IT: It is Assessing Officer who has to record his satisfaction with regard to correctness of assessee's claim before proceeding to disallow expenditure under section 14A and satisfaction to be recorded by Assessing Officer under section 14A(2) cannot be substituted by satisfaction recorded by first appellate authority
■■■
[2018] 89 taxmann.com 189 (Mumbai - Trib.) 
IN THE ITAT MUMBAI BENCH 'C' 
Arnav Gruh Ltd.
v.
Deputy Commissioner of Income-tax, Central Circle-36, Mumbai*
SAKTIJIT DEY, JUDICIAL MEMBER 
AND Manoj Kumar Aggarwal, ACCOUNTANT MEMBER 
IT Appeal Nos. 3840 & 3841 (Mum.) of 2015
[ASSESSMENT YEARS 2009-10 AND 2010-11] 
DECEMBER  15, 2017 
Section 14A of the Income-tax Act, 1961, read with rule 8D of the Income-tax Rules, 1962 - Expenditure incurred in relation to income not includible in total income (Satisfaction of AO) - Assessment years 2009-10 and 2010-11 - Whether it is Assessing Officer who has to record his satisfaction with regard to correctness of assessee's claim before proceeding to disallow expenditure under section 14A and satisfaction to be recorded by Assessing Officer under section 14A(2) cannot be substituted by satisfaction recorded by first appellate authority, even accepting fact that his power is co-terminus with that of Assessing Officer - Held, yes [Para 8][In favour of assessee] 
CASES REFERRED TO
 
Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 194 Taxman 203/328 ITR 81 (Bom.) (para 8) and Maxopp Investment Ltd. v. CIT [2011] 15 taxmann.com 390 (Delhi) (para 8).
Pawan Ved  for the Appellant. Rajat Mittal  for the Respondent. 
ORDER
 
