2024 (12) TMI 1565 - AT - Income Tax

Disallowance u/s 14A r.w.r.8D - expenditure incurred towards earning exempt income - rejection of suo moto disallowance made by the assessee - Mandation to record satisfaction - HELD THAT - AO has not taken into consideration the elaborate details and scientific basis adopted while arriving at the suo-moto disallowance but has proceeded merely on his own presumptions to invoke section 14A r.w.r. 8D. As similar issue has been dealt in assessee s own case for Assessment Year 2007-08 to 2013-14 2020 (11) TMI 809 - ITAT MUMBAI wherein under same computation mechanism the Coordinate Bench accepted the computation mechanism adopted by the assessee as fair and reasonable and directed the AO to restrict the disallowance under section 14A of the Act to the amount which the assessee has suo-moto disallowed in its return of income and delete the disallowance worked out as per Rule 8D. We also find that in CIT v. M/s Asian Paints Ltd. 2019 (2) TMI 819 - BOMBAY HIGH COURT while dismissing the appeal filed by the Revenue on a similar issue held that in the absence of recording of satisfaction in terms of section 14A(2) of the Act invocation of Rule BD is not permissible Adjustment made in computing the book profit for the purpose of Section 115JB - As in the case of Vireet Investment (P) Ltd. 2017 (6) TMI 1124 - ITAT DELHI and held that disallowance under section 14A of the Act as computed in accordance with rule 8D of the Rules cannot be made while computing book profits under section 115JB and the same should be restricted to actual expenditure incurred. In view of the above assessee submitted that the addition made by the ld. Assessing Officer on the basis of disallowance computed u/s.14A of the Act r.w.r. 8D should be deleted and the addition to book profits u/s. 115JB of the Act should be restricted to Rs 904, 943/- being the amount suo motto disallowed which was based on scientific method consistent with previous years. Accordingly the ground taken by the assessee in this respect is allowed. Levy of interest u/s. 234C - We note that the provisions contained in section 234C requires the returned income to be taken into account for the levy of interest. Accordingly we direct the ld. AO to delete the interest so levied computed on assessed income. Accordingly ground taken by the assessee in this respect is allowed.

Summary

The core legal questions considered in this appeal pertain primarily to the disallowance under section 14A of the Income-tax Act, 1961 (the Act) relating to expenditure incurred towards earning exempt income, the applicability of Rule 8D of the Income-tax Rules, 1962 (the Rules), the computation of book profits under section 115JB of the Act, and the levy of interest under section 234C of the Act. The key issues are:

1. Whether the Assessing Officer (AO) was justified in rejecting the assessee's suo-moto disallowance under section 14A and making a disallowance under Rule 8D without recording requisite satisfaction as mandated by section 14A(2) of the Act.

2. Whether the AO was correct in applying Rule 8D only to investments yielding exempt income and restricting disallowance accordingly.

3. Whether the provisions of Rule 8D are automatic or require the AO to record satisfaction regarding the correctness of the assessee's claim before invocation.

4. Whether the disallowance made on a reasonable and scientific basis by the assessee in earlier years should be accepted in the current assessment year.

5. Whether disallowance under section 14A read with Rule 8D can be applied while computing book profits under section 115JB of the Act.

6. Whether interest levied under section 234C of the Act on assessed income instead of returned income is justified.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A and Invocation of Rule 8D Without Recording Satisfaction

Legal Framework and Precedents: Section 14A(2) of the Act mandates that the AO shall determine expenditure incurred in relation to exempt income by a prescribed method only if, having regard to the accounts of the assessee, he is not satisfied with the correctness of the claim made by the assessee. Rule 8D(1) of the Rules similarly requires the AO to record satisfaction regarding the correctness of the claim before invoking its provisions. The Supreme Court in Maxopp Investment Ltd. v. CIT (2018) 402 ITR 640 and Godrej & Boyce Manufacturing Company Ltd. v. DCIT (2017) 394 ITR 449 emphasized that the AO must record an objective satisfaction based on the accounts before applying Rule 8D.

Court's Interpretation and Reasoning: The Tribunal noted that the AO had rejected the assessee's suo-moto disallowance of Rs. 9,04,943/- on the basis of presumptions rather than recording any objective satisfaction regarding the correctness of the claim "having regard to the accounts of the assessee." The AO did not provide cogent reasons for rejecting the scientific and detailed working furnished by the assessee. Mere disagreement or presumptions do not satisfy the statutory requirement.

Key Evidence and Findings: The assessee had apportioned various expenses, including salaries, commission, director's fees, sitting fees, and administrative expenses, on a scientific and consistent basis for computing the suo-moto disallowance. This method had been accepted in earlier years by the Tribunal in identical circumstances. The AO failed to record any satisfaction rejecting this methodology.

Application of Law to Facts: Since the AO did not record the mandatory satisfaction as per section 14A(2) and Rule 8D(1), the invocation of Rule 8D was held impermissible. The Tribunal followed its earlier coordinate bench decisions holding that in the absence of recorded satisfaction, the suo-moto disallowance made by the assessee should be accepted.

