Case Law Details
Smartchem Technologies Ltd. Vs. ACIT (ITAT Mumbai)
There is no reference to any of the fact-situation or any credible reasoning or material by the assessing officer before rejecting the plea of the assessee and proceeding to determine the dis allowance by applying the formula contained in rule 8D of the Rules. In fact, the phraseology of section 14A of the Act itself specifies that the satisfaction contemplated is required to be arrived at “having regard to the accounts”, an approach which is conspicuous by its absence in the present case. Therefore, in view of such an inadequacy in the action of the assessing officer, it has to be held that the satisfaction contemplated under section 14A(2) of the Act has not been recorded by the assessing officer and thus, he has failed to comply with the condition precedent before embarking on applying the formula contained in rule 8D of the Rules in order to compute the dis allowance under section 14A of the Act. Thus, in our considered opinion, on this aspect itself, the determination of dis allowance made by the assessing officer at Rs. 9,95,080 is untenable.
Full Text of the ITAT Order is as follows:-
The captioned are six appeals relating to the same assessee for different assessment years involving a common issue, therefore, they have been clubbed and heard together, and a consolidated order is being passed for the sake of convenience and brevity.
2. Since it was a common point between the parties that the facts and circumstances are similar in all the assessment years, the appeal for the assessment year 2008-09 in ITA No. 7014/Mum/2013 is taken up as the lead case. This appeal by the assessee is directed against the order of Commissioner (Appeals)-36, Mumbai dated 16-9-2013, pertaining to the assessment year 2008-09, which in turn has arisen from the order passed by the assessing officer dated 29-12-2011 under section 143(3) read with section 153A of the Income Tax Act, 1961 (in short ‘the Act’).
3. The solitary grievance of the assessee is with regard to the dis allowance computed by the income-tax authorities under section 14A of the Act. In brief, the relevant facts are that in response to a notice issued under section 153A of the Act assessee filed its return of income for the assessment year 2008-09 declaring a total income of Rs. 20,47,66,430, which was subject to a scrutiny assessment under section 143(3) read with section 153A of the Act, whereby the total income has been assessed at Rs. 20,57,61,510 after making an addition of Rs. 9,95,080 on account of section 14A of the Act. The aforesaid dis allowance has since been affirmed by the Commissioner (Appeals) also and is accordingly in dispute before us.
4. At the time of hearing, while explaining the factual matrix, the learned representative for the assessee pointed out that during the year under consideration, assessee- company had earned dividend income of Rs. 1,15,57,760, which was claimed as exempt. In the return of income, assessee made a suo motu dis allowance under section 14A of the Act of Rs. 57,790, which was 0.50% of the exempt income. However, the assessing officer by applying the provisions of rule 8D of the Income Tax Rules, 1962 (in short ‘the Rules’), determined the dis allowance under section 14A of the Act at Rs. 9,95,080. This action of the assessing officer has since been affirmed by the Commissioner (Appeals) also, against which assessee is in further appeal before us.
5. Before us, the learned representative for the assessee vehemently pointed out that the action of assessing officer in adding a sum of Rs. 9,95,080 to the returned income on account of dis allowance under section 14A of the Act is untenable. Firstly, it is sought to be pointed out that the assessing officer has not recorded the satisfaction contemplated under section 14A(2) of the Act to the effect that the dis allowance computed by the assessee was incorrect. It has been canvassed that only after recording such a satisfaction, in an objective manner, about the incorrectness of assessee’s claim, that the assessing officer could have invoked rule 8D of the Rules in order to compute the dis allowance. Secondly, it is sought to be pointed out that the assessing officer was required to demonstrate the nexus between the expenses sought to be disallowed and the exempt income, which has not been done, and rather the dis allowance has been mechanically computed at Rs. 9,95,080 by applying rule 8D of the Rules. At the time of hearing, the learned representative has also referred to the written communications addressed to the assessing officer dated 15-12-2011 and 21-12-2011 placed at pages 49 to 52 and 53 to 58 of the Paper Book respectively, wherein assessee had duly explained the manner and justification for estimating the dis allowance at Rs. 57,790. It has been asserted that, on the contrary, the assessing officer has not given any reasons to disregard the claim of the assessee and invoke rule 8D of the Rules, which could not have been automatically invoked except in the circumstances permitted by section 14A(2) of the Act. In the course of hearing, reference has been made to the judgment of Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT (2010) 328 ITR 81 and also the judgment of the Hon’ble Supreme Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT (2017) 394 ITR 449 (SC) in support of the case of the assessee.
6. On the other hand, the learned Commissioner (Appeals)–Departmental Representative appearing for the Revenue has defended the case of the Revenue by placing reliance on the orders of the authorities below. The learned Commissioner (Appeals)–Departmental Representative referred to the discussion in the order of Commissioner (Appeals) to contend that it was not feasible to accept that substantial dividend income could have been earned by incurring the nominal expenditure as claimed by the assessee.
