TMI Blog2022 (8) TMI 354X X X X Extracts X X X X X X X X Extracts X X X X ..... that where the expenses was not supported bills/vouchers the disallowance equivalent to 5% of such expenditure was justified. - Decided partly in favour of assessee. - ITA No.81/Lkw/2021 - - - Dated:- 4-8-2022 - Shri A.D. Jain, Vice President And Shri T. S. Kapoor, Accountant Member For the Appellant : Shri P.K. Kapoor, CA For the Respondent : Shri Harish Gidwani, DR ORDER PER T.S. KAPOOR, A.M.: This is an appeal filed by the assessee against the order of ld. CIT(A), dated 16.07.2021.The grounds of appeal taken by the assessee are reproduced below: 1. The Ld. Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi was wrong in law on facts confirming the following additions/ disallowances as made by the Ld. Assessing Officer: a) Rs. 95,000/- -- Addition/Disallowance U/s 14A read with Section 8(2)(iii) b) Rs. 97,133/- --- Disallowance out of Salary Wages amounting to Rs. 30,05,333/- 2. The Ld. Commissioner of Income Tax (Appeals), National Faceless Appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... R further submitted that though the disallowance u/s. 14A read with Rule 8D is mandatory but Assessing Officer before proceeding to make disallowance u/s. 14A of the Act has to record an objective satisfaction so as to state as to how he was not satisfied with the disallowance/or no disallowance made by the assessee. Our attention was invited to the order of Assessing Officer where he has made such disallowance and it was submitted that Assessing Officer has held that assessee has made investments of Rs.1,90,00,000/- during the year which fact is wrong in itself as is apparent from the copy of balance sheet where the investment is appearing as same as in earlier year and therefore the finding of AO that investment was made during the year is wrong. The ld. AR submitted that in view of the above no objective satisfaction has been made by the Assessing Officer and therefore disallowance made by Assessing Officer and upheld partly by ld. CIT(A) is not sustainable. Reliance in this respect was placed on a judgment of ITAT, Lucknow Bench in the case of U.P. Electronics Corporation Ltd. vs. DCIT in ITA No. 538/Lkw/2012. 3. Arguing another ground regarding disallowance out of salary an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as held that before making such disallowance u/s.14A of the Act, the Assessing Officer has to record an objective finding as to how the claim of assessee that no expenditure was incurred is not correct. In this respect, it is important to look into the findings of Assessing Officer who while making disallowance u/s. 14A held as under: 4. A perusal of Note-12 relating to Non-Current Investment annexed to and forming part of Balance sheet of the assessee company shows that during the year under consideration, it has made investment in equity shares amounting to 1,90,00,000/- in the immediately previous year. Further, it was also seen that during the year, assessee had incurred expenditure of interest but no disallowance u/s. 14A of the Act has been made. During assessment proceedings, the assessee was specifically required to explain and justify as to why provisions of Section 14A read with Rule 8D may not be applied as the investment has been made in respect of Dividend income (generated from such investment) shown by the assessee company would remain exempt from taxation. The assessee vide reply dated submitted as under: The reply of the assessee is not acceptable on the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... forward calculated the disallowance of expenditure relying on the provisions of Rule 8D(2)(iii) of the I.T. Rules. He has not even considered the arguments of assessee that disallowance, if any, cannot exceed the exempt income. Therefore, it is held that Assessing Officer made the disallowance u/s.14A of the Act without recording objective satisfaction. The Lucknow bench of the Tribunal, under similar facts and circumstances of not recording objective satisfaction, has deleted similar disallowances in ITA 538/Lkw/2012 in the case of U.P. Electronics Corporation Ltd. vs. DCIT (TDS) (Supra), by recording the following findings: 12. The issue of recording objective satisfaction by the Assessing Officer, before proceeding to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the Income-tax Act, was also examined by the Pune Bench of the Tribunal in the case of Kalyani Steels Ltd. vs. Addl. CIT (supra) and the Pune Bench, following the judgment of the Hon'ble Bombay High Court in the case of Godrej And Boyce Mfg. Co. Ltd. vs. Dy. CIT Another (supra), was also of the view that recording of objective satisf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hod for determining the amount of expenditure incurred in relation to income which does not form part of the