Whether disallowance under section 14A–Invoking rule 8D for computing disallowance is mandatory ?

Even in case AO doubts the quantum of expenditure incurred towards exempted income, as shown by assessee, AO is not bound to follow the formula prescribed in rule 8D to compute the disallowance because rule 8D should be the last choice after applying all other reasonable basis.

Assessee had offered suo motudisallowance under section 14A in relation to expenditure incurred for earning exempt income. AO enhanced the disallowance. CIT invoked revisionary jurisdiction holding that when AO doubted the quantum of expenditure incurred towards exempted income, it was mandatory for him to apply the formula prescribed in rule 8D of the Income Tax Rules, 1962.

It is held that even in a case where AO rejects the claim of the assessee that no expenses were incurred to earn the exempt income, it is not mandatory for him to invoke the method of calculation prescribed by rule 8D and AO is free to make the disallowance on any reasonable basis. Therefore, it could not be said that once AO rejects the mode of computation of disallowance under section 14A as made by the assessee, he has no other option but to resort to rule 8D.

Decision: In assessee’s favour.

Relied: Godrej & Boyce Manufacturing Company Ltd. v. Dy. CIT & Anr. (2017) 7 SCC 421 : 2017 TaxPub(DT) 0968 (SC), Maxopp Investment Ltd. v. CIT (2011) 203 Taxman 364 (Del) : 2011 TaxPub(DT) 2171 (Del-HC), Godrej and Boyce Mfg. Co. Ltd. v. Dy. CIT & Anr. (2010) 328 ITR 81 (Bom.) : 2010 TaxPub(DT) 2182 (Bom-HC), and Britannia Industries Ltd. v. DCIT [ITA No. 390/Kol/2013, dt. 2-3-2016]

IN THE CALCUTTA HIGH COURT

ANIRUDDHA BOSE & MOUSHUMI BHATTACHARYA, JJ.

Pr. CIT v. Britannia Industries Ltd.

ITAT No. 45 of 2017 and GA No. 420 of 2017

19 July, 2018

Appellant by: S.N. Dutta, Advocate

Respondent by: R.K. Murarka, Sutapa Roychowdhury, Advocates

The Court:

If an assessing officer doubts the quantum of expenditure incurred towards exempted income, is it mandatory for the assessing officer to apply the formula prescribed in rule 8D of the Income Tax Rules, 1962 or can he take a view otherwise? This is the question which is involved in this appeal. In the assessee’s case, the assessing officer took the latter course while dealing with expenditure shown by the assessee towards exempted income, being income from dividend in this case.

The assessee had sought disallowance of Rs. 26,07,177 as expenditure incurred in connection with earning of the exempted income but the assessing officer had raised the amount to Rs. 36,09,734. Such disallowance shown by the assessee was under three heads and the assessing officer found the amount reflected under one head to be on the lower side. Otherwise, the clarification of the assessee in respect of such expenditure was found to be reasonable. The Commissioner in exercise of his revisional power under section 263 of the Act directed :–

“I have considered the matter. In this case, the assessee had suo motu offered disallowance of Rs. 26,06,178 on account of expenses incurred for earning exempt income. After that during the assessment the assessing officer found that this was not correct and increase the disallowance to Rs. 36,09,734. A plain reading of rule 8D would show that once the assessing officer was not satisfied with the correctness of the claim of expenditure in relation to exempt income then the disallowance has to be compulsorily computed as per the provisions of rule 8D. This is mandatory. Further, the Malabar Industrial Company case (supra) of the Supreme Court will also not apply in this case as the only correct course open to the assessing officer was computing disallowance as per provisions of rule 8D which he has not done. Thus, the assessing officer by not computing the expenditure as per rule 8D made the order erroneous causing loss of revenue which caused prejudice to the interest of revenue. I, therefore, set aside the assessment to this extent and direct the assessing officer to compute disallowance of expenditure relating to earnings of exempt income as per provisions of rule 8D.”

