skn 1 1017.17-itxa.doc IN HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO. 1017 OF 2017 Pr.Commissioner of Income Tax-2. Appellant. V/s. M/s.Bombay Stock Exchange Ltd. Respondent. Mr.Suresh Kumar for Appellant. Mandar Vaidya for Respondent. CORAM : M.S. SANKLECHA AND NITIN JAMDAR, JJ. DATE : 15 October 2019. P.C. : 1. This appeal under section 260-A of Income Tax Act, 1961 (Act), challenges order dated 7 February 2016 passed by Income Tax Appellate Tribunal (Tribunal). impugned order dated 7 February 2016 of Tribunal is in respect of assessment year 2008-09. 2. Revenue has urged following question of law for our consideration: Whether on facts and circumstances of case and in law, Tribunal has erred in holding that AO has not recorded ::: Uploaded on - 22/10/2019 ::: Downloaded on - 23/10/2019 10:45:51 ::: skn 2 1017.17-itxa.doc satisfaction u/s 14A(2) despite AO discussing assessee s method in para 5.3 before not accepting same? 3. Respondent is recognized stock exchange. Respondent earned dividend income of Rs.143.39 crore which was exempt under section 10 of Act. In its return of income for subject assessment year, Respondent had disallowed sum of Rs.40.29 lakh under section 14A of Act as expenditure attributable to earning of exempt income. However, Assessing Officer did not accept claim of Respondent of disallowance under section 14A of Act. Thus, he worked out disallowance at Rs.7.42 crore by application of Rule 8D of Income Tax Rules, 1961 (Rules) in his assessment order dated 27 December 2010. 4. Being aggrieved with order dated 27 December 2010, Respondent filed appeal to Commissioner of Income Tax (Appeals) [CIT(A)]. By order dated 25 April 2012, CIT(A) dismissed Respondent s appeal. 5. On further appeal, Tribunal by impugned order dated 2 June 20016 allowed Respondent s appeal by, inter alia, holding that Assessing Officer did not record his non-satisfaction to reject disallowance under section 14A of Act claimed by Respondent. It also relied upon its decision on this issue for assessment year 2006-07 and 2007-08. In above view, it held there would be no occasion to invoke Rule 8D of Rules to work out disallowance. ::: Uploaded on - 22/10/2019 ::: Downloaded on - 23/10/2019 10:45:51 ::: skn 3 1017.17-itxa.doc 6. Being aggrieved by impugned order, Revenue is in appeal before us. 7. Mr.Suresh Kumar, learned counsel appearing in support of appeal submits that impugned order incorrectly proceeds on basis that Assessing Officer did not record non-satisfaction on disallowance claimed by Respondent under section 14A of Act. In support of his submission, he invites our attention to paragraph- 5.3 of assessment order which reads as under: 5.3 submissions of assessee are examined. basis for calculation of expenses related to exempted incomes as adopted by assessee are not consistent with provisions of Section 14A and working of same, as envisaged in Rule 8D of IT Rules. basis adopted by assessee for calculation of disallowance under under section 14A appears peculiar as assessee has adopted total area occupied by particular section, i.e. , Treasury Section of assessee out of total area occupied by company. This is not basis by any standard or imagination. On above basis, it is submitted that non-satisfaction has been recorded of by Assessing Officer of disallowance made by Respondent. Therefore, invocation of Rule 8D cannot be disputed. It also incorrectly placed reliance upon order of Tribunal for assessment year 2006-07, as Rule 8D of Rules was not applicable for that assessment year. ::: Uploaded on - 22/10/2019 ::: Downloaded on - 23/10/2019 10:45:51 ::: skn 4 1017.17-itxa.doc 8. For purpose of this appeal, we accept that reliance upon order passed by Tribunal for assessment year 2006-07 is not correct. This, as in that year, Rule 8D of Rules was not in force. However, we would examine whether in absence of above, does question give rise to any substantial question of law. 9. We note that it is evident from extracted part of assessment order referred to hereinabove that Assessing Officer has come to conclusion that disallowance claimed by Respondent was not consistent with Rule 8D of said Rules. It is only in view of disallowances not being worked out as per Rule 8D of Rules, that Assessing Officer is not satisfied with disallowance offered by Respondent. This, to our mind, is putting cart before horse. Assessing Officer must first record conclusion that having regard to accounts of assessee, he is not satisfied with disallowance offered by Respondent in terms of section 14A(2) of Act. It only on being dissatisfied with above, does Rule 8D of Rules can be invoked to compute disallowance. 