Gains from share transactions constitute capital gains and purchase payments to non-resident parent attracting no TDS disallowance confirmed.

ORDER

Mahavir Singh, Vice President.- These cross-appeals are arising out of the order of learned Commissioner of Income Tax (Appeals), NFAC, Delhi in appeal No.NFAC/2009-10/10370119 dated 19^th December, 2025.

2. Initially, a draft assessment order dated 29^th March, 2014 was passed under Section 143(3)/144C(1) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’) determining income at Rs. 4896,58,43,555/-. Aggrieved, objections were filed by the assessee before Dispute Resolution Panel (DRP). Thereafter, pursuant to the directions dated 8^th January, 2015 issued by DRP, final assessment was completed vide order dated 20^th January, 2015 under Section 143(3) read with Section 144C of the Act. As per the said order, income of the assessee was assessed at Rs. 4649,87,40,313/-. Against the aforesaid assessment order, the assessee filed appeal before the ITAT, which was decided vide order dated 9^th February, 2023. The Tribunal deleted certain additions/disallowances and set aside certain issues back to the file of the Assessing Officer, with specific directions. In pursuance to the aforesaid order, the Assessing Officer passed impugned order dated 31^st March, 2024 under Section 254 read with Section 143(3) of the Act, after making additions/disallowances as under:-

3. First, we will take up Revenue’s appeal in ITA No.2619/Del/2026.

4. Learned CIT(A) deleted the addition made by the Assessing Officer on account of re-characterization of gains arising from sale of shares and securities claimed as capital gains to business income and against this, the Revenue has filed following ground No.l:-

“1. Whether on facts and in the circumstances of the case, Ld. CiT(A) has erred in rejecting the decision of Assessing Officer on recharacterization of gains arising from sale of shares and securities as business income to the tune of Rs.125,66,52,965/- without considering the Judgment of Hon’bie Supreme Court in the case of Raja Bahadur Vishweshwara Singh and others v. CIT (SC) 41 ITR 685?”

5. At the outset, learned Counsel for the assessee stated that the issue raised in the Revenue’s appeal is squarely covered by the Tribunal in assessee’s own case for assessment year 2011-12 to 2013-14 in Maruti Suzuki India Ltd. v. Dy. CIT   (Delhi – Trib.)/ITA No. 287/Del/ 2016 and others, order dated 8^th October, 2025. When the order of the Tribunal was confronted to the learned CIT-DR, he could not controvert the fact situation and could not distinguish on facts, rather, he admitted that the facts are clearly identical.

6. After hearing both the sides and perusing the material placed before us, we noted that learned CIT(A) has relied on the decision of the Tribunal in assessee’s own case and deleted the addition by observing in paragraph Nos.6.2.2 to 6.2.4, as under:-

“6.2.2 I have carefully considered the facts and submissions on record and the order dated 08.10.2025 of Hon’bie Jurisdictional ITAT in assessee’s own case for AY 2011-12, AY 2012-13 and AY 2013-14 wherein ITA No. 287/Del/2016 for AY 2011-12 was taken as the lead case. In AY 2011-12, the AO in para 14.6 to para 14.8 (which contains the reason of the AO and the DRP. for making the disallowance), of the assessment order dated 31.12.2015, has noted as under-

14.6 To conclude, as the facts and circumstances of these claims are the same as preceding years and the reply furnished by the assessee is also on the same lines, following the same rationale and arguments, the claim of the assessee for this year is also declined. For detailed discussion made in the assessment order of A. Y. 2010-11 may be referred to. Thus, in view of the detailed discussion made by the Assessing Officer in A. Y. 2010-11 on this issue and after considering the reply of the assessee in the current year, I disallow the claim of the assessee.

14.7 The assessee company filed its objection before the Hon’ble Dispute Resolution Panel-2, New Delhi. The Hon’ble Dispute Resolution Panel-2, New Delhi, vide para 35 on page 15 of order dated 20.11.2015 has held that “DRP has examined the issue. The primary issue involved is whether investment in mutual funds by the assessee should he treated as stock in trade or capita! investment. The AO has relied upon his finding in preceding A Y since facts of the present year are the same as those in earlier year. For AY 2010-11, then DRP has decided the matter against the assessee. It is noted that assessee’s purchase and sale of securities were for short periods and in high volume out of mixed pool of funds over a long period of time involving great number of staff etc. Since factual matrix of the year under consideration is the same as that in preceding year, concurring with view taken by then DRP for preceding A Y, the panel upholds the action of the AO. The objection is dismissed”.