The assessee, however, was successful in its appeal before the Income Tax Appellate Tribunal. The Tribunal invalidated the Commissioner’s order, inter alia, holding :–

“7. We have given a careful consideration to the rival submissions. The provisions of section 14A of the Act as originally introduced and as amended from time to time as well as the insertion of rule 8D was subject-matter of several decisions rendered by various Benches of the ITAT as well as the Hon’ble High Courts. The Hon’ble Delhi High Court in the case of Maxopp Investments Ltd. v. CIT (2011) 203 Taxman 364 (Del) : 2011 TaxPub(DT) 2171 (Del-HC) and the Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (2010) 328 ITR 81 (Bom.) : 2010 TaxPub(DT) 2182 (Bom-HC) have taken a view that rule 8D of the Income Tax Rules will apply only for assessment years 2008-09 and subsequent assessment years. It has also been laid down that the assessee has to make a claim (including a claim that no expenditure was incurred) with regard to expenditure incurred for earning income which is not chargeable to tax. Such a claim has to be examined by the assessing officer and only if on an objective satisfaction arrived at by the assessing officer that the claim made by the assessee is not correct, can the assessing officer proceed to apply the computation mode as specified in rule 8D(2) of the Rules. If the assessing officer comes to the conclusion that claim made by the assessee is not correct, it is only thereafter that the assessing officer can proceed to make the disallowance in terms of rule 8D of the Rules. Even in a case where the assessing officer rejects the claim of the assessee that no expenses were incurred to earn the exempt income, it is not mandatory for him to invoke the method of calculation prescribed by rule 8D(2) of the Rules and is free to make the disallowance on any reasonable basis. By applying the rule 8D of the Rules blindly sometimes absurd disallowances would result. In our view, therefore while examining the claim of the assessee regarding expenditure incurred in earning the exempt income including a claim that no expenses were incurred, the assessing officer is bound to take note of such absurdities and refrain from invoking the method of disallowance of expenses as prescribed by rule 8D(2) of the Rules. It is for this reason that the satisfaction of the assessing officer regarding expenses incurred for earning exempt income is to be objective satisfaction. In other words, it is only when no reasonable and proper parameters for making disallowance can be arrived at, that resort to rule 8D(2) can be had by the assessing officer. Rule 8D(2) will thus be a last resort when it becomes impossible to arrive at a just conclusion on the amount of expenses that has to be disallowed as attributable or incurred in earning exempt income. It cannot therefore be said that once the assessing officer rejects the mode of computation of disallowance under section 14A of the Act as made by the assessee, he has no other option but to resort to rule 8D of the Rules.

8. Besides the above, we are also of the view that the assessing officer has adopted one of the possible course open to him in law. The CIT cannot invoke jurisdiction under section 263 of the Act just because he does not agree with the view of the assessing officer. In other words under section 263 of the Act, the CIT cannot substitute his view with that of the assessing officer. The decision relied upon by the learned counsel for the assessee clearly supports the stand taken by the assessee in this regard.

9. We therefore hold that the order of the assessing officer was neither erroneous nor prejudicial to the interest of the revenue and therefore jurisdiction under section 263 of the Act ought not to have been invoked by the CIT. We therefore quash the order under section 263 of the Act and allow the appeal by the assessee.”

The question raised in this appeal is no more res integra and has been determined by the Supreme Court in the case of Godrej and Boyce Manufacturing Company Ltd. v. Dy. CIT & Anr. (2017) 7 SCC 421 : 2017 TaxPub(DT) 0968 (SC). In that decision, the Supreme Court examined applicability of rule 8D and held :–

“37. We do not see how in the aforesaid fact situation a different view could have been taken for assessment year 2002-03. 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.”

The Tribunal in substance has followed the principle enunciated by the Hon’ble Supreme Court with regard to the applicability of rule 8D. We have set out the relevant passage from the decision of the Tribunal on that point and do not find any error in the decision of the Tribunal which is under appeal. We do not think that any point of law is involved in this appeal as the same stands covered by the decision of the Hon’ble Supreme Court. The appeal and the stay petition are accordingly dismissed.

We are apprised by Mr. Murarka, learned counsel for the assessee-respondent that although his advocate-on-record has not filed vakalatnama yet, he has instructions to appear in this matter. On the undertaking that such vakalatnama shall be filed by 23-7-2018, counsel has been permitted to represent the assessee before us.