TMI Blog2022 (7) TMI 1362X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment order and the order of the CIT(A) that there is no discussion about any expenditure which is relatable to exempt income and how the AO recorded the satisfaction and in our considered view, the AO has not carried out any analysis of the accounts or he has not gone into the accounts despite complete books of accounts were produced before him and has not rejected the disallowance suo moto offered by the assessee. According to us, the mandate given by the provisions of Sec.14A(2) and Rule 8D(2) of the Rules, as regards to recording of satisfaction by the AO qua correctness of the accounts of the assessee for the expenditure claimed qua exempt income is absent and hence, on this very issue, we reverse the order of the lower authorities and allow this jurisdictional issue in favour of the assessee. - ITA No. 941/Chny/2020 And ITA No. 942/Chny/2020 - - - Dated:- 29-7-2022 - Shri Mahavir Singh, Hon ble Vice President And Shri G. Manjunatha, Hon ble Accountant Member For the Appellant : Mr. R. Sivaraman, Adv. For the Respondent : Dr.S.Palani Kumar, CIT/Mr. D. Hema Bhupal, JCIT. ORDER PER MAHAVIR SINGH, VICE PRESIDENT: ITA No.941/Chny/2020 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITR 217)). SLP against this judgment has been dismissed by the Hon'ble SC. SLP(C) No.11379 of 2018 dated 07.09.2018 (259 Taxman 83). ii. Marg Limited Vs CIT [2020] 120 Taxmann.com 84 (Madras) iii. CIT Vs Taikisha Engineering India Ltd (229 Taxman 143) Delhi HC. iv. CIT Vs I P Support Services India P Ltd (378 ITR 240) Delhi HC. 8. The CIT(A) erred in not appreciating the fact that in the appellant's case the ITAT Chennai in their orders in 1.T.A No.1766 / Chny / 2019 dated 16.12.2019 for the assessment year 2013-14, has deleted the addition made u/s.14A r.w.rule 8D as the Assessing Officer has not recorded any findings as to the correctness or otherwise of the appellant's claim that only expenditure of Rs.73,602/- was incurred to earn exempt income. 3. Brief facts of the case are that the AO on perusal of financials of the assessee noted that the assessee company has made investment in shares of associate and other companies, mutual funds and government securities and earned dividend income of Rs.240,66,89,000/- from such investment of Rs.3739,48,95,000/-. The AO noted that the assessee has suo moto disallowed a sum of Rs.10,66,916/- as expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rule 8D(2)(i) (iii) of the Rules. The Ld.Counsel for the assessee took us through the assessment order Para No.5.1, wherein the AO noted as under: 5.1 On perusal of the financials of the assessee shows that the assessee has investments in shares of associate and other companies, mutual funds and government securities. The assessee has received a dividend income of Rs.240,66,89,000/- from such investments of Rs.3 39,48,95,000/- However the assessee has suo moto disallowed Rs.10,66,916/- as expenses pertaining to earning the above dividend income. However, since disallowance u/s.14A is to be' made by applying the procedural provisions laid down under rule 8D, the assessee was asked to show-cause as to why expenditure in relation to exempted income cannot be disallowed as per u/s 14A r.w.r. 8D. In response, the Assessee Company vide letter dated 28/12/2018 has submitted as follows: We hereby clarifying that the AO has not re-produced the assessee s explanation submitted vide letter dated 28.12.2018 and this portion of the order is left blank. 7. The Ld.Counsel for the assessee took us through Para No.5.3 of the assessment order, wherein he has interpreted the CBD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... = Rs.37,17,04,365/- Total amount disallowed by the assessee = Rs.10,66,916/- Balance amount to be disallowed = Rs.37,06,37,449/- [Disallowance Rs.37,06,37,449/-] 8. The Ld.Counsel for the assessee, in view of the above, stated that provisions of Sec.14A(2) r.w.r.8D(2)(i) very categorically requires that the AO first has to satisfyy himself about the correctness of claim made by the assessee by making suo moto disallowance that the expenses relatable to exempt income already disallowed by the assessee is sufficient or not and moreover, he has to record satisfaction qua the amount of expenditure incurred in relation to such income, which does not form part of total income under this Act in accordance with such method as prescribed u/r.8D of the Rules and if the AO having regard to the accounts of the assessee, is not satisfied with the correctness of claim made by the assessee, in respect to such expenditure in relation to income which does not form part of total income under this Act, in that eventuality only he has to resort to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder of CIT(A). We noted that the AO in Para No.5.1 has simply issued show cause notice, as to why, the expenditure in relation to exempt income cannot be disallowed as per Sec.14A r.w.r.8D of the Rules and then he resorted to the disallowance of expenses relatable to exempt income by invoking formula prescribed u/r.8D of the Rules vide Para No.5.6 (both paras are re-produced hereinabove in this order at Para No.7) as pointed out by the Ld.Counsel for the assessee on a