10. Mr.Vaidya, learned counsel appearing for Respondent is correct in his submission that satisfaction which was to be recorded by Assessing Officer has to be clear and on objective basis without any reference to Rule 8D. In support of his contention, our attention is drawn to judgment of this Court in case of Godrej & Boyce Mfg.Co.Ltd. v. Deputy Commissioner of Income-tax 1 while dealing 1 (2010) ITR 81 (Bom) ::: Uploaded on - 22/10/2019 ::: Downloaded on - 23/10/2019 10:45:51 ::: skn 5 1017.17-itxa.doc with constitutional validity of Rule 8D of said Rules, negatived challenge to its validity by, inter alia, recording as under: 57. Now in dealing with challenge it is necessary to advert to position that Sub-section (2) of Section 14A prescribes uniform method for determining amount of expenditure incurred in relation to income which does not form part of total income only in situation where Assessing Officer, having regard to accounts of assessee is not satisfied with correctness of claim of assessee in respect of such expenditure. It therefore merits emphasis that Sub- section (2) of Section 14A does not authorize or empower Assessing Officer to apply prescribed method irrespective of nature of claim made by assessee. Assessing Officer has to first consider correctness of claim of assessee having regard to accounts of assessee. satisfaction of Assessing Officer has to be objectively arrived at on basis of those accounts and after considering all relevant facts and circumstances. application of prescribed method arises in situation where claim made by assessee in respect of expenditure which is relatable to earning of income which does not form part of total income under Act is found to be incorrect. In such situation method had to be devised for apportioning expenditure incurred by assessee between what is incurred in relation to earning of taxable income and that which is incurred in relation to earning of non-taxable income. As matter of fact, memorandum explaining provisions of Finance Bill 2006 and CBDT circular dated 28 December 2006 state that since existing provisions of Section 14A did not provide method of computing expenditure incurred in relation to income which did not form part of total ::: Uploaded on - 22/10/2019 ::: Downloaded on - 23/10/2019 10:45:51 ::: skn 6 1017.17-itxa.doc income, there was considerable dispute between tax payers and department on method of determining such expenditure. It was in this background that Sub-section (2) was inserted so as to provide uniform method applicable where Assessing Officer is not satisfied with correctness of claim of assessee. Sub-section (3) clarifies that application of method would be attracted even to situation where assessee has claimed that no expenditure at all was incurred in relation to earning of non-taxable income. 58. Parliament has provided adequate safeguard to invocation of power to determine expenditure incurred in relation to earning of non-taxable income by adoption of prescribed method. invocation of power is made conditional on objective satisfaction of Assessing Officer in regard to correctness of claim of assessee, having regard to accounts of assessee. When statute postulates satisfaction of Assessing Officer "Courts will not readily defer to conclusiveness of executive authority's opinion as to existence of matter of law or fact upon which validity of exercise of power is predicated".- M.A. Rasheed v. State of Kerala AIR 1974 SC 2249 (at para 7 page 2252). decision by Assessing Officer has to be arrived at in good faith on relevant considerations. Assessing Officer must furnish to assessee reasonable opportunity to show cause on correctness of claim made by him. In event that Assessing Officer is not satisfied with correctness of claim made by assessee, he must record reasons for his conclusion. These safeguards which are implicit in requirements of fairness and fair procedure under Article 14 must be observed by Assessing Officer when he arrives at his satisfaction under Sub-section (2) of Section 14A. As we shall note shortly hereafter, Sub-rule (1) of Rule 8D has ::: Uploaded on - 22/10/2019 ::: Downloaded on - 23/10/2019 10:45:51 ::: skn 7 1017.17-itxa.doc also incorporated essential requirements of Sub-section (2) of Section 14A before Assessing Officer proceeds to apply method prescribed under Sub-rule (2). (emphasis supplied) 11. Non-satisfaction with disallowance offered by assessee has to be arrived at on basis of accounts submitted by assessee. In this case, Assessing Officer had not carried out aforesaid exercise but rejected disallowance claimed by assessee only on ground that it was not in accordance with Rule 8D of Rules. application of Rule 8D of Rules would only arise once Assessing Officer is not satisfied on objective criteria in context of its accounts, that suo motu disallowance claimed by assessee is not proper. 12. In fact, Supreme Court in case of Maxopp Investment Ltd. v. Commissioner of Income Tax2 while upholding view of Delhi High Court has held that Assessing Officer needs to record his non-satisfaction having regard to sou motu disallowances claimed by assessee in context of its accounts. It is only thereafter, occasion to apply rule 8D of Rules for apportionment of expenses can arise. 13. In present facts, Tribunal has correctly come to conclusion that non-satisfaction as recorded by Assessing 2 (2018) 91 taxman,.com 154 (SC) ::: Uploaded on - 22/10/2019 ::: Downloaded on - 23/10/2019 10:45:51 ::: skn 8 1017.17-itxa.doc Officer for rejecting sou motu disallowances claimed by assessee is not done as required under section 14A(2) of Act. On facts, view taken by Tribunal is possible view and calls for no interference. 14. In above view, question as proposed does not give rise to any substantial question of law. Thus, not entertained. 15. Accordingly, appeal is dismissed. (NITIN JAMDAR, J.) (M.S. SANKLECHA, J.) ::: Uploaded on - 22/10/2019 ::: Downloaded on - 23/10/2019 10:45:51 ::: Pr. Commissioner of Income-tax-2 v. Bombay Stock Exchange Ltd