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TMI Blog2022 (11) TMI 1302X X X X Extracts X X X X X X X X Extracts X X X X ..... ch was claimed as exempt income under Section 10(34) of the Act. The Assessee had suo moto disallowed a sum of Rs.1,00,000/- as expenditure towards administrative expenses under Section 14A of the Act, in respect of the said tax-free income. The Assessing Officer ('AO') was not satisfied with the working of the disallowance made by the Assessee and he, therefore, determined a sum of Rs. 1,44,85,000/as the disallowance towards administrative expenses under Rule 8D(2)(iii) of the Income Tax Rules, 1962 ('IT Rules'). 2.1 The Commissioner of Income Tax (Appeals) ['CIT(A)'] relying upon the judgment of this Court in ACB India Ltd. vs. ACIT, (2015) 374 ITR 108 (Del), restricted the disallowance by ascertaining the amount of total investment and limiting it to the investment from which the tax-exempt dividend was earned. The CIT(A), however, excluded the investment held by the Assessee in its subsidiary company even though it had yielded dividend. The CIT(A), therefore, restricted the disallowance under Rule 8D(2)(iii) to Rs. 26.70 Lakhs. 2.2 The Income Tax Appellate Tribunal ('Tribunal') relied upon the judgment of this Court in Assessee's own case for the AY 2010-11 to uphold the afor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ua investment made by the Assessee in the shares/mutual funds and has also considered the working of the suo moto disallowance by the Assessee, however, the basis on which the Assessee arrived at the said figure of Rs. 9,75,000/- was not explained. The Tribunal further modified the order of the CIT(A) to the extent it excluded the value of Assessee's strategic investment in its subsidiary for the purpose of computation of disallowance and added the same. The Tribunal held that the said investment held by the Assessee in the subsidiary company has to be considered for the purpose of disallowance following the judgment of the Supreme Court in Maxopp Investment Ltd. (supra) and directed the AO to re-compute the disallowance by including the investment made in the subsidiary company. Arguments of the Assessee 4. The arguments raised by the learned counsel for the Assessee are common for both the appeal(s) as the issues raised in the present appeal(s) are same. 4.1. The learned counsel for the Assessee states that the Tribunal erred in holding that the AO has duly recorded its proper satisfaction in terms of Section 14A(2) of the Act, without considering the submissions of the Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned counsel for the Assessee states that for AYs 2010-11 and 2011-12, the issue of recording of proper satisfaction under Section 14A of the Act was remanded by the ITAT to the AO. He therefore states that it is incorrect for Revenue to contend that the disallowance for AYs 2010-11 and 2011-12 has been made as per Rule 8D of the IT Rules. Analysis by this Court 7. We have heard the learned counsel for the parties. The submission of learned counsel for the Assessee that the method adopted by the Assessee for calculating the disallowance had been upheld in AY 2008-09 and therefore the same should be accepted in the AY(s) 201213 and 2013-14, which are subject matter of the present appeal(s), on the principle of consistency, is incorrect and contrary to the record. The submission of the learned counsel for the Assessee that the issue of satisfaction for AYs 2010-11 and 2011-12 was remanded by ITAT to AO is also not borne out from the record. 7.1. On a perusal of the Tribunal's order, it is borne out that in the intervening assessment years i.e., AYs 2010-11 and 2011-12, the AO had similarly calculated the disallowance under Rule 8D(2)(iii), on account of administrative expenses i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of the ITAT on the latter aspect, i.e. exclusion of tax exempt income derived from a strategic investments, is not a correct view in the light of the decision of the Supreme Court in Maxopp Investment Ltd. Vs. Commissioner of Income Tax, (2018) 402 ITR 640. Accordingly, the observations of the ITAT on this aspect are set aside. However, its observations with respect to the calculation of disallowance under Section 14A being confined to investments that derived tax exempt income are valid in the light of the Division Bench ruling in ACB India Ltd. v. ACIT, (2015) 374 ITR 108 (Del). In view of the above clarification, the ITAT's order, to the extent that it makes observations with respect to exclusion of income derived from strategic investments, is hereby set aside. This appeal is partly allowed." (Emphasis supplied) 7.4. This Court in fact modified the order of remand and issued further directions to the AO for arriving at the value of average investment for applying the method under Rule 8D(2)(iii). The order of this Court proceeded on the premises that Section 14A of the Act, has been invoked after recording of proper satisfaction. 