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Pr. Commissioner of Income-Tax-14 vs. Godrej & Boyce Mfg. Co. Ltd. - (High Court of Bombay) (20 Feb 2023)

AO is not empowered to apply Rule 8D of IT Act without considering the correctness of the assessee's claim in respect of expenditure incurred in relation to the exempt income


Direct Taxation

The assessee filed its return for income for A.Y. 2011-12 on 21.11.2011 declaring total income at Rs. 358,47,29,328 under normal provisions and book profit of Rs. 431,48,93,079 under Section 115JB of the I.T. Act. The return was processed under Section 143(1) of the Act. The case was selected for scrutiny and notice under Section 143(2) of the I.T. Act 1961 was issued to the assessee. The AO made various additions/disallowances - which includes disallowances under Section 14A read with Rule 8D amount to Rs. 5,11,85,000. The AO completed assessment vide order.

Being aggrieved by order, the assessee company filed an appeal before the CIT(A). The Learned CIT (A) by his order partly allowed the assessee company's appeal.

In the present case, the assessee had earned an exempt income of Rs. 84,30,37,423 from shares and mutual funds and submitted a computation of inadmissible expenditure under Section 14A amounting to Rs. 13,66,635. The assessee claimed that the disallowance made under Section 14A was as per the books of account attributable to earning of exempt income. On a perusal of the assessment order, present Court find that, there is no discussion by the AO with regard to the computation of inadmissible expenditure made by the assessee forming part of the return of income. Further, the AO has not recorded any satisfaction that the working of inadmissible expenditure under Section 14A is incorrect with regard to the books of account of the assessee. The provision under Section 14(2) does not empower the AO to apply Rule 8D straightaway without considering the correctness of the assessee's claim in respect of expenditure incurred in relation to the exempt income.

In the present case, the AO has neither examined the claim in respect of expenditure incurred in relation to exempt income of the assessee nor has recorded any satisfaction with regard to the correctness of assessee's claim with reference to the books of account. Consequently, the disallowance made by applying the Rule 8D is not only against the statutory mandate but contrary to the legal principles laid down. The CIT (A) has rightly deleted the addition made on account of interest expenditure as the assessee had sufficient interest free surplus fund to make the investment and the ITAT has rightly deleted the disallowance made by the AO under Section 14A read with Rule 8D. Consequently, the interest expenditure cannot be disallowed under Section 14A read with Rule 8D(2)(ii) under any circumstances. There is no substantial question of law that is required to be framed. Appeal dismissed


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