Essilor India Pvt. Ltd. Vs DCIT (Karnataka High Court)
Summary: The Karnataka High Court in Essilor India Pvt. Ltd. Vs Deputy Commissioner of Income Tax considered whether the Assessing Officer could invoke Section 14A of the Income-tax Act, 1961, read with Rule 8D of the Income-tax Rules, 1962, without recording dissatisfaction with the assessee’s expenditure claim. The appeal concerned Assessment Year 2008–09. Essilor India Pvt. Ltd., engaged in processing and trading ophthalmic lenses, had received dividend income of ₹36,97,500 from its subsidiary GKB RX Lens Pvt. Ltd., in which it held a 50% shareholding. The dividend was claimed as exempt under Section 10(34). The Assessing Officer initially disallowed ₹34,21,059 as expenditure attributable to earning exempt income.
Following an unsuccessful appeal before the Commissioner of Income Tax (Appeals), the Tribunal remitted the matter to the Assessing Officer for reconsideration. During the fresh proceedings, the assessee voluntarily offered ₹1,61,035 as disallowance, based on the proportionate allocation of employee salary and travel expenditure connected with attending the subsidiary’s board meetings. Nevertheless, the Assessing Officer again disallowed ₹34,21,059 by order dated 9 February 2015. The CIT(A) upheld that order on 5 July 2016, and the Tribunal dismissed the assessee’s appeal on 7 July 2017, leading to the present appeal under Section 260A.
The assessee contended that the Assessing Officer had not recorded satisfaction that its voluntary disallowance was incorrect, making the additional disallowance unsustainable. It relied on the judgments in Hindustan Aeronautics Ltd. v. ACIT, Godrej & Boyce Manufacturing Co. Ltd. v. DCIT, and Eicher Motors Ltd. v. CIT. The Revenue argued that the necessary satisfaction had been recorded and that the prescribed Rule 8D computation was justified. It alternatively submitted that the assessee’s own disallowance should be upheld.
The High Court explained that Section 14A(2) and Rule 8D(1) require the Assessing Officer to examine the assessee’s accounts and record reasons for disagreeing with the correctness of the expenditure claim before applying the prescribed method. Referring to the Supreme Court’s decision in Godrej & Boyce Manufacturing Co. Ltd., it examined paragraphs 7 to 14 of the assessment order and found that the Assessing Officer had failed to record the requisite satisfaction regarding expenditure beyond the ₹1,61,035 offered by the assessee.
The Court therefore answered the substantial question of law in the negative and restricted the disallowance under Section 14A read with Rule 8D to ₹1,61,035. The orders of the Assessing Officer, CIT(A) and Tribunal were modified accordingly, and the Assessing Officer was directed to disallow only that amount. The assessee’s appeal was disposed of on that basis.
Cases Discussed
- Hindustan Aeronautics Ltd. v. ACIT and Another, (2021) 125 taxmann.com 80 (Karnataka High Court) — Cited by the assessee in support of its challenge to disallowance without recorded satisfaction.
- Godrej & Boyce Manufacturing Company Ltd. v. DCIT, (2017) 81 taxmann.com 111 (Supreme Court) — Relied upon for the mandatory requirement that the Assessing Officer record dissatisfaction with the assessee’s claim before invoking Rule 8D.
- Eicher Motors Ltd. v. CIT, (2017) 86 taxmann.com 49 (Delhi High Court) — Cited by the assessee in support of its argument against additional disallowance.
FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT
This appeal under Section 260-A of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’, for short) has been filed by the assessee. The subject matter of the appeal pertains to the Assessment Year 2008-09. The appeal was admitted by a Bench of this Court on the following substantial question of law:
The tribunal was right in upholding the disallowance under Section 14A of the Act read with Rule 8D of the Rules, although no satisfaction had been recorded by the assessing officer to the effect that the disallowance proposed to the extent of Rs.1,61,035/- by the appellant was incorrect?
2. Facts leading to filing of this appeal briefly stated are that the assessee is engaged in the business of processing and trading of ophthalmic lenses. The assessee received dividend of Rs.36,97,500/- from its subsidiary viz., GKB RX Lens Pvt. Ltd. in which assessee held 50% shares. The assessee filed its return of income for assessment Year 2008- 09 in which assessee claimed the aforesaid dividend income which was received during assessment year 2008-09 as exempt under Section 10(34) of the Act. The Assessing Officer passed an order of assessment dated 28.10.2010 and disallowed a sum of Rs.34,21,059/- under Section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 (hereinafter referred to as ‘the Rules’ for short) as being expenditure which was incurred towards earning the exempt income.