14.8 in view of the decision of Hon’ble Dispute Resolution Panel-2, New Delhi and the reasons mentioned above, the claim of the assessee of Long Term Capital Loss of Rs.219,70,90,370/- and Short Term Capital Gain of Rs.6,90,68,982/- is disallowed and the above transactions are held as business transactions. Thus, the business income of the assessee from the above transactions in Mutual Funds is computed at Rs.58,03,05,393/-(Rs.51,12,36,410 + Rs.6,90,68,983) which is added to the total income of the assessee.

(Addition of Rs.58,03,05,393/-)

6.2. 3 From the above it is apparent that AO has noted in the above order for AY 11-12 that the facts in respect of these claims is same as preceding years and the AO and DRP, both have relied on the discussion made in the AY 10-11 i.e. the year under consideration, for making and sustaining the disallowance respectively. Therefore, this issue in AY 11-12 is identical to the issue under consideration in this appeal for AY 10-11. Hon’ble Jurisdictional ITAT in assessee’s own case for AY 2011-12 vide order dated 08.10.2025 has held as under:

“34. Considered the rival submissions and material placed on record. We observe that this issue is covered in favour of the assessee in its own cases in different assessment years as mentioned above. For the sake of brevity, we reproduce relevant findings of the coordinate Bench in ITA No.961/Del/2015 order dated 09.02.2023 for AY 2010-11 on this issue as under:-

“84. We have heard Ld. Authorized Representatives of the parties and perused the material available on record. It is not in dispute that the AO in earlier years has allowed the claim of the assessee regarding treatment of transactions related to sale and purchase of mutual funds/securities etc. as the investment, in the year under consideration, the AO has taken a different stand and treated the surplus arising out of the sale of mutual funds/securities as income from business, it is also not in dispute that the investment made by the assessee is out of non-interest bearing fund. The AO did not accept the contention of assessee made during the course of assessment proceedings on the basis that most of the investments were held for a period of 13 months in respect of long term capita! gain and in respect of short term capital gain also there was frequent sale and purchases. He was also view of the fact that looking to the volume of transaction, the total purchase price of mutual fund is Rs.1004,58,57,202/- in respect of long term capital gain and Rs.1587, 10,65,228/- in respect of short term capital gain which is substantial by any standard. Hence, he treated the transaction as the business activity of the assessee. Law is well settled now that intent is required to be examined whether it is for investment or otherwise for business of course to arrive at any conclusion certain factors need to be kept in mind, if such factors point towards business activity certainly then any surplus arising would partake character of business profit however, if it for parking surplus fund or is mandatoriiy made under government policy or otherwise then it will fall in category of investment. Therefore, Considering the totality of the facts, to verify the claim of the assessee that the transaction in question are pure investments by the assessee, the impugned disallowance is hereby set aside and the issue is restored back to the file of AO for decision afresh. The AO would consider all the objections of the assessee in the light of binding precedents. The Ground Numbers 13 to 13.5 are allowed for statistical purpose only”.

35. Considered the above findings of the coordinate bench and material placed on record. We observe from the above decision of the coordinate bench that the AO in the earlier years had agreed with the fact that the investments made by the assessee in the Mutual funds were for the purpose of investment. Only recently the AO had taken a view on the basis of volume of transactions of purchase and sale of mutual funds made him to believe that these transactions are trading and to be treated as part of business transactions. In order to verify the nature and purpose of transactions, coordinate bench had remitted back to the file of AO to verify in AY that the assessee is consistently making investments in the mutual funds out of 2010-11. However, after considering the materials placed before us, we observe surplus funds available in the business with the only intention to maximize the return reinvest the same only after maturity of the investments and do not make any short on its investments in the mutual funds or short term investments. They always selling or traded the same. As per the information available on the record they the intention is only to make the investment and not for trading. It is normal in the always buy the mutual funds with the term 13months, it clearly demonstrates that indicate that this is for investment only, not for trading. Therefore, we are in companies to park their additional funds for a return, the notion return clearly agreement with the assessee these investments are made with the only intention of making investments, it can only be allowed to classify the same under the head capital gains not under the head income from Business.

