Siara Engineering Pvt.Ltd, Pune V. Deputy Commissioner of Income-tax, Circle - 8, Pune

ITA 656/PUN/2022

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Siara Engineering Pvt. Ltd. appealed against the order of the National Faceless Appeal Centre (NFAC), which had confirmed the disallowance made by the Assessing Officer under section 14A of the Income Tax Act, 1961. The disallowance pertained to expenses claimed by the company which were incurred to earn exempt income. The Tribunal examined whether the Assessing Officer had appropriately recorded satisfaction regarding the disallowance. It was determined that the Assessing Officer's satisfaction was not adequately recorded as per the requirements of section 14A(2), leading to the Tribunal allowing the appeal and setting aside the higher disallowance.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 137450 (ITAT-PUNE)
• Duration Of Justice: 7 month(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 26-03-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 26-03-2023
• Assessment Year: 2017-2018
• Appeal Filed On: 25-08-2022
• Other Referred Cases: Maxopp Investment Ltd. vs. CIT, Pr.CIT vs. Reliance Capital Asset Management Ltd, CIT vs. Taikisha Engineering India Ltd., PCIT vs. Moonstar Securities Trading and Finance Co. (P) Ltd, PCIT vs. Keshav Power Ltd.
• Laws Referred To: Income Tax Act, 1961, Income Tax Rules, 1962
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Earning of tax free income; Rule 8D
• Section: 143(3); 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH “B”, PUNE BEFORE SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER AND SHRI PARTHA SARATHI CHAUDHURY, JUDICIAL MEMBER आयकर अपील सं. / ITA No.656/PUN/2022 िनधाᭅरण वषᭅ / Assessment Year : 2017-18 Siara Engineering Pvt. Ltd., 156/2, Mahalunge, Chakan Talegaon Road, Tal: Khed, Dist: Pune- 410501. PAN : AAECS6669Q Vs. DCIT, Circle-8, Pune. Appellant Respondent आदेश / ORDER PER INTURI RAMA RAO, AM: This is an appeal filed by the assessee directed against the order of the National Faceless Appeal Centre, Delhi [‘NFAC’] dated 19.07.2022 for the assessment year 2017-18. 2. Briefly, the facts of the case are that the appellant is a Private Limited Company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of manufacturing of CNC turning, Hobbing, shaping, chamfering, deburring and grinding. The Return of Income for the assessment year 2017-18 was filed on 28.10.2017 disclosing total income of Rs.5,05,11,610/-. Against the said return of income, the assessment Assessee by : Shri Sharad Shah Revenue by : Shri M. G. Jasnani Date of hearing : 27.03.2023 Date of pronouncement : 27.03.2023 ITA No.656/PUN/2022 2 was completed by the Assistant Commissioner of Income Tax, Circle-10, Pune (‘the Assessing Officer’) vide order dated 05.12.2019 passed u/s 143(3) of the Income Tax Act, 1961 (‘the Act’) at a total income of Rs.5,46,16,384/-. While doing so, the Assessing Officer made a disallowance of Rs.41,04,779/- u/s 14A of the Act r.w. Rule 8D(2)(iii) of the Income Tax Rules, 1962 (‘the Rules’) rejecting the contention of the appellant that the appellant is incurred only expenditure of Rs.3,19,665/-. 3. Being aggrieved by the above assessment order, an appeal was preferred before the NFAC, who vide impugned order confirmed the action of the Assessing Officer. However, the NFAC had accepted the alternative contention of the appellant that for the purpose of computing the average value of investments as envisaged under Rule 8D, the value of those investments which yielded the exempt income alone, should be considered. Based on this finding, the NFAC restricted the amount of disallowance to Rs.26,65,853/- as against Rs.41,04,779/- made by the Assessing Officer. 4. Being aggrieved, the appellant is in appeal before us in the present appeal. 5. It is contended before us that the satisfaction recorded by the Assessing Officer while rejecting the contention of the appellant ITA No.656/PUN/2022 3 that the expenditure is only Rs.3,19,665/- was incurred to earn the exempt income of Rs.2,14,29,253/- is not satisfaction as envisaged u/s 14A(2) of the Act. Thus, he submits that the disallowance made by the Assessing Officer should be deleted. 