If Assessee is cash-rich entity, AO cannot presume that it had infused significant funds by way of equity in JV Company, for making disallowance under Rule 8D

While dismissing the Revenue’s appeal, The Delhi High Court held that where AO made disallowance of expenditure under section 14A by invoking rule 8D, since AO did not examine even a shred of accounts of assessee before making such disallowance, impugned disallowance made ignoring version of assessee that being a cash-rich company, it did not have to deploy any person by way of any special effort which could be treated as expenditure to earn exempted income was unjustified.

A Division Judge Bench of Justice Rajiv Shakdher and Justice Girish Kathpalia observed that “Section 14A(2) of the Act empowers the Assessing Officer to determine the expenditure in relation to income not forming part of total income if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in regard to such expenditure.”

“The Assessing Officer also assumed that the expenditure incurred by the respondent/assessee towards the audit of such investments and representation before the authorities are also expenses incurred towards maintaining such assets. Having thus concluded the disallowance under Section 14A of the Act, the Assessing Officer took recourse to Rule 8D(iii) of the Rules and quantified the disallowance”, added the Bench. 

Advocate Puneet Rai appeared for the Petitioner whereas Advocate Rajiv Tyagi appeared for the Respondent. 

The brief facts of the case were that the respondent/assessee, a public sector undertaking engaged in the business of designing and printing bank notes, minting of coins, medallion seals and tokens, etc, filed its return of income for the Assessment Year 2014-15 on 09.10.2014. The case of the respondent/assessee came under scrutiny and the Assessing Officer under Section 143(3) of the Act. During an assessment, the Assessing Officer (AO) made an addition on account of disallowance made under Section 14A of the Act. The respondent/assessee challenged the said Assessment Order before the Commissioner of Income Tax (CIT), but the said appeal of the respondent/assessee was dismissed. However, the respondent/assessee succeeded before the Tribunal in the second appeal. Placing reliance on its earlier decisions in the case of the respondent/assessee for the Assessment Years 2012-13 and 2013-14, the learned Tribunal allowed the appeal and deleted both the impugned additions. Hence, the Revenue approached the Court.

After considering the Submission, the Bench noted that the dispute revolves around the disallowance of CSR expenses and the disallowance of expenditure under Section 14A of the Act.

The Bench also noted that before recording aforesaid disbelief, the Assessing Officer did not examine even a shred of accounts of the assessee.

The Bench stated that without looking into the accounts of the assessee, the Assessing Officer held that the assessee had infused funds by way of equity in a joint venture company and also held that it was not believable that no expenditure had been incurred in relation to assets, income where from did not form part of total income.

The Bench also stated that by completely ignoring the version of the assessee that being a cash-rich company, it did not have to deploy any person by way of any special effort which could be treated as expenditure to earn exempted income, Assessing Officer recorded a conclusion that assessee had infused significant funds by way of equity in joint venture company.

The Bench further mentioned that no cogent reasons, much less supported by data extracted from accounts of the assessee were advanced by the Assessing Officer to explain why the case set up by the assessee was not believable.

The court expressed that even quantification of disallowance was carried out under rule 8D(iii), without scrutinizing accounts of the assessee and by jumping over the mandate to first proceed under section 14A.

On finding the impugned disallowance of expenditure under section 14A made by the Assessing Officer was unjustified, the Court dismissed the Appeal. 

Cause Title: PR. CIT v. M/s Security Printing & Mining Corporation of India [ITA 162/2023 / 2023-Enterslice-28-HC-Del-IT]

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