36. The next issue is whether the CBDT circular be applied prospectively or Calcutta High Court in the case of Century Plyboards Ltd. (supra), wherein it was retrospectively, we observed that this issue was already addressed by the Hon’ble held that CBDT Circular 6/2016 dated 29/2/2016 would be applicable retrospective in operation and would apply to the assessments years prior to the issue of the Circular also. Similar view was also expressed by the Jurisdictional High Court in the case of WIG Investments (supra). Therefore, we are inclined to allow the grounds raised by the assessee in this regards instead of remitting the issue back to the AO for verification, in the result, ground nos. 9 to 9.4 raised by the assessee are allowed with the above observations.”

6.2 .4 Therefore, respectfully following the judicial discipline and following the judgement of Hon’bie Jurisdictional ITAT dated 08.10.2025 in the case of the appellant in ITA No.287/Del/2016 for AY 2011-12 (lead case), as discussed above, these grounds are allowed.”

7. We noted that the facts are exactly identical and the issue is squarely covered by the decision of the Tribunal in assessment year 2011-12, 2012-13 and 2013-14 cited supra. Hence, respectfully following the decision of the Tribunal in assessee’s own case, we confirm the order of learned CIT(A) deleting the addition. Accordingly, this ground of Revenue’s appeal is dismissed.

8. The second issue in this appeal of the Revenue is the order of learned CIT(A) deleting the disallowance made by the Assessing Officer invoking the provisions of Section 40(a)(ia) of the Act holding that provisions of Section 40(a)(ia) cannot be applied in view of the provisions of DTAA.

9. At the outset, learned Counsel for the assessee stated that this issue also is covered by the decision of the Tribunal for assessment year 2011-12 to 2013-14 in ITA No.287/Del/2016 and others, order dated 8^th October, 2025 (supra). We noted that the Assessing Officer disallowed purchases made from M/s SMC for non-deduction of TDS and thereby invoking the provisions of Section 40(a)(1) read with Section 195 of the Act. We noted that the Assessing Officer has disallowed payment made by the assessee against the purchases made from SMC, which is parent company of the assessee by invoking the provisions of Section 40(a)(1) read with Section 195 of the Act. From the facts narrated by the learned Counsel for the assessee as well as from the orders of lower authorities, it is clearly established that the payments made by the assessee were only against the purchases and material supplied by SMC from Japan. It is also a fact that both the parties agreed that the Assessing Officer has invoked the above provisions on the basis of non-deduction of tax at the time of payments. When these facts were confronted to the learned CIT-DR, he could not controvert the above fact situation that this issue is not covered. We noted from the order of learned CIT(A) that the learned CIT(A) deleted the addition by observing in paragraph Nos.6.3.2 to 6.3.4, as under:-

“6.3.2 I have carefully considered the facts and submissions on record and the order dated 08.10.2025 of Hon’bie Jurisdictional ITAT in assessee’s own case for AY 2011-12, AY 2012-13 and AY 2013-14 wherein ITA No.287/Dei/2016 for AY 2011-12 was taken as the lead case. In AY 2011-12, the AO in para 15.3 to para 15.6 (which contains the reason of the AO and the DRP for making the disallowance), of the assessment order dated 31.12.2015, has noted as under:

15.3 As the facts and circumstances of these claims are the same as preceding years and the reply furnished by the assessee is also on the same Unes, following the same rationale and arguments, the claim of the assessee for this year is also declined. For detailed discussion made in the assessment order of A. Y. 2010-11 may be referred to. Thus, in view of the detailed discussion made by the Assessing Officer in A.Y. 2010-lion this issue and after considering the reply of the assessee in the current year, i disallow the claim of the assesse.

15.4 Thus, in view of the above, it is evident that the assessee was required to deduct TDS on the business profits on the purchases made from M/s SMC, Japan, as per the provision of Section 195 of the Income-tax Act. The assessee has not submitted the details regarding the business profits accrued to M/s SMC on above purchases, hence, it is estimated that the Net Profit on the above sales to the assessee @20% of the sales. It is further held that 50% of the above profit is attributable to the business of operations of M/s SMC in India, in absence of any information. Thus, the business profit of M/s SMC on the sales made to the assessee comes out to Rs.238,20,87,484/- on which the assessee was liable to deduct TDS u/s 195 which the assessee failed to deduct.