6. On the other hand, ld. Sr. DR placed reliance on the orders of the lower authorities. 7. We heard the rival submissions and perused the material on record. The only issue in the present appeal relates to the computation of the amount of disallowance u/s 14A of the Act. Admittedly, the assessee company made investments which yielded the dividend income. The assessee company itself offered suo motu disallowance of Rs.3,19,665/-. The provisions of sub-section (2) of section 14A provides that resort to disallowance u/s 14A can be made only if the AO is not satisfied with the correctness of the claim of assessee in respect of expenditure incurred to earn the exempt income. Therefore, it is incumbent upon the AO to record satisfaction as to the correctness or otherwise of the assessee company that only an expenditure of Rs.3,19,665/- was incurred to earn the exempt income. The Hon’ble Supreme Court in the case of Maxopp Investment Ltd. vs. CIT (supra) held as follows: “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 Assessing Officer needs to record satisfaction that having regard to the kind of the assessee, suo motu ITA No.656/PUN/2022 4 disallowance under section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the Assessing Officer 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, the nature of the loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the Assessing Officer.” 8. Even the Hon’ble Bombay High Court in the case of Pr.CIT vs. Reliance Capital Asset Management Ltd, 400 ITR 217 (Bom) held as under: “The AO is not entitled to make any disallowance under Rule 8D if he does not specifically record that he is not satisfied with the correctness of the assessee's claim. The fact that the CIT(A) and ITAT were not satisfied with the assessee's disallowance and enhanced it does not mean that Rule 8D becomes applicable and the disallowance should be computed as per the prescribed formula.” 9. The similar view was taken by the Hon’ble Delhi High Court in the case of CIT vs. Taikisha Engineering India Ltd., 370 ITR 338 (Del) and PCIT vs. Moonstar Securities Trading and Finance Co. (P) Ltd, 105 taxmann.com 274. In the present case, the AO observed that the assessee company made substantial investments in mutual funds and therefore, incurred substantial expenditure to earn the exempt income and in the circumstances, he was of the opinion that Rule 8D has to be applied. Therefore, the question that comes up for consideration before us is whether the above observation made by the AO amounts to satisfaction as envisaged u/s 14A(2). It is a settled position of law that the satisfaction recorded by the AO ITA No.656/PUN/2022 5 should be based on the objective material and cannot be subjective. From mere reading of para 3.3 onwards of the assessment order, it is clear that the AO has not recorded satisfaction regarding the correctness of suo motu disallowance offered by the assessee u/s 14A and mere rejection of the explanation of the assessee per se, cannot be said to be a satisfaction as envisaged u/s 14A(2). The ratio laid down by the Hon’ble Delhi High Court in the case of PCIT vs. Moonstar Securities Trading and Finance Co. (P) Ltd (supra) and PCIT vs. Keshav Power Ltd., 112 taxmann.com 323 as well as the Hon’ble Bombay High Court in the case of Pr.CIT vs. Reliance Capital Asset Management Ltd (supra) is squarely applicable to the facts of the present case. Therefore, we hold that the disallowance of Rs.41,04,779/- as made by the AO as confirmed by the CIT(A) is incorrect in law, as the AO had failed to record the satisfaction as envisaged u/s 14A(2). Thus, the grounds of appeal filed by the assessee stand allowed. 10. In the result, the appeal filed by the assessee stands allowed. Order pronounced on this 27 th day of March, 2023. Sd/- Sd/- (PARTHA SARATHI CHAUDHURY) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER पुणे / Pune; ᳰदनांक / Dated : 27 th March, 2023. Sujeet ITA No.656/PUN/2022 6 आदेश कᳱ ᮧितिलिप अᮕेिषत / Copy of the Order forwarded to : 1. अपीलाथᱮ / The Appellant. 2. ᮧ᭜यथᱮ / The Respondent. 3. The Pr. CIT concerned. 4. िवभागीय ᮧितिनिध, आयकर अपीलीय अिधकरण, “B” बᱶच, पुणे / DR, ITAT, “B” Bench, Pune. 5. गाडᭅ फ़ाइल / Guard File. आदेशानुसार / BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण, पुणे / ITAT, Pune.