Rule 8D Of IT Rules Can Be Invoked Only If Assessee's Computation Of Expenses Attributable To Earning Exempt Income Is Found Inadequate: Delhi HC
Kapil Dhyani
19 Dec 2024 2:35 PM IST
The Delhi High Court has held that recourse to Rule 8D of the Income Tax Rules, 1962 for computing disallowance under Section 14A of the Income Tax Act is available only if the Assessee's computation of expenses attributable to earning exempt income, is found to be inadequate.
Rule 8D provides a mechanism to determine the expenditure in relation to exempt income.
In the case at hand, Assessee had earned income by way of dividend amounting to ₹8,55,88,493/-, which was exempt under Section 10(34) of the Act. It had suo moto attributed expenses amounting to ₹7,50,000/- as incurred towards earning the said exempt income, and had accordingly not claimed the same as a deduction from its taxable income.
The Assessing Officer however computed the disallowance under Section 14A of the Act by applying Rule 8D, at ₹93,62,120/-.
Aggrieved, the Assessee preferred an appeal before the Commissioner of Income Tax (Appeals) which observed that the Assessee's computation of ₹7,50,000/- as the expenditure attributable to earning exempt income, was not found defective by the AO.
The CIT(A) faulted the AO for not recording its adequate satisfaction before invoking Rule 8D but proceeded to make a disallowance of ₹20,00,000/- on an ad hoc basis.
In Assessee's appeal, the ITAT concurred with the decision of CIT(A) that the AO had not recorded its dissatisfaction in regard to the Assessee's computation before proceeding to compute the disallowance under Rule 8D. However, it did not concur with the ad hoc disallowance.
Hence, the present appeal was preferred by Revenue.
At the outset, the High Court noted that neither the AO nor any of the appellate authorities had found that the Assessee's computation of expenditure, which was allocable to earning exempt income, was erroneous or inadequate.
“None of the authorities had determined that the Assessee's computation of expenditure attributable to the exempt income was erroneous or had faulted the same. In the aforesaid circumstances, it was not permissible for the AO to proceed to compute disallowance under Rule 8D of the Rules,” it held.
The division bench of Justices Vibhu Bakhru and Swarana Kanta Sharma cited Coforge Limited v. ACIT (2021) where the High Court had held that if the assessee claims a certain amount of expenditure was incurred by him to earn the income which does not form part of the total income, the Assessing Officer is required to examine the accounts, and thus, satisfy himself as to the correctness of the claim made by the assessee about the expenditure incurred in that regard.
“It is when an Assessing Officer is not satisfied as to the correctness of the claim made by the assessee, about the expenditure said to have been incurred by him on such income which does not form part of the total income under the Act, he then proceeds to determine the amount of expenditure, by following such method as is prescribed, i.e., Rule 8D of the Rules,” it was held therein.
In the present case, the Court noted that the AO had not found fault with the Assessee's computation of expenditure allocable to exempt income and, therefore, recourse to Rule 8D of the Rules for determining the expenditure incurred for earning exempt income, was not available.
Accordingly, Revenue's appeal was dismissed.
Appearance: Mr. Puneet Rai, SSC with Mr. Ashvini Kumar and Mr. Rishabh Nangia, JSCs for Appellant; Ms. Kavita Jha, Sr. Advocate with Mr. Vaibhav Kulkarni and Mr. Himanshu Aggarwal, Advocates for Respondent
Case title: Pr. Commissioner Of Income Tax-7, Delhi v. UK Paints India Pvt. Ltd.
Case no.: ITA 24/2024
