Pr. CIT Vs Vedanta Limited (Delhi High Court)
It is apparent that the Assessing Officer without examining, commenting and rejecting the disallowance made by the respondent-assessee had applied Rule 8D as compulsory and universally applicable rule where the assessee has earned exempt income. However, Rule 8D cannot be invoked and applied unless the Assessing Officer records his dissatisfaction regarding correctness of the claim made by the assessee in relation to expenditure incurred to earn exempt income. This is the mandate and pre-condition imposed by sub-section (2) to Section 14A of the Act. Rule 8D is in the nature of best judgment determination i.e. determination in default and on rejection of the explanation of the assessee in relation to expenditure incurred to earn exempt income. Rule 8D is not applicable by default but only if and when the Assessing Officer records his satisfaction and rejects the explanation of the assessee regarding the disallowance of expenditure. In the present case the assessment order proceeds on a wrong assumption that Rule 8D would applies to all cases and is mandatory.
Sub-sections (2) and (3) of Section 14-A of the Act read with Rule 8-D of the Rules merely prescribe a formula for determination of expenditure incurred in relation to income which does not form part of the total income under the Act in a situation where the assessing officer is not satisfied with the claim of the assessee. Whether such determination is to be made on application of the formula prescribed under Rule 8-D or in the best judgment of the assessing officer, what the law postulates is the requirement of a satisfaction in the assessing officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Sections 14-A(2) and (3) read with Rule 8-D of the Rules or a best judgment determination, as earlier prevailing, would become applicable.
Assessee had rightly submitted that disallowance was also against the principle of consistency in the absence of any facts.
FULL TEXT OF THE ITAT JUDGMENT
CM APPL. 53243/2018(for condonation of delay) in ITA 1467/2018
This is an application for condonation of delay of 59 days in filing of the appeal. The application is not opposed by counsel for the respondent. Accordingly the application is allowed and delay is condoned.
ITA 1467/2018
This appeal by the Revenue under Section 260A of the Income-tax Act 1961 (for short ‘Act’) in the case of Vedanta Ltd (Formerly known as Madras Aluminium Co. Ltd.) relates to the assessment year 2010-2011 and arises from the order dated 10th April, 2018 passed by the Income-Tax Appellate Tribunal (‘Tribunal’, for short).
2. The issue raised by the Revenue relates to the disallowance under Section 14A of the Act. It is an accepted and admitted position that the respondent assessee had earned dividend income of Rs.8.97 crores which was exempted under Section 10(34) of the Act. The said dividend was paid by group companies. The assessee had made self disallowance of Rs. 9,07,453/-.
3. The assessing officer, without examining and referring to the disallowance or recording his dissatisfaction on disallowance made, had invoked and applied Rule 8D of the Income Tax rules, 1962(‘Rules’, for short) as if it was mandatory. This is clear from the relevant portion of the assessment order under the heading expenditure incurred in relation to income not includible in total income under section 14A read with Rule 8D, which for the sake of completeness and clarity is reproduced below:-
“The assessee company filed its return electronically on 28.09.2010 admitting an income of Rs. 81,99,030/-under normal computation and Rs. 168,14,36,980/-u/s 115B of the Act, The return was e-processed U/s 143(1) of the I.T. Act. The case was selected for scrutiny and notice u/s 143(2) of the I.T. Act was issued on 29.08.2011 which was duly served on the assessee company on 06.09.2011.
In response to the above notice and subsequent hearing notice, Sh. Rajkumar Bashak, authorized representative of the assessee company attended from time to time and produced books of account and other details called for. The books of account and details produced were examined.
The assessee company has income from business and income from Short Term Capital Gains during the financial year. The assessee had also claimed deduction u/s 80IA of the I.T. Act on the income generated from eligible unit limited to business income. It is further observed during the examination of books of account that the assessee had not worked out deduction as per Section 14A read with Rule 8D with regard to the expenditure in relation to dividend income on which exemption u/s 10(34) has been claimed. Therefore, the total income as per regular computation has been assessed as follows:-
4. The Commissioner of Income-Tax (Appeals) deleted the said addition on two accounts; firstly, he held that the Assessing Officer had failed to record his objective satisfaction whether the disallowance made by the assessee was appropriate and in accordance with law. He observed that the Assessing Officer had mechanically applied Rule 8D without recording any satisfaction for invoking the said rule. The Rule 8D can be applied only if the assessing officer is not satisfied with the correctness of the claim made by the assessee in respect of the expenditure which the assessee claims to have been incurred in relation to income which does not form part of his total income.
5. The second reason given by the Commissioner of Income-Tax (Appeals) was facts specific. He had recorded the following findings:-
“Further I found disallowance has been worked out mechanically without considering the submissions or referring to the accounts of the assessee. I have examined the annual report of the appellant and it is seen that