15.5 The assessee company filed its objection before the Hon’ble Dispute Resolution Panel-2, New Delhi. The Hon’ble Dispute Resolution Panel-2, New Delhi, vide para 38 on page 17 of order dated 20.11.2015 has held as under:

“38.1 DRP has examined the issue, it is seen that AO has based his finding on conclusion drawn in preceding A Y 2010-11. Then DRP has decided the matter against the assessee. The case of the assessee is that SMC does not have any PE in India and hence its business receipts are not subject to tax in India.

38.2 The panel has noted that there are two directors on board of directors of the assessee nominated by SMC. These directors retain their lien with SMC and it can not be said that they are not advocating the business interests of SMC while sitting in board of directors of the assessee. It is worth while to note that the assessee has made purchases of Rs.2382 cr from SMC. The assessee has not established that nominee directors have no role to play in these purchases from SMC. Under these circumstances, there is a place of management of SMC in premises of the assessee which represents PE of SMC in India. Since factual matrix of the year under consideration is the same as that in preceding year, concurring with view taken by then DRP for preceding A Y, the pane! upholds the action of the AO. The objection is dismissed”.

15.6 In view of the decision of Hon’ble Dispute Resolution Panei-2, New Delhi and the reasons mentioned above, the above amount is disallowed u/s 40(a)(i) of the Income-tax Act and added back to the total income.

(Addition of Rs.238,20,87,484/-)

6.3.3 From the above it is apparent that AO has noted in the above order for A 11-12 that the facts in respect of these claims is same as preceding years and the AO and DRP, both have relied on the discussion made in the AY 10-11 i.e. the year under consideration, for making and sustaining the disallowance respectively. Even the Ld. Departmental Representative for the revenue has himself accepted during the hearing (page 77 of the Hon’ble ITAT order) that the core facts remain consistent identical to the issue under consideration in this appeal for AY 10-11. Hon’ble Jurisdictional ITAT in assessee’s own case for AY 2011-12 vide order dated 08.10.2025 has held as under:

“40. Considered the rival submissions and material placed on record. We observed that the AO had disallowed the payment made by the assessee against the purchases made from the SMC which is the parent company of the assessee. The AO invoked the provisions of section 40(a)(i) r.w.s 195 of the Act. From the facts submitted before us clearly establishes that the payment made by the assessee was only against the purchases and materials supplied by SMC from Japan. It is established fact on record and also both the parties agree with the above facts on record, we noticed that the AO had invoked the above provisions on the basis of non-deduction of tax at the time of payments. First let us discuss the taxability of the above transactions under section 40(a) (i) and section 195 of the Act. In our considered view, it is settled position of law that any payment to a non-resident, tax has to be deducted only upon the transaction or payment which is chargeable to tax under Income Tax Act, as held in the case of GE India Technology Centre (P) Ltd v. CiT 327 iTR 456 (SC), Engineering Analysis Centre of Excellence Pvt Ltd v. CiT:   (SC)] it is precondition that the AO had to establish that the payments made are chargeable to tax under the provisions of income Tax. in the given case, the disallowances were made on the significant payments towards purchases to the SMC, Japan Which is the parent company. The issue is whether the provisions of with holding tax applicable to the purchases?. In our view, the provisions are outside the scope of payments towards purchases, it is fact on record that the manufacturing of the goods imported by the assessee are made outside the territory of India, in our view, the above transaction has to be evaluated on the basis of related party transactions involving International Transaction on the basis of transfer pricing. From the facts brought on record, the provisions of section 40(a)(i) r.w.s 195 is not applicable to the present transaction, the additions proposed are not valid.

41. The revenue argued that any payment made to the non-resident has to be subjected to TDS, even if the tax is not payable, the assessee should have made application before AO or obtained a certificate as per the rule prescribed u/s 195 (3) and (6) of the Act. These rules are applicable particularly when the payments are made with concessional rate or payments are made subject to tax. When the persons making the payment aware of the fact that the transaction is not taxable in the territory of India, there is no requirement of deduction of tax.