7.5. The contention sought to be r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment order reads as under: "3.1 A perusal of profit & loss account and balance sheet reveals that assessee company has made investment in quoted shares at Rs. 9,29,28,10,000/- as on 31st March, 2012 out of which investment of Rs. 2,99,11,00,000/-has been made in equity shares for the purpose of earning dividend income and long term capital gains which are exempt and not chargeable to tax under the Income Tax Act whereas the total turnover of the assessee company is Rs. 12,14,21,56,000/-. The assessee company has earned dividend income at Rs. 5,80,00,000/- during the year under reference. On examination of computation of income it is noted that the assessee has disallowed Rs. 1,00,000/- u/s 14A being expenses pertaining to the tax free income. During the assessment proceedings, the assessee company was asked to explain the basis of estimation of expenses at Rs. 1,00,000/pertaining to tax free income and as to why such disallowance may not be computed as per Rule 8D of I.T. Rules, 1962. In response, vide reply dated 10.12.2014, the assessee has submitted that no direct expense was incurred for earning of this dividend income however the disallowance of Rs. 1,00,000/- compute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons of the Assessee in its letter dated 10th December, 2014, held that the amount offered by the Assessee as a disallowance towards administrative expenses was on a 'guess estimate' basis rather than it being actually borne out from the records of the Assessee. Accordingly, the CIT(A) concurred with the disallowance made by the AO under Rule 8D(2)(iii) of the IT Rules, after rejecting the explanation submitted by the Assessee for offering the sum of Rs. 1,00,000/-. 8.6. In the appeal filed by the Assessee, the Tribunal as well upheld the finding of the AO recording his unsatisfaction with respect to the disallowance offered by the Assessee. Further, the Tribunal in its impugned order dated 26th August, 2021, for AY 2013-14 has returned a finding of fact that in the year under consideration there was churning and change in the investment portfolio of the Assessee, as the Assessee had sold some of its investments and made new investments. The Tribunal held that the decisions pertaining to selection of new investments and appropriate time for sale of existing investments would necessarily require application of mind and time by the management of the Assessee. The Tribunal, therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied. The said amount has been determined by allocating the proportionate salary cost of corporate finance department executives in the ratio of exempt income to gross turnover ratio. The said method of allocation is given at Annexure 6 of this submission." (Emphasis supplied) 8.10. The method of allocation adopted by the company for calculating the disallowance filed in support of the said letter is reproduced hereunder:- H T Media Ltd FY 2011-12 Allocation of proportionate corporate finance cost towards exempt Income Particulars Amount (Rs.) Remarks Total Salary Cost of executives of Corporate Finance Department (A) 20,151,504 As per Annexure attached Exempt Income (B) 50,019,274 Dividend Income earned during FY 2011-12 Gross Turnover (C) 13,191,397,465 Revenue from Operations Proportionate cost allocated to exempt Income A*B/C 88,632 Say Rs. 1 Lakh (Emphasis supplied) 8.11. A perusal of the contents of the letter and the table calculating the disallowance, substantiate the finding of the AO and CIT(A) that the disallowance made by the Assessee is admittedly on an ad-hoc basis. The AO and CIT(A) rejected the method of apportionment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rent findings of the appellate authorities. 9. It is pertinent to note here that the Supreme Court in the case of Godrej & Boyce Manufacturing Co. Ltd. v. Dy. CIT & Anr., [2017] 394 ITR 449 (SC) at paragraph no. 37 has held as under:- "37. ...Whether such determination is to be made on application of the formula prescribed under rule 8D 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 section 14-A(2) and (3) read with rule 8-D of the Rules or a best judgment determination, as earlier prevailing, would become applicable." 10. As noted above, in the present case as well, a perusal of the record reveals that the AO has applied his mind to the controversy as he firstly examined accounts, secondly duly invited the reply of the Assessee to explain the basis of the disallowance offered by the Assessee and thirdly after examining the explanation of the Assessee has r ..... X X X X Extracts X X X X X X X X Extracts X X X X
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