Treatment of Competing Arguments: The Revenue relied on the AO's application of Rule 8D and the presumptions about investment-related expenses. However, the Tribunal rejected this approach due to lack of recorded satisfaction and failure to consider the detailed submissions and computations of the assessee.

Conclusion: The disallowance under section 14A read with Rule 8D made by the AO was deleted, and the suo-moto disallowance of Rs. 9,04,943/- made by the assessee was accepted.

2. Application of Rule 8D Only to Investments Yielding Exempt Income

The CIT(A) upheld the AO's direction to apply Rule 8D only in respect of investments yielding exempt income and restrict disallowance accordingly. This approach aligns with the purpose of section 14A, which targets expenditure related to exempt income. The Tribunal did not find any error in this principle and accepted the CIT(A)'s direction in this regard.

3. Requirement of Recording Satisfaction Before Invoking Rule 8D

The Tribunal reiterated that the requirement of recording satisfaction is a pre-condition for invoking Rule 8D. This is not a mere formality but an objective evaluation of the correctness of the assessee's claim based on accounts. The AO's failure to record such satisfaction renders the invocation invalid. This principle is supported by the Supreme Court and Bombay High Court rulings, including the Asian Paints Ltd. case.

4. Acceptance of Consistent Scientific Method of Suo-moto Disallowance Adopted in Earlier Years

The Tribunal relied on its own earlier decisions for assessment years 2007-08 to 2013-14 where the same method of suo-moto disallowance was accepted as scientific and reasonable. Consistency in approach was emphasized to maintain fairness and predictability. The Tribunal applied these precedents mutatis mutandis to the present year, reinforcing the acceptance of the assessee's method.

5. Disallowance under Section 14A and Computation of Book Profit under Section 115JB

Legal Framework and Precedents: Section 115JB provides for Minimum Alternate Tax (MAT) on book profits, which are computed as per Explanation 1 to section 115JB(2) starting from the profit as per profit and loss account prepared under Schedule III of the Companies Act. The Special Bench of the ITAT in Vireet Investment (P.) Ltd. held that disallowance under section 14A read with Rule 8D is not to be applied while computing book profits under section 115JB.

Court's Interpretation and Reasoning: The Tribunal observed that section 115JB is a separate code and does not refer to disallowances under section 14A. Since section 14A disallowance is a fiction for normal income tax purposes, it cannot be superimposed on the book profit computation. Instead, only actual expenditure debited to profit and loss account related to exempt income can be added back.

Application of Law to Facts: The assessee had debited Rs. 9,04,453/- as expenditure related to exempt income in its profit and loss account. The Tribunal directed that this amount alone be added back in computing book profits for section 115JB, deleting the addition based on disallowance computed under section 14A read with Rule 8D.

Conclusion: The addition made by the AO to book profits on the basis of section 14A disallowance was deleted, and the book profit adjustment was restricted to actual expenditure debited.

6. Levy of Interest under Section 234C

Legal Framework: Section 234C levies interest for deferment of advance tax payments based on the tax due on the returned income, not the assessed income.

Court's Interpretation and Reasoning: The Tribunal noted that the AO levied interest under section 234C on the assessed income rather than the returned income, which is contrary to the statutory provision.

Conclusion: The Tribunal directed deletion of interest levied under section 234C and held that interest should be computed only on the basis of returned income.

Significant Holdings:

"The satisfaction arrived at by ld. Assessing Officer in terms of the above provisions is not just a mere disagreement with the submissions made by the assessee but has to be an objective satisfaction by taking into consideration the methodology adopted by the assessee for the claim made by it and then arriving at a satisfaction accepting or rejecting the same having regard to the accounts of the assessee."

"In the absence of recording the aforesaid fact of non-satisfaction in terms of Section 14A(2) of The Act, invocation of Rule 8D is not permissible."

"Section 115JB of the Act is a separate code and it does not refer to any disallowance made under section 14A of the Act read with Rule 8D of the Rules while arriving at the book profits for the purpose of section 115JB(2) of the Act."

"Provisions contained in section 234C requires the returned income to be taken into account for the levy of interest."

Core principles established include the mandatory requirement of recording AO's satisfaction based on accounts before invoking Rule 8D, the non-automatic nature of Rule 8D, the non-applicability of section 14A disallowance while computing book profits under section 115JB, and the correct basis for levy of interest under section 234C.

Final determinations are that the suo-moto disallowance made by the assessee under section 14A is to be accepted in the absence of AO's recorded satisfaction; disallowance under section 14A read with Rule 8D cannot be invoked without such satisfaction; book profit computation under section 115JB shall exclude disallowance under section 14A read with Rule 8D and include only actual expenditure; and interest under section 234C must be computed on returned income, not assessed income. Accordingly, the appeal is allowed on all these grounds.