42. At the same time, we observed that the assessee had declared the above purchases from SMC as international transaction before the TPO, which is reproduced at page 2 of the TPO order. The TPO had accepted the above purchases and not proposed any TP adjustment, it is also fact on record that the above components and consumables were utilized by the assessee in the manufacturing in their plant. It is the domain of the TPO to verify the purchases as part of the transfer pricing and if there is any SMC interest in terms of Permanent Establishment or not had to be analyzed by him considering the same as special domain. Once the Purchases are accepted as proper in the TP study, there is no room for the AO not make any addition at the time of making payments. In our view, the purchases are made from the related concern having impact on the functions and manufacturing carried on by the assessee having direct impact on the Indian Market, therefore, this is the domain of the TPO, the AO instead of applying section 195 on the payment to the SMC, he should have referred this issue back to the TPO, there is not domain of the assessing officer particularly he is aware of the fact that the transaction involving import of material or components from the AE. We observe that for the issue of payments towards purchases, several issues relating to PE and all the relevant issues raised in this appeal relating to Permanent Establishment involving permanent or fixed place of business, service PE, controlling of subsidiary by employing deputed directors, whether in the pay roll of the assessee company or not, whether there can be any place of management issue, issue of dependent agent PE has to be analyzed at the back drop of analyzing the international transaction with the related concern. This is not domain of the assessing officer, it is the domain of technical units like TPO. Therefore, in our considered view, TPO had already considered the issues involving the transfer pricing at the reference of the AO, the same cannot be revisited with the wrong additions proposed by the AO. The additions proposed by the AO have no legs to stand.

43. With regard to article 24 non-discrimination clause of the treaty, we have already held that the payment for purchases are not subjected to the TDS provisions, it falls under the Article 5 and 7 of the treaty, this has to be evaluated under the transfer pricing. The article 24 has direct implication when the tax authorities impose TDS provisions differently for domestic and foreign entities. In the domestic transactions, the TDS provisions are not applicable in the case of purchases, similar treatment has to be extended to the nonresidents involving similar purchases, only difference is it should be evaluated by applying Transfer Pricing provisions. There are specific provisions applicable with regard to import of goods from AEs. Therefore, we are inclined to delete the additions made u/s 40(a)(i) of the Act.”

6.3. 4 Therefore, respectfully following the judicial discipline and following the judgement of Hon’bie Jurisdictional ITAT dated 08.10.2025 in the case of the appellant in ITA No.287/De!/2016 for AY 2011-12 (lead case), as discussed above, these grounds are allowed.”

10. We observe that the facts are exactly identical and this issue is squarely covered by the decision of the Tribunal in assessment year 2011-12, 2012-13 and 2013-14 cited supra. Hence, respectfully following the decision of the Tribunal in assessee’s own case, we confirm the order of learned CIT(A) deleting the addition. Accordingly, this ground of Revenue’s appeal is dismissed.

11. As regards the appeal of the assessee in ITA No.2133/Del/2026, the only issue raised by the assessee is as regards the order of learned CIT(A) confirming the action of the Assessing Officer in disallowing expenses relatable to exempt income by invoking the provisions of Section 14A of the Act read with Rule 8D(2)(iii) of the Income-tax Rules, 1962 (hereinafter referred to as ‘the Rules’) amounting to Rs. 16,95,78,062/-. For this, the assessee has raised following grounds:-

“1. That on the facts and circumstances of the case and in law, the Commissioner of income Tax (Appeal) [‘CIT(A)’] erred in affirming the disallowance of Rs.16,95,78,062 made by the assessing officer under section 14A of the Act, over and above the suo-motu disallowance of Rs.1,69,36,938 made by the appellant.

1.1. That the CIT(A) erred in not appreciating that the assessing officer made the disallowance without satisfying any of the pre-conditions for making the said disallowance as prescribed under sub-sections (2)/(3) of section 14A of the Act.

1.2. That on the facts and circumstances of the case and in law, the CIT(A) erred in not deleting the disallowance made under section 14A of the Act, despite the fact that no valid satisfaction, having regard to the accounts of the appellant, was recorded by the Assessing Officer before invoking the provisions of section 14A read with Rule 8D of the Income-tax Rules, 1962.

1.3. That the CIT(A) further erred in not appreciating that the assessing officer referred to the provisions of Rule 8D(2)(iii) of the Rules without appreciating that jurisdictional conditions for invoking the said rule were not satisfied.”

