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TMI Blog2022 (7) TMI 1362X X X X Extracts X X X X X X X X Extracts X X X X ..... ly after recording satisfaction by the AO in terms of provisions of Sec.14A r.w.r.8D of the Rules. As noted from the assessment order and the order of the CIT(A) that there is no discussion about any expenditure which is relatable to exempt income and how the AO recorded the satisfaction and in our considered view, the AO has not carried out any analysis of the accounts or he has not gone into the accounts despite complete books of accounts were produced before him and has not rejected the disallowance suo moto offered by the assessee. According to us, the mandate given by the provisions of Sec.14A(2) and Rule 8D(2) of the Rules, as regards to recording of satisfaction by the AO qua correctness of the accounts of the assessee for the expenditure claimed qua exempt income is absent and hence, on this very issue, we reverse the order of the lower authorities and allow this jurisdictional issue in favour of the assessee. X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst this judgment has been dismissed by the Hon'ble SC. SLP(C) No.11379 of 2018 dated 07.09.2018 (259 Taxman 83). ii. Marg Limited Vs CIT [2020] 120 Taxmann.com 84 (Madras) iii. CIT Vs Taikisha Engineering India Ltd (229 Taxman 143) Delhi HC. iv. CIT Vs I P Support Services India P Ltd (378 ITR 240) Delhi HC. 8. The CIT(A) erred in not appreciating the fact that in the appellant's case the ITAT Chennai in their orders in 1.T.A No.1766 / Chny / 2019 dated 16.12.2019 for the assessment year 2013-14, has deleted the addition made u/s.14A r.w.rule 8D as the Assessing Officer has not recorded any findings as to the correctness or otherwise of the appellant's claim that only expenditure of Rs.73,602/- was incurred to earn exempt income. 3. Brief facts of the case are that the AO on perusal of financials of the assessee noted that the assessee company has made investment in shares of associate and other companies, mutual funds and government securities and earned dividend income of Rs.240,66,89,000/- from such investment of Rs.3739,48,95,000/-. The AO noted that the assessee has suo moto disallowed a sum of Rs.10,66,916/- as expenses relatable to earning of di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rules. The Ld.Counsel for the assessee took us through the assessment order Para No.5.1, wherein the AO noted as under: 5.1 On perusal of the financials of the assessee shows that the assessee has investments in shares of associate and other companies, mutual funds and government securities. The assessee has received a dividend income of Rs.240,66,89,000/- from such investments of Rs.3 39,48,95,000/- However the assessee has suo moto disallowed Rs.10,66,916/- as expenses pertaining to earning the above dividend income. However, since disallowance u/s.14A is to be' made by applying the procedural provisions laid down under rule 8D, the assessee was asked to show-cause as to why expenditure in relation to exempted income cannot be disallowed as per u/s 14A r.w.r. 8D. In response, the Assessee Company vide letter dated 28/12/2018 has submitted as follows: We hereby clarifying that the AO has not re-produced the assessee's explanation submitted vide letter dated 28.12.2018 and this portion of the order is left blank. 7. The Ld.Counsel for the assessee took us through Para No.5.3 of the assessment order, wherein he has interpreted the CBDT Circular issued vide No.5/2014[F.No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of Sec.14A(2) r.w.r.8D(2)(i) very categorically requires that the AO first has to satisfyy himself about the correctness of claim made by the assessee by making suo moto disallowance that the expenses relatable to exempt income already disallowed by the assessee is sufficient or not and moreover, he has to record satisfaction qua the amount of expenditure incurred in relation to such income, which does not form part of total income under this Act in accordance with such method as prescribed u/r.8D of the Rules and if the AO having regard to the accounts of the assessee, is not satisfied with the correctness of claim made by the assessee, in respect to such expenditure in relation to income which does not form part of total income under this Act, in that eventuality only he has to resort to the formula prescribed u/r.8D of the Rules. The Ld.Counsel for the assessee also took us through Rule 8D(1), which also mandates recording of satisfaction by the AO for invoking of formula prescribed under rule 8D of the Rules. The Ld.Counsel for the assessee stated that this issue is squarely covered by the decision of the Hon'ble Supreme Court in the case of Maxopp Investment Ltd. v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n this order at Para No.7) as pointed out by the Ld.Counsel for the assessee on a specific query whether the copy of show cause notice issued by the AO is available, he referred to his Paper Book consisting of Pages 1-166 and particularly, he drew our attention to Page No.34, where show cause notice issued is enclosed