Saktijit Dey, Judicial Member - Aforesaid appeals by the assessee are against two separate orders, both dated 20th March 2015, passed by the learned Commissioner (Appeals)-53, Mumbai, for the assessment years 2009- 10 and 2010-11.
2. The first common issue raised by the assessee in both the appeals relate to disallowance made under section 14A r/w rule 8D.
3. Brief facts are, the assessee a company is engaged in the business of builder and property developer. For the assessment year 2010-11, the assessee filed its return of income on 29th September 2009, declaring total income of Rs. 60,52,460. During the assessment proceedings, the Assessing Officer noticing that the assessee has debited an amount of Rs. (-) 1,54,24,888, as share from joint venture which is not taxable, whereas, the assessee has debited expenditure towards interest and finance charges amounting to Rs. 2,56,70,226, called upon the assessee to explain why expenditure attributable to earning exempt income should not be disallowed. In response to the query raised by the Assessing Officer, the assessee made detailed submissions before the Assessing Officer stating therein that it has not done any investment during the year other than the investment in capital account of the joint venture and only income earned by assessee during the year is interest income from the joint venture which has been offered to tax and share in profit/(loss) from the joint venture. Thus, it was submitted by the assessee that it has not earned any exempt income during the year to suffer disallowance under section 14A of the Act. Further, the assessee submitted, since it has voluntarily made a disallowance of Rs. 1,08,00,000 under section 14A in the computation of income, no further disallowance out of the interest expenditure can be made. The Assessing Officer, however, rejecting the contention of the assessee held that disallowance under section 14A has to be made in accordance with the method prescribed under rule 8D and accordingly, proceeded to quantify the disallowance under section 14A r/w rule 8D at Rs. 1,38,92,625. In almost identical manner, the Assessing Officer disallowed an amount of Rs. 71,67,830 for Assessment Year 2010-11. Being aggrieved of the disallowances made by the Assessing Officer, assessee preferred appeals before the first appellate authority.
4. The learned Commissioner (Appeals) after considering the submissions of the assessee, though, agreed that the Assessing Officer has not recorded any satisfaction on the correctness or otherwise of the assessee's claim of expenditure attributable to earning of exempt income, however, at the same time, he expressed the view that such lapse or omission on the part of the Assessing Officer is procedural lapse and can be corrected by the first appellate authority, since, his powers are co-terminus with that of the Assessing Officer. Accordingly, he proceeded to quantify the disallowance under section 14A r/w rule 8D at Rs. 1,08,29,111 for Assessment Year2009-10 and, thereby, allowing partial relief to the assessee. In Assessment Year2010-11 the Commissioner (Appeals) enhanced the disallowance to Rs. 1,22,66,185. Being aggrieved of the aforesaid decision of the learned Commissioner (Appeals), assessee is in appeal before us.
5. In grounds no.1 and 2 of the revised Form no.36 filed on 23rd February 2017 for Assessment Year 2009-10, the assessee has challenged the decision of the first appellate authority in not allowing netting off of interest received against the interest paid while computing disallowance under section 14A. That besides, the assessee has also raised an additional ground on the issue that no disallowance under section 14A can be made in respect of share income received from association of persons (AOP). Therefore, even the disallowance made voluntarily by the assessee is sought to be deleted.
6. The learned Authorised Representative submitted, apart from the fact that Assessing Officer failed to record any satisfaction while making the disallowance, in the relevant previous year the assessee has not earned any exempt income. Therefore, no disallowance under section 14A r/w rule 8D can be made at all. He submitted, even though the assessee in the computation of income filed along with return of income has voluntarily disallowed expenditure under section 14A, however, if the provisions of section 14A are not applicable to the share in the profit of AOP, since, it cannot be considered as exempt income no disallowance under section 14A can at all be made.
7. Learned Departmental Representative on the other hand relied upon observations of the first appellate authority.
8. We have heard the rival contentions and perused the material on record in the context of relevant statutory provisions as contained under section 14A r/w rule 8D. As could be seen from the factual matrix of the case, the assessee in the relevant previous year has earned interest income from the capital invested in the joint venture which has been offered to tax in the return of income filed. That besides, the assessee has shown his portion of the share in the loss suffered by the joint venture during the year. It is also a fact that assessee has suo-motu disallowed an amount of Rs. 1,08,00,000 under section 14A of the Act in Assessment Year2009-10. In the course of assessment proceedings, in response to the query raised by the Assessing Officer, the assessee has justified the disallowance made by it under section 14A through detailed submissions. However, the Assessing Officer except recording a vague and general observation that the submissions of the assessee was not found tenable has not recorded any satisfaction as to why the claim of the assessee with regard to the disallowance made by it under section 14A is not correct having regard to its books of account. Section 14A(2) of the Act which has been introduced to the statute w.e.f. 1st April 2007 by Finance Act, 2006 mandates recording of satisfaction by the Assessing Officer on the correctness of assessee's claim having regard to its accounts. Even, rule 8D(1) also postulates similar recording of satisfaction by the Assessing Officer. The Hon'ble Jurisdictional High Court in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 194 Taxman 203/328 ITR 81 (Bom.) has held that recording of satisfaction under section 14A(2) of the Act is a sin qua non for making disallowance of expenditure attributable to earning of exempt income. The Hon'ble Delhi High Court in case of Maxopp Investment Ltd. v. CIT [2011] 15 taxmann.com 390 has also expressed similar view. Undisputedly, in the facts of the present case, the Assessing Officer has not recorded any satisfaction as per the mandate of section 14A(2) r/w rule 8D(1). It is relevant to observe that the learned Commissioner (Appeals) has accepted the aforesaid factual position by holding that the Assessing Officer has not recorded any satisfaction with regard to the correctness of assessee's claim. However, he has stepped into the shoes of the Assessing Officer for correcting the lapse committed by the Assessing Officer. As could be seen from the language of section 14A(2) r/w rule 8D(1), it is the Assessing Officer who has to record his satisfaction with regard to the correctness of assessee's claim before proceeding to disallow expenditure under section 14A. In the facts of the present case, the Assessing Officer has failed to do so. The learned Commissioner (Appeals) has given a clear and categorical finding in this regard which has not been challenged by the Department. Therefore, when the statutory provisions mandate a particular act to be done by a particular Authority in a particular manner, it has to be done by that authority in that manner only or not at all. The satisfaction to be recorded by the Assessing Officer under section 14A(2) cannot be substituted by the satisfaction recorded by the first appellate authority, even, accepting the fact that his power is co-terminus with that of the Assessing Officer. That being the case, the Assessing Officer could not have done any further disallowance under section 14A r/w rule 8D.
9. Having held so, it is now necessary to look into the issue whether the assessee's claim that suo motu disallowance made by it under section 14A also requires to be deleted. As could be seen, from the facts on record, before the Assessing Officer and the first appellate authority the assessee had contended that it had not earned tax free income in the relevant previous year to attract the provisions of section 14A in the sense that share of loss from joint venture cannot be treated as tax free income at the hands of the assessee, since, the profit/loss is taxed at highest rate in the hands of the joint venture and what had come to the joint venture partner is simply post tax share of profit/loss. However, as it appears from the facts on record, the assessee before the Departmental Authorities has pleaded against any additional disallowance to be made under section 14A r/w rule 8D over and above the disallowance already made by it. In other words, the assessee's submissions before the Departmental Authorities was restricted to the additional disallowance proposed and made by the Assessing Officer under section 14A r/w rule 8D. The issue as raised by the assessee before us to the effect that the suo-motu disallowance made by the assessee even has to be deleted is a completely new issue raised for the first time before us. Therefore, for the purpose of giving a fair opportunity to the Department to have its say on assessee's aforesaid claim, we restore the matter back to the file of the Assessing Officer for adjudication after considering the submissions of the assessee and keeping in view the judicial precedents that may be cited before him and in accordance with the relevant statutory provisions. It is open for the assessee to raise all contentions regarding applicability of section 14A to the share in the Profit & Loss derived from the joint venture. With the aforesaid observations, no separate adjudication of ground no1 & 2 is required and ground no.4 is allowed for statistical purposes. Our aforesaid decision will apply mutatis mutandis to similar issue raised in ITA no.3841/MUM/2015.
10. The only other common issue raised in both the appeals relates to part disallowance of interest expenditure under section 36(1)(iii)/section 57(iii) of the Act.
11. We have heard the rival contentions and perused the material on record. The learned Commissioner (Appeals) has disallowed 6% out of interest expenditure incurred by the assessee only on the reasoning that while the assessee has paid interest @ 18% on the borrowed fund it has received interest @ 12% on interest bearing advances made to the joint venture. We are of the view that the rate of interest at which the assessee has borrowed funds cannot be made applicable to the interest bearing advances made to the joint venture as the joint venture is constituted by the partners and the assessee apart from receiving the interest income has also a share in the distribution of the income of the joint venture. Moreover, the interest bearing advance to joint venture being made only for the purpose of business no disallowance out of interest expenditure can be made. Grounds raised by the assessee on this issue in both the appeals are allowed.
12. In the result, assessee's appeals are partly allowed.
pooja 

*In favour of assessee.