12. Brief facts are that the assessee company is a public limited company engaged in the business of manufacture, purchase and sale of automobiles. The assessee filed its return of income declaring an income of Rs. 3259,18,58,726/-. Assessment was framed under Section 143(3) read with Section 144C(1) of the Act. The Assessing Officer, while framing assessment, made disallowance of Rs. 32,57,05,335/- of expenses relatable to exempt income by invoking the provisions of Section 14A of the Act read with Rule 8D(2)(iii) of the Rules. The assessee has made suo motu disallowance of expenses relatable to exempt income amounting to Rs. 1,69,36,938/- being administrative expenses. The matter was carried up to the Tribunal and, the Tribunal, vide order dated 9^th February, 2023 in Maruti Suzuki India Ltd. v. Dy CIT [IT Appeal Nos. 961 and 1507 (Del) of 2015] , remanded the matter back to the file of the Assessing Officer with the following directions (these directions are culled out from paragraph 45 of the Tribunal’s order):-

“(a) Since the appellant had sufficient own funds, no disallowance was to be made out of interest expenses;

(b) Disallowance to be computed out of the administrative expenses has to be verified having regard to the suo motu disallowance made by the appellant.”

13. The Assessing Officer finally disallowed administrative expenses to the extent of Rs.16,95,78,062/- in the set aside assessment in relation to exempt income by invoking the provisions of Section 14A of the Act read with Rule 8D(2)(iii) of the Rules over and above suo motu declaration made by the assessee to the extent of Rs.1,69,36,938/-. The matter was carried to the CIT(A) and the learned CIT(A) has confirmed the action of the Assessing Officer. Aggrieved, the assessee is in second round before us.

14. Before us, learned Counsel for the assessee pointed out from the Tribunal’s order in first round and particularly paragraph 45 that the assessee has suo motu disallowed a sum of Rs.1,69,36,938/- and the Assessing Officer in first round or second round has not recorded any satisfaction for invocation of Section 14A of the Act read with Rule 8D(2) of the Rules despite a clear mandate as per Rule 8D(2) of the Rules. Learned Counsel for the assessee took us through Rule 8D(1), which clearly mandates that the Assessing Officer has to specify with regard to accounts of the assessee that the assessee has not disclosed or what type of expenses were incurred by the assessee for earning of exempt income. Learned Counsel for the assessee pointed out Rule 8D(1) of the Rules, which reads as under:-

” 8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with—

in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2).”

15. Even the Assessing Officer could not point out or comply with the directions of the Tribunal and he read out the relevant directions given in paragraph 45, which read as under:-

“We are of the considered view that the assessee was required to Justify the suo-moto disallowance as to why the provision of Rule 8D of the Rules should not be made applicable on the facts of the present case. Therefore, we restore this issue to the file of AO for a limited purpose to verify the claim of the assessee regarding administrative expenses incurred for maintaining such huge investment. Thereafter, AO would make disallowance as per law. Thus, Ground Nos. 5 to 5.6 raised by the assessee are partly allowed for statistical purposes.”

16. For this proposition, learned Counsel for the assessee relied on the decision of Hon’bie Delhi High Court in the case of H.T. Media Ltd. v. Pr. CIT 399 ITR 576 (Delhi) and Coforge Ltd. v. ACIT 436 ITR 546 (Delhi). Learned Counsel for the assessee relied on paragraph 30 of the decision in the case of H.T. Media Ltd. (supra), wherein it is held as under:-

“30. Rule 8D(1) states more or less what Section 14 A (2) of the Act states. It requires the AO to first examine the accounts of the Assessee and then record that he is not satisfied with (a) the correctness of the Assessee’s claim of expenditure or (b) the claim made by the assessee that no expenditure has been incurred. Unless this stage is crossed i.e. the stage of the AO recording that he is not satisfied with the claim of the Assessee in manner indicated i.e. after examining the Assessee’s accounts, the question of applying the formula in Rule 8D (2) does not arise. That this is a mandatory pre-requisite for applying Rule 8D(2) is fairly well-settled.”

17. The learned Counsel also relied on the decision of Hon’bie Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT  328 ITR 81 (Bombay) and, finally, he drew our attention to paragraph Nos.32 to 40 of the said judgment, which read as under:-

“32. The question regarding the failure of the AO to record his dissatisfaction with the correctness of the