SUPREME NONWOVENS PRIVATE LIMITED,CHEMBUR V. ACIT, MUMBAI

ITA 1384/MUM/2024

AI Insights

The case revolves around an appeal by Supreme Nonwovens Private Limited against the order of the National Faceless Appeal Centre, which upheld the disallowance of expenses related to exempt income under Section 14A read with Rule 8D of the Income Tax Rules, 1962. The primary contention was the calculation of disallowance amounts, where the AO's disallowance was significantly higher than what the assessee had self-disallowed. The Tribunal referenced a similar case involving the same assessee for a different assessment year, where it was ruled that the AO must record satisfaction regarding the disallowance, failing which Rule 8D cannot be applied.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 47267 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-04-2025
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Assessment Year: 2016-2017
• Other Referred Cases: PCIT-2 vs. Bombay Stock Exchange Ltd.
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: BHANGEPATIL PUSHKARAJ RAMESH
• Assessee Lawyers: K.GOPAL AW MISS NEHA PARANJPE
• Keywords: Set aside; Revised return; Onus to prove; Earning of tax free income; Rule 8D
• Section: 250; 113; 14A

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “G”, MUMBAI BEFORE SHRINARENDRA KUMAR BILLAIYA, ACCOUNTANT MEMBER AND SHRI ANIKESH BANERJEE, JUDICIAL MEMBER ITA No.1384/Mum/2024 (Assessment year: 2016-17) Supreme Nonwovens Private Limited, Plot No.110, Supreme House, 16th Road, Maharastra, 400 071 PAN : AAACS5921R vs ACIT-14(3)(2), Mumbai, RoomNo.455,4thFloor,Aayakar Bhavan, M.K. Road, Mumbai APPELLANT RESPONDENT Assessee by : Shri K.Gopal a/w Miss Neha Paranjpe Respondent by : Shri Bhangepatil Pushkaraj Ramesh– Sr. AR Date of hearing : 01/04/2025 Date of pronouncement : 07/04/2025 O R D E R Per Anikesh Banerjee (JM): The instant appeal by the assessee was filed against the order of the National Faceless Appeal Centre, Delhi *in short,’Ld.CIT(A)’], passed under section 250 of the Income-tax Act, 1961(in short, ‘the Act’), date of order 13-01-2023 for A.Y. 2016-17.The impugned order emanated from the order of the Learned Assistant Commissioner of Income-tax, Circle 14(3)(2), Mumbai passed under section 143(3), date of order 30/11/2018. 2 ITA 1384/Mum/2024 Supreme Nonwovens Pvt Ltd 2. The Ld.AR argued that the only issue before the Bench is related to disallowance under section 14A read with rule 8D of the Income tax Rule, 1962. The Ld.AR contended that the assessee suo motu disallowed the expenses related disallowance under section 14A read with rule 8D of I.T. Rules, 1962 amount to Rs.4,06,523/-.The Ld.AO had rejected the calculation of the assessee for disallowance U/s 14A of the Act and calculated the said disallowance to the extent of Rs.23,88,891/-. The balance amount of Rs. 19,82368/- {Rs.23,88,891/- (-) Rs. 4,06,523/-) was added back with total income. The aggrieved assessee filed appeal before the Ld. CIT(A). The Ld.CIT(A) upheld the view of the Ld. AO and the appeal of the assessee was rejected. Being aggrieved, the assessee filed appeal before us. 3. The Ld.AR argued that during the rejection of assessee’s calculation related to disallowance under section 14A, the Ld.AO had not recorded any satisfaction, while passing the order. Accordingly, the entire addition under section 14A is arbitrary and bad in law. 4. The Ld.DR vehemently argued and invited our attention to page 2, first para and he contended that discussion in the said paragraph is considered as the satisfaction of the AO. The relevant paragraphs is reproduced below: - “On perusal of the submission made by the assessee, it was noticed that the assesses has received dividend income to the tune of Rs. 13,75,74,357/- and also made investments in unquoted equity Instruments to the tune of Rs. 66,19,42,4261, However, assessee had made disallowance of only Rs 4,16,291 pertaining to only the interest component is under Rule 8D(2)(ii). The suo motu disallowance made by the assessee does not include the various