7. We have carefully considered the rival submissions. section 14A of the Act stipulates that no deduction shall be allowed in respect of an expenditure incurred by the assessee in relation to an income which does not form part of the total income under the Act. In the instant case, assessee earned dividend income of Rs. 1,15,57,760 and in the return of income, it made a suo motu dis allowance of Rs. 57,790 as being expenditure covered by the dis allowance envisaged under section 14A of the Act. Notably, the assessing officer has differed with the assessee on the amount of such expenditure, which according to him, is to be determined by application of the formula contained in rule 8D of the Rules at Rs. 9,95,080. Essentially, the dispute between the assessee and the Revenue pertains to the quantification of dis allowance envisaged under section 14A of the Act and insofar as the applicability of section 14A of the Act is concerned, there is no dispute.
8. In the above background, now we may proceed to adjudicate the controversy in the present case. section 14A(1) of the Act prescribes that for the purposes of computing the total income under Chapter IV of the Act, no deduction shall be allowed in respect of an expenditure incurred by the assessee in relation to an income which does not form part of the total income under the Act. Sub-section (2) of section 14A of the Act, inter alia, lays down the manner in which the amount of expenditure incurred in relation to an income which does not form part of the total income is to be determined. So, however, the phraseology of Sub-section (2) of section 14A of the Act itself makes it clear that the assessing officer is entitled to proceed to determine the amount of expenditure incurred in relation to an exempt income only after recording a satisfaction about the incorrectness of the claim of the assessee in respect of such expenditure. It is a well-settled proposition that recording of such satisfaction is a condition precedent for the assessing officer before proceeding to determine the amount of expenditure incurred in relation to an exempt income, the prescribed method being the formula contained in rule 8D of the Rules. Sub-section (3) of section 14A of the Act is really another facet of Sub-section (2) inasmuch as Sub-section (3) applies in a situation where assessee claims that no expenditure has been incurred by him in relation to an income which does not form part of the total income, whereas Sub-section (2) applies in a situation where the assessee makes determination of certain amount of expenditure in relation to income which does not form part of the total income. So, however, the requirement of recording the satisfaction contemplated under Sub-section (2) of section 14A of the Act is applicable in the context of Sub-section (3) also. The aforesaid legal position is aptly supported by the judgment of the Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra) as well as the Hon’ble Delhi High Court in the case of Maxopp Investment Ltd. v. CIT (2012) 347 ITR 272. We are saying so in the present case for the reason that the initial plea raised by the assessee before the assessing officer was that it has incurred no expenditure in relation to the exempt income. At the time of hearing, the learned representative has also referred to the recent judgment of the Hon’ble Supreme Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra) wherein the requirement of recording of satisfaction by the assessing officer, as contemplated in Sub-section (2) of section 14A of the Act, before he can proceed to determine the dis allowance by application of the formula contained in rule 8D of the Rules has been upheld.
9. As to the nature of such satisfaction, which is contemplated under section 14A(2) of the Act, the Hon’ble Bombay High Court has explained that such satisfaction has to be arrived at on an objective basis, having regard to the accounts of the assessee. The Hon’ble Punjab & Haryana High Court in the case of CIT v. Abhishek Industries Ltd. (2016) 380 ITR 652 (Punj & Har.), speaking in the context of the satisfaction contemplated under section 14A(2) of the Act, explained that such satisfaction has to be “on the basis of clear and cogent material” and not merely “by recording general observation”. In this background, we may now examine the manner in which the claim of the assessee has been dealt with by the assessing officer in the process of applying formula contained in rule 8D of the Rules in order to compute the dis allowance under section 14A of the Act.
10. We have perused the relevant discussion in the assessment order, which is quite sketchy. There is no reference to any of the fact-situation or any credible reasoning or material by the assessing officer before rejecting the plea of the assessee and proceeding to determine the dis allowance by applying the formula contained in rule 8D of the Rules. In fact, the phraseology of section 14A of the Act itself specifies that the satisfaction contemplated is required to be arrived at “having regard to the accounts”, an approach which is conspicuous by its absence in the present case. Therefore, in view of such an inadequacy in the action of the assessing officer, it has to be held that the satisfaction contemplated under section 14A(2) of the Act has not been recorded by the assessing officer and thus, he has failed to comply with the condition precedent before embarking on applying the formula contained in rule 8D of the Rules in order to compute the dis allowance under section 14A of the Act. Thus, in our considered opinion, on this aspect itself, the determination of dis allowance made by the assessing officer at Rs. 9,95,080 is untenable.
11. Even otherwise, we find that in its written submissions made to the assessing officer during the assessment proceedings, copies of which are placed in the Paper Book, assessee had explained the manner and justification for estimating such expenditure at Rs. 57,790 and there is nothing on record to suggest as to why the same has been disregarded by the assessing officer. Therefore, in consequence, it has to be held that the dis allowance of Rs. 9,95,080 made by the assessing officer over and above the suo motu dis allowance made by the assessee is unjustified and is directed to be deleted.
12. In the result, the appeal of the assessee in ITA No. 7014/Mum/2013 for assessment year 2008-09 is allowed.
13. At the time of hearing, it was a common point between the parties that the facts and circumstances in ITA Nos. 7015 & 7016/Mum/2013 and 5021 to 5023/Mum/2013 are pari materia to those considered by us in ITA No. 7014/Mum/2013 for assessment year 2008-09, therefore, our decision therein shall apply mutatis mutandis in the said appeals also.
