Invocation of rule 8D without recording objective satisfaction by the Assessing Officer is not proper

Issue before tribunal:

• Whether provision of section 14A read with rule 8D can be invoked without recording any satisfaction by AO that the claim made by the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income is incorrect.
• Whether interest income on funds deposited in bank supplied by Govt. for the disbursement to the employees of UPTRON India Limited under the Voluntary Retirement Scheme (VRS) can be taxed in hands of the assessee.

Brief facts:

• AO noticed that some funds was parked by the assessee in bank which was given to it by Govt. via order dated 03.04.1980. AO added interest earned on the said fund to the income of assessee.
• AO has made addition of Rs.40,31,477/- under section 14A read with rule 8D, having noticed that the assessee has shown dividend income of Rs.7,52,120/- which were exempted from tax. He accordingly computed the corresponding expenditure as per rule 8D (iii) of the rules at Rs.40,31,477/- and made addition of the same.
• On appeal CIT (A) following its earlier order rejected the ground of the assessee on interest income on parked funds in bank. Addition u/s 14A r.w.r. 8D was also sustained by him.

Contention of the revenue:

• Interest income should be taxed in the hands of the assessee.
• Claim of the assessee regarding to dividend income was incorrect. Some expenditure must have incurred by the assessee in earning the dividend income which does not form part of the total income.

Contention of the assessee:

• Ground of interest income on parked funds in bank is covered by the order of the Tribunal in the assessee’s own case for assessment years 2005-06 and 2006-7, in which the Tribunal has restored the issue to the file of the Assessing Officer with a direction to re-examine the issue afresh in the light of the order of the State Government dated 3.4.1980.
• Before invoking rule 8D of the rules, the AO has not recorded any finding with regard to the correctness of computation furnished by the assessee.
• The claim of disallowance under section 14A of the Act cannot exceed the income. Assessee relied upon the decision of the Chandigarh Bench of the Tribunal in the case of ACIT vs. Punjab State Coop & Marketing Fed. Ltd. in I.T.A. No. 548/CHD/2011, dated 30.9.2011.
• Whatever investment was made, it was made in the 100% owned subsidiary concerns of the assessee. Since the investment was in 100% owned subsidiaries, no disallowance can be made after invoking the provisions of rule 8D and 14A of the Act.
• Assessing Officer has not recorded satisfaction with regard to the correctness of the computation of disallowance as per rule 8D.

Held by the court:

• Following the order of tribunal in assessee’s own case in earlier years the issue of interest income was restored to the file of AO for fresh examination as per Govt. Order 03.04.1980.
• In the case of M/s JM Financial Limited vs. Addl. CIT (I.T.A. No. 4521/Mum/2012), the Tribunal has examined the issue of recording objective satisfaction by theAO before proceeding for computation of corresponding expenditures as per rule 8D and possibility of disallowance in case where strategic investment was made in the subsidiary companies and the Tribunal has finally concluded that sub-section (2) of section 14A of the Act does not ipso facto empower the AO to apply the method prescribed by Rules straightaway without considering whether the claim made by the assessee is correct.
• Pune Bench of the Tribunal in the case of Kalyani Steels Ltd. vs. Addl. CIT, I.T.A. No. 1733/PN/2012, in which it has been held that the Assessing Officer was required to record objective satisfaction with regard to the correctness of the claim of the assessee which is mandatorily required in terms of section 14A(2) of the Act.
• In the case of DCIT vs. M/s Jindal Photo Limited in I.T.A. No. 814/Del/2011, the Delhi Bench of the Tribunal has also expressed similar view, in which it has been held that satisfaction of the Assessing Officer is pre-requisite to invoke the provisions of Rule 8D. Therefore, in the absence of objective satisfaction by the AO, the disallowance made under rule 8D is not sustainable in the eyes of law.

Conclusion:

In the instant case AO has simply recorded the contention of the assessee not any satisfaction that expenditure was incurred to earn exempted income which was not permissible in eye of law as mentioned and examined by various benches of tribunal and courts.