direct and indirect costs associated with the earning of exempt Income. Assessee was asked vide show cause notice dated 22.11.2018 as to why the various indirect costs be not disallowed as per rule 8D(2). Assessee stated in it's response that there were no expenses other than proportionately attributable interest expenditure. The 3 ITA 1384/Mum/2024 Supreme Nonwovens Pvt Ltd submission of the assesese is considered but not found acceptable. The contention that there are no direct or indirect expenditure incurred for earning exempt income is not correct. The disallowance of expenditure has to be made considering the direct and indirect costs associated with earning exempt income as per rule 8D(2) The assessee ought to have made disallowances of expenditure in relation to the income which does not or shall not form part of total u/s 14A in accordance with the provision of Rule 8D of the Income Tax Rules, 1962, Thus, the accounting treatment of the assesses company is not acceptable as the same is not in tune with the provisions of section 14A r.w.r 8D of the IT Act. It is very clearly that any dividend / exempt income cannot be received without making and expenses. The above submission made by the assessee is considered but not acceptable.” 5. We have heard the rival submissions and carefully perused the materials available on record. The Ld. AR raised a similar issue for AY 2017–18 before the ITAT, Mumbai Bench “G”, in ITA No. 235/Mum/2024, where the order was pronounced on 26/06/2024. In that case, the Co-ordinate Bench ruled in favour of the assessee, specifically on the issue of non-recording of satisfaction for making a disallowance under Section 14A read with Rule 8D of the Income Tax Rules. The relevant observation from page 7 of that order is reproduced below: “The AO cannot straight away resort to Rule 8D. Sub-Section 2 of Section14A and Rule 8D (1), both require the ld. AO to first consider the books of accounts of the taxpayer before resorting to Rule 8D. The ld. AO must arrive at an. objective satisfaction that the assessee's claim is incorrect. The satisfaction of the AO as to the incorrect claim made by the assessee in this regard is sine qua non for invoking the applicability of Rule 8D. Such satisfaction can be reached and recorded only when the claim of the assessee is verified. If the assessee proves before the ld. AO that it incurred a particular expenditure in respect of earning the exempt income and the AO gets satisfied, then there is no requirement to still proceed with the computation of amount disallowable as per Rule 8D. 4 ITA 1384/Mum/2024 Supreme Nonwovens Pvt Ltd We respectfully relied on the order of Bombay Stock Exchange Ltd.(supra). We reject the impugned appeal order. The addition amount to Rs. 77,17,358/- is quashed. The appeal of the assessee is succeeded.” 6. In the present case, the assessee earned exempt income during the relevant assessment year and also incurred interest expenditure that is not directly attributable to any specific income. In such circumstances, disallowance under Rule 8D(2)(ii) could be applicable. However, the Ld. AO may invoke Rule 8D only upon recording dissatisfaction with the assessee’s claim or explanation, as mandated by Section 14A(2).The decision of the Co-ordinate Bench of the ITAT (supra) relied upon the judgment of the Hon’ble Jurisdictional High Court in PCIT- 2 vs. Bombay Stock Exchange Ltd. (2020) 113 taxmann.com 303 (Bom).During the proceedings, the Ld. DR submitted a written submission dated 17/03/2025. The relevant extract is as follows: “Conclusion: In conclusion, the Revenue respectfully prays that the disallowance of 19,82,368/- under Section 14A r.w. Rule 8D be sustained in full for AY 2016-17. The disallowance is substantively correct because the assessee undeniably incurred expenditure related to its exempt-income investments, and the law demands that such expenditure be disallowed irrespective of whether any exempt income was realized during the year. The quantum has been determined using the statutory formula, leaving little room for arbitrariness. Procedurally, the AO followed the mandate of Section 14A(2) by examining the assessee's accounts and not being satisfied with the token amount the assessee had offered, thereby justifying the resort to Rule 8D. The various counter-arguments by the assessee have been addressed: The absence of actual exempt income in the year is not a shield against disallowance, in view of clarificatory amendments and binding interpretative guidance. Allowing otherwise would defeat the purpose of Section 14A and permit revenue leakage contrary to legislative intent () (). 