and the relevant queries raised by the AO in the show cause notice reads as under: Government of India Ministry of Finance Income Tax Department Office of the Assistant Commissioner of Income Tax Corporate Circle-6(1), Chennai To Shriram Capital Ltd., 4, Shriram House, Burkit Road, T.Nagar, Chennai-600 017, Tamil Nadu, India PAN: AABCS 2726 B AY: 2017-18 DIN & Notice No. ITBA/AST/F/143(3)(SCN)/2019- 20/1023343877(1) Dated: 28.12.2019 Hearing Date & Time: 30.12.2019 10:00 AM SHOW CAUSE NOTICE 1. On perusal of your financials, it is seen that you have made payment to Shriram Ownership Trust for Artistic copy Right Fee of Rs.5,41,49,057/-. Hence, please explain the purpose of your payment and so as to why it should not be treated as capital in nature as per provision of section 32. 2. In light of above observations please furnish the followin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed80, if 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. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act: 14. Similarly, we have gone through the Rule 8D(1) which provides when the AO can exercise this power before invoking of formula, he has to record satisfaction as regards the correctness of claim expenditure made by the assessee. The relevant Rule 8D(1) reads as under: "…..(1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year,is not satisfied with - (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO. 17. We also gone through the case law cited by the ld.CIT-DR, Dr.S.Palani Kumar, of Hon'ble Delhi High Court in the case of India Bulls Finance Ltd. (supra), wherein the Hon'ble High Court has discussed in Para No.8 that AO has carried out elaborate analysis in regard to the expenditure incurred by the assessee in relation to exempt income and the Hon'ble High Court has recorded this finding in Para No.8 as under: "….8. In this instance the elaborate analysis carried out by the AO - as indeed the three important steps indicated by him in the order, shows that all these elements were present in his mind, that he did not expressly record his dissatisfaction in these circumst ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee furnish an objective basis for the Assessing Officer to arrive at a satisfaction in regard to the correctness of the claim of the assessee of the expenditure which has been incurred in relation to income which does not form part of the total income, there would be no warrant for taking recourse to the method prescribed by the rules. For, it is only in the event of the Assessing Officer not being so satisfied that recourse to the prescribed method is mandated by law. Sub section (3) of Section 14A provides for the application of sub section (2) also to a situation where the assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under the Act. Under the proviso, it has been stipulated that nothing in the section will empower the Assessing Officer, for an Assessment Year beginning on or before 1 April 2001 either to reassess under Section 147 or pass an order enhancing the assessment or reducing the refund already made or otherwise increasing the liability of the assessee under Section 154. 34. The circumstances in which the provisions of sub sections (2) and (3) were introduced by an amendment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expenditure under section 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. 22. We, therefore, 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 Assesee 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. 20. As in the present case before us, we noted from the assessment order and the order of the CIT(A) that there is no discussion about any expenditure which is relatable to exempt income and how the AO recorded the satisfaction and in our con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2116,63,27,000/- + Rs.2128,40,84,000/-) / 2 = 2122,52,05,500/- 1% of average of investments = Rs.21,22,52,055/- Total 14A disallowance under Rule 8D = Rs.21,22,52,055/- However, the Assessing Officer restricted the total disallowance to the extent of total expenditure claimed in the P & L A/c by the assessee to the extent of Rs.5,65,000/- and by giving credit for suo moto disallowance of Rs.1,05,588/-, he worked the disallowance of remaining expenses at Rs.4,60,181/-. 25. Aggrieved, the assessee preferred an appeal before the Ld.CIT(A) and the Ld.CIT(A) also confirmed the action of the AO on the issue of recording of satisfaction by observing in Para No.5.1.2 as under: 5.1.2 The Appellant contended that A.O did not record his satisfaction for applying Rule 8D for computation of disallowance. However, the A.O, in the assessment order, discussed in details the background of the case and particulars of Appellant's investment and other details in this regard. From this, his satisfaction for necessity to examine Appellant's case and bring it within the scope of examination for applying provisions of sec. 14A r.w.r 8D is discernible. Hence, this objection of the Appel ..... X X X X Extracts X X X X X X X X Extracts X X X X
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