Facts of the Case

The Revenue filed an appeal under Section 260A of the Income-tax Act, 1961 challenging the order dated 16.06.2023 passed by the Income Tax Appellate Tribunal for Assessment Year 2008-09. The assessee, UK Paints India Pvt. Ltd., had filed its return declaring total income of ₹10,43,43,498/-.

During the relevant year, the assessee earned exempt dividend income of ₹8,55,88,493/- under Section 10(34). The assessee suo motu disallowed ₹7,50,000/- as expenditure attributable to earning such exempt income, comprising part salary of directors, administrative staff, and other administrative expenses.

The Assessing Officer applied Rule 8D and computed total disallowance at ₹93,62,120/-, making a net addition of ₹86,12,120/- after reducing the assessee’s disallowance. The CIT(A) held that the Assessing Officer had not recorded proper satisfaction under Section 14A(2) but nevertheless sustained an ad hoc disallowance of ₹20,00,000/-. The ITAT deleted the ad hoc disallowance and restricted the disallowance to ₹7,50,000/- as offered by the assessee.

Issues Involved

Whether disallowance under Section 14A could be enhanced by invoking Rule 8D when the Assessing Officer had not recorded dissatisfaction with the assessee’s suo motu computation of expenditure attributable to exempt income.

Petitioner’s Arguments (Revenue)

The Revenue contended that the Assessing Officer had rightly computed disallowance under Section 14A read with Rule 8D and that the ITAT erred in restricting the disallowance to ₹7,50,000/-, ignoring the statutory formula under Rule 8D.

Respondent’s Arguments (Assessee)

The assessee argued that it had made a reasonable and justified suo motu disallowance, which was never found to be incorrect or inadequate by the Assessing Officer. It was contended that in the absence of recorded dissatisfaction as mandated by Section 14A(2), invocation of Rule 8D was impermissible.

Court Order / Findings

The Delhi High Court observed that neither the Assessing Officer nor the appellate authorities had recorded any finding that the assessee’s computation of ₹7,50,000/- was erroneous or inadequate. The Court reiterated that recourse to Rule 8D is permissible only after the Assessing Officer records dissatisfaction with the correctness of the assessee’s claim having regard to the accounts.

Relying on its earlier decisions including Coforge Ltd. v. ACIT, HT Media Ltd. v. PCIT, and the Supreme Court judgment in Maxopp Investment Ltd., the Court held that mere application of Rule 8D without recording satisfaction violates Section 14A(2).

The Court further held that once the statutory procedure was not followed, neither the Assessing Officer nor the CIT(A) could resort to ad hoc enhancement of disallowance beyond the amount voluntarily offered by the assessee.

Important Clarification

The Court clarified that where an assessee has made a suo motu disallowance under Section 14A, the burden shifts to the Revenue to examine the accounts and record dissatisfaction before invoking Rule 8D. In the absence of such satisfaction, no further disallowance can be sustained.

Final Outcome

The appeal filed by the Revenue was dismissed. The Delhi High Court answered the substantial question of law in favour of the assessee and upheld the ITAT’s order restricting the disallowance under Section 14A to ₹7,50,000/- as voluntarily offered by UK Paints India Pvt. Ltd. Pending applications were disposed of accordingly.

 

Link to download the order - https://www.mytaxexpert.co.in/uploads/1769841246_PR.COMMISSIONEROFINCOMETAX7DELHIVsUKPAINTSINDIAPVT.LTD..pdf

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