5 ITA 1384/Mum/2024 Supreme Nonwovens Pvt Ltd The AO's satisfaction was adequately recorded in substance, thus the pre- condition to apply Rule 8D was met, aligning with the ratio of Maxopp and Godrej & Boyce. The assessee's minimal disallowance was rightly found insufficient against the evidence of the accounts. The assessee's self-serving assertion that no further expenditure was incurred is not backed by evidence. On the contrary, applying the law's formula revealed a substantial expenditure attributable to exempt investments, which the assessee failed to disprove. The burden of proof on this issue rested on the assessee (since facts about its expenses are peculiarly within its knowledge), and that burden was not discharged.  Legislative intent and judicial precedents heavily favor the Revenue's position. The Supreme Court's rulings have upheld the broad applicability of Section 14A and the reasonableness of Rule 8D, while the Finance Act 2022 has resolved any doubt in favor of disallowance even in zero-income scenarios. Any earlier High Court rulings to the contrary must now be viewed in light of this clarification, which the Tribunal is entitled to apply when interpreting the scope of Section 14A in this appeal. The CBDT's guidance (Circular 5/2014) further buttresses the Revenue's view, indicating a long-standing policy against allowing such expenses.  The withdrawal of the revised return by the assessee has no bearing on the legality of the disallowance. The AO was under a duty to compute the correct disallowance as per Section 14A and Rule 8D, which duty he fulfilled. The assessee cannot avoid a statutory disallowance through procedural maneuvers. The Tribunal's task is to ensure the correct application of law to facts, which in this case leads to the confirmation of the 219.82 lakh disallowance. The Revenue submits that upholding the AO's disallowance would be in line with the letter and spirit of the law, whereas accepting the assessee's contentions would not only violate the clear statutory mandate but also set a precedent enabling tax-free income to be indirectly subsidized by deductible expenses an outcome Section 14A was enacted to prohibit. We therefore humbly request the Hon'ble ITAT to decide this issue in favour of the Revenue.” 7. After due consideration, we are of the opinion that although the Ld. DR has comprehensively discussed the issue, the specific aspect of non-recording of 6 ITA 1384/Mum/2024 Supreme Nonwovens Pvt Ltd satisfaction by the Ld. AO has not been addressed effectively. This issue is directly covered by the Co-ordinate Bench's decision in the assessee’s own case in ITA No. 235/Mum/2024(supra), which in turn is supported by the binding precedent laid down by the Hon’ble Bombay High Court in PCIT-2 vs. Bombay Stock Exchange Ltd. (supra). Accordingly, we find merit in the assessee’s argument. The impugned assessment order is set aside, and the disallowance made under Section 14A is hereby deleted. 8. In the result, the appeal bearing ITA No.1384/Mum/2024 is allowed. Order pronounced in the open court on 07th day of April, 2025. Sd/- sd/- (NARENDRA KUMAR BILLAIYA) (ANIKESH BANERJEE) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai,दिन ांक/Dated: 07/04/2025 Pavanan Copy of the Order forwarded to: 1. अपील र्थी/The Appellant , 2. प्रदिव िी/ The Respondent. 3. आयकरआयुक्त CIT 4. दवभ गीयप्रदिदनदि, आय.अपी.अदि., मुबांई/DR, ITAT, Mumbai 5. ग र्डफ इल/Guard file. BY ORDER, //True Copy// (Asstt. Registrar), ITAT, Mumbai "