specific query whether the copy of show cause notice issued by the AO is available, he referred to his Paper Book consisting of Pages 1-166 and particularly, he drew our attention to Page No.34, where show cause notice issued is enclosed and the relevant queries raised by the AO in the show cause notice reads as under: Government of India Ministry of Finance Income Tax Department Office of the Assistant Commissioner of Income Tax Corporate Circle-6(1), Chennai To Shriram Capital Ltd., 4, Shriram House, Burkit Road, T.Nagar, Chennai-600 017, Tamil Nadu, India PAN: AABCS 2726 B AY: 2017-18 DIN Notice No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8D of the Rules without recorded any finding as to correctness of claim made by the assessee qua the expenses relatable to exempt income. 13. Now as argued by both the sides, we have gone through the provisions of Sec.14A of the Act and the relevant provisions i.e. Sec.14A (1) to (3) reads as under: (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred79a by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed80, if 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 in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c.14A, he has to record satisfaction. That this satisfaction cannot be plain or simple satisfaction or simply invoking the formula prescribed u/r.8D(2), but it is to be done with regard to the analysis carried out on the accounts of the assessee. 16. The Hon ble Supreme Court in the case of Maxopp Investment Ltd. (supra) has considered this issue and finally at Para No.41, held as under: 41) Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO. 17. We also gone through the case law cited by the ld.CIT-DR, Dr.S.Palani Kumar, of Hon ble Delhi High Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urred in relation to income which does not form part of the total income is correct. The Assessing Officer must, in the first instance, determine whether the claim of the assessee in that regard is correct and the determination must be made having regard to the accounts of the assessee. The satisfaction of the Assessing Officer must be arrived at on an objective basis. It is only when the Assessing Officer is not satisfied with the claim of the assessee, that the legislature directs him to follow the method that may be prescribed. In a situation where the accounts of the assessee furnish an objective basis for the Assessing Officer to arrive at a satisfaction in regard to the correctness of the claim of the assessee of the expenditure which has been incurred in relation to income which does not form part of the total income, there would be no warrant for taking recourse to the method prescribed by the rules. For, it is only in the event of the Assessing Officer not being so satisfied that recourse to the prescribed method is mandated by law. Sub section (3) of Section 14A provides for the application of sub section (2) also to a situation where the assessee claims that no expenditu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Assessee nor the Revenue are entitled to take a deviated view of the matter. Because as already noted by us, the negative figure of disallowance cannot amount to hypothetical taxable income in the hands of the Assessee. The disallowance of expenditure incurred to earn exempted income has to be a smaller part of such income and should have a reasonable proportion to the exempted income earned by the Assessee in that year, which can be computed as per Rule 8D only after recording the satisfaction by the Assessing Authority that the apportionment of such disallowable expenditure under section 14A made by the Assessee or his claim that no expenditure was incurred is validly rejected by the Assessing Authority by recording reasonable and cogent reasons conveyed to Assessee and after giving opportunity of hearing to the Assessee in this regard. 22. We, therefore, dispose of the present appeal by answering question of law in favour of the Assessee and against the Revenue and by holding that the disallowance under rule 8D of the IT Rules read with Section 14A of the Act can never exceed the exempted income earned by the Assesee during the particular assessment year and further, wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,52,055/- by observing as under: In view of the above facts, disallowance u/s.14A is made by applying rule 8D which is computed as under: Rule 8D Disallowance 1. the amount of expenditure directly relating to income which does not form part of total income = NIL 2. an amount equal to 1% of the annual average of the monthly averages of the opening and closing balances of the value of the investment, income from which does not or shall not form part of total income Average value of investments = (opening balance as on 01.04.2016 + closing balance as on 31.03.2017)/ 2 = 2116,63,27,000/- + Rs.2128,40,84,000/-) / 2 = 2122,52,05,500/- 1% of average of investments = Rs.21,22,52,055/- Total 14A disallowance under Rule 8D = Rs.21,22,52,055/- However, the Assessing Officer restricted the total disallowance to the extent of total expenditure claimed in the P L A/c by the assessee to the extent of Rs.5,65,000/- and by giving credit for suo mo ..... 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