3. The Commissioner of Income Tax (Appeals) by an order dated 27.07.2012 dismissed the appeal. Being aggrieved, the assessee filed an appeal before the tribunal. The tribunal remitted the matter back to the file of Assessing officer to examine the disallowance under Section 14A of the Act afresh with a direction to examine the contention of the assessee that no expenses were incurred by it in earning the exempt income. In the proceeding initiated to give effect to the order of the tribunal, the assessee made a voluntary disallowance of Rs.1,61,035/- under Section 14A on the basis of proportionate allocation of salary and travel costs of employees traveling through GKB RX Pvt. Ltd to attend Board Meetings.
4. The assessing officer however, by an order dated 09.02.2015 again made a disallowance to the extent of Rs.34,21,059/- under Section 14A of the Act read with Rule 8D of the Rules. The Commissioner of Income tax (Appeals) by an order dated 05.07.2016 upheld the order passed by the assessing officer. The appeal filed by the assessee was dismissed by the tribunal by an order dated 07.07.2017. In the aforesaid factual background, this appeal has been filed.
5. Learned Senior counsel for the assessee submitted that no further disallowance beyond the disallowance of Rs,1,61,035/- under Section 14A read with Rule 8D of the Rules could be made. It is further submitted that in the order of assessment, the assessing officer has not recorded the satisfaction that disallowance made by the assessee was incorrect and in the absence of the satisfaction recorded by the assessing officer with regard to incorrectness of the claim of the assessee, no further disallowance by the assessing officer could have been made. Learned Senior counsel for the assessee has fairly submitted that in any case, disallowance under Section 14A of the Act read with Rule 8D has to be confined in respect of the claim made by the assessee to the extent of Rs.1,61,035/-. In support of aforesaid submissions, reliance has been placed on decisions in ‘HINDUSTAN AERONAUTICS LIMITED S. ACIT AND ANOTHER’, (2021) 125 TAXMANN.COM 80, ‘GPDREK & BOYCE MANUFACTURING COMPANY LTD. VS. DCIT’, (2017) 81 TAXMANN.COM 111 (SC), and ‘EICHER MOTORS LTD. VS. CIT’, (2017) 86 TAXMANN.COM 49 (DELHI).
6. On the other hand, learned counsel for the revenue submitted that the assessing officer in his order has recorded the required satisfaction and therefore, condition precedent for invocation of power under Section 14A read with Rule 8D of the Rules, has been fulfilled. It is also urged that application of the formula prescribed in rule 8D is justified. It is alternatively argued that in any case disallowance made to the extent as claimed by the assessee has to be upheld.
7. We have considered the submissions made on both sides and have perused the record. Section 14A of the Act deals with expenditure in relation to income not includable in total income. Section 14A(2) provides that assessing officer shall determine 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 may be prescribed, if the Assessing Officer having regard to the accounts of the assessee is not satisfied with the correctness of the claim of assessee in respect of such expenditure in relation to income which does not form part of total income under this Act. It is well settled in law that assessing officer has to record reasons for disagreeing with the claim of the assessee that it had incurred no expenditure for earning such exempt income. Even Rule 8D(1)” target=”_blank” rel=”noopener”>Rule 8D(1) requires the assessing officer to mandatorily record his satisfaction that the claim made by the assessee that no expenditure has been incurred in earning the exempt income is incorrect. [See:’GODREJ & BOYCE MANUFACTURING COMPANY LTD. VS. DCIT’, (2017) 81 TAXMANN.COM 111 (SC)]
8. Now we may advert to the facts of the case and examine whether the assessing officer has recorded satisfaction with regard to the correctness of the claim made by the assessee in respect of such expenditure in relation to the exempt income. The assessee has made disallowance of Rs.1,61,035/- under Section 14A of the Act read with Rule 8D of the Rules. From the perusal of the order passed by the assessing officer and in particular paragraph 7 to 14, it is evident that the assessing officer has failed to record its satisfaction with regard to the claim of the assessee that it had incurred any expenses in earning the exempt income except a sum of Rs.1,61,035/-. Therefore, in the absence of any satisfaction recorded by the assessing officer, the substantial question of law has to be answered in the negative. However, as fairly stated by learned Senior counsel that disallowance to the extent of Rs.1,61,035/- which was proposed by the assessee itself has to be upheld. Therefore, the disallowance under Section 14A of the Act read with Rule 8D of the Rules is confined to the extent of Rs.1,61,035/-. To the aforesaid extent, the orders passed by the Income Tax Appellate Tribunal, Commissioner of Income Tax (Appeals and the Assessing Officer are modified. The Assessing Officer is directed to disallow a sum of Rs.1,61,035/- under Section 14A of the Act read with Rule 8D of the Rules.
Accordingly, the appeal is disposed of.