total income only in a situation where the Assessing Officer, having regard to the accounts of the assessee is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. It, therefore, merits emphasis that sub-section (2) of section 14A does not authorize or empower the Assessing Officer to apply the prescribed method irrespective of the nature of the claim made by the assessee. The Assessing Officer has to first consider the correctness of the claim of the assessee having regard to the accounts of the assessee. The satisfaction of the Assessing Officer has to be objectively arrived at on the basis of those accounts and after considering all the relevant facts and circumstances. The application of the prescribed method arises in a situation where the claim made by the assessee in respect of expenditure which is relatable to the earning of income which does not form part of the total income under the Act is found to be incorrect. In such a situation a method had to be devised for apportioning the expenditure incurred by the assessee betwee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall note shortly hereafter, sub-rule (1) of rule 8D has also incorporated the essential requirements of sub-section (2) of section 14A before the Assessing Officer proceeds to apply the method prescribed under sub-rule (2). [underlined for emphasis by us] 9. The aforesaid observations of the Hon ble High Court clearly show that the satisfaction of the Assessing Officer with regard to the correctness or otherwise of the claim made by the assessee must be based on reasons and on relevant considerations. Ostensibly, the invoking of rule 8D of the Rules in order to compute the disallowance u/s 14A of the Act is to be understood as being conditional on the objective satisfaction of the Assessing Officer with regard to the incorrectness of the claim of the assessee, having regard to the accounts of the assessee. At this stage, we may also touch-upon a similar view expressed by the Hon ble Delhi High Court in the case of Maxopp Investment Ltd. Ors. vs. CIT, (2012) 247 CTR 162 (Del), wherein reference has been made to the judgment of the Hon ble Bombay High Court in the case of Godrej Boyce Manufacturing Co. Ltd. (supra). As per the Hon ble Delhi High Court, the requirement of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns to the Assessing Officer, which have been reproduced by the CIT(A) in para 3.2.1 of his order. As per the assessee, the determination of disallowance u/s 14A of the Act of Rs.5,00,000/- was based on the employee costs and other costs involved in carrying out this activity. Further, assessee also explained that the shares which have yielded exempt income were acquired long back out of own funds and no borrowings were utilized. The mutual fund investments were claimed to be also made out of surplus funds. It was specifically claimed that no fresh investments have been made during the year under consideration in shares yielding exempt income. All the aforesaid points raised by the assessee have not been addressed by the Assessing Officer and the same have been brushed aside by making a bland statement that the disallowance is not acceptable . Therefore, in our view, in the present case, the Assessing Officer has not recorded any objective satisfaction in regard to the correctness of the claim of the assessee, which is mandatorily required in terms of section 14A(2) of the Act and therefore his action of invoking rule 8D of the Rules to compute the impugned disallowance is untenab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and circumstances and judicial precedents, the disallowance sustained by ld. CIT(A) is deleted and therefore, Ground No.1 is partly allowed. 10. Now coming for another ground of sustenance of disallowance out of salary and wages which the Assessing Officer has made on adhoc basis due to insufficiency of vouchers or due to self made cash vouchers. The ld. AR has argued that since expenses were incurred for the purpose of business therefore no disallowance was warranted. In this respect, we find that the Assessing Officer had made disallowance equivalent to 5% of such expenses which the ld. CIT(A) has restricted to 50% of such disallowance which is quite reasonable, keeping in view the fact that the Hon'ble Allahabad High Court in the case of Rimjhim Ispat Ltd. (Supra) has held that where the expenses was not supported bills/vouchers the disallowance equivalent to 5% of such expenditure was justified. 11. In view of above facts and circumstances, we do not find any illegality or infirmity in the order of ld. CIT(A), therefore, Ground No.2 is dismissed. 12. In the result, appeal filed by the assessee is partly allowed. (Order pronounced in the open court on 04/08/ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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