court in the case of Maxopp Investment Ltd. 2018 (3) TMI 805 - SUPREME COURT which was followed by the Coordinate Benches of the Tribunal in assessee s own case for the assessment year 2013-14 2017 (5) TMI 1702 - ITAT CHENNAI to decide the issue in favour of the assessee. Thus respectfully following the decision of the Coordinate Benches of the Tribunal in assessee s own case for the assessment year 2013-14 as well as the decision of the Hon ble Supreme Court in the case of Maxopp Investment Ltd. v. CIT (supra) we hold that the Assessing Officer was not justified in making disallowance under section 14A of the Act. Thus the ground raised by the assessee is allowed. Exclusion of the disallowance under section 14A for disallowance u/s 115JB - HELD THAT - As in the case of Sobha Developers Ltd. v. DCIT 2021 (1) TMI 378 - KARNATAKA HIGH COURT wherein it was held that the disallowance made under section 14A of the Act could not be added to book profits of the assessee under section 115JB. Royalty payment as revenue expenditure - HELD THAT - Against the disallowance of royalty payment by following the decisions of the Tribunal in assessee s own case for the assessment years 2012-13 and 2013-14 the ld. CIT(A) directed the Assessing Officer to allow the royalty payment by treating it as revenue expenditure. Thus we find no infirmity in the order passed by the ld. CIT(A). Just because the Revenue has filed an appeal against the order of the Tribunal before the Hon ble Madras High Court we cannot take a different view until and unless the decision of the Tribunal has been reverted or modified. Accordingly the ground raised by the Revenue stands dismissed.

Summary

Issues Involved:

1. Disallowance under Section 14A read with Rule 8D.
2. Exclusion of disallowance under Section 14A while computing book profit under Section 115JB.
3. Disallowance of royalty payments.

Issue-wise Detailed Analysis:

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

The primary issue revolves around the disallowance of ?34,28,05,564 under Section 14A read with Rule 8D by the Assessing Officer (AO) for the assessment year (AY) 2012-13. The assessee had suo motu disallowed ?8,000 towards expenses incurred for earning exempt income. The AO did not record any satisfaction regarding the correctness of the assessee's disallowance and made an additional disallowance of ?34,28,05,564. The CIT(A) directed the AO to restrict the disallowance to ?17,10,42,084 and exclude the disallowance under Section 14A while computing book profit under Section 115JB. The Tribunal, relying on the Supreme Court decision in Maxopp Investment Ltd. v. CIT (2018) and the Tribunal's decision in the assessee's own case for AY 2013-14, held that the AO was not justified in making the disallowance under Section 14A without recording satisfaction. Consequently, the Tribunal allowed the assessee's appeal and dismissed the Revenue's appeal.

2. Exclusion of disallowance under Section 14A while computing book profit under Section 115JB:

For AY 2012-13, the AO included the disallowance of ?34,28,05,564 under Section 14A while computing the book profit under Section 115JB. The CIT(A) directed the AO to exclude this disallowance, which was contested by the Revenue. The Tribunal upheld the CIT(A)'s decision, referencing the Karnataka High Court's judgment in Sobha Developers Ltd. v. DCIT (2020), which held that the disallowance under Section 14A could not be added to book profits under Section 115JB. The Tribunal dismissed the Revenue's appeal on this ground for both AY 2012-13 and AY 2014-15.

3. Disallowance of royalty payments:

For AY 2014-15, the AO disallowed royalty payments of ?69,81,626. The CIT(A), following the Tribunal's decisions in the assessee's own case for AY 2012-13 and AY 2013-14, directed the AO to treat the royalty payments as revenue expenditure. The Revenue appealed, arguing that the matter was pending before the Madras High Court. The Tribunal found no infirmity in the CIT(A)'s order and dismissed the Revenue's appeal, stating that the Tribunal's decision should stand unless reverted or modified by a higher court.

Conclusion:

The Tribunal allowed the assessee's appeals and dismissed the Revenue's appeals for both AY 2012-13 and AY 2014-15. The key takeaways include the necessity for the AO to record satisfaction before making disallowances under Section 14A, and the exclusion of such disallowances while computing book profits under Section 115JB, as supported by relevant case laws. The royalty payments were also upheld as revenue expenditure based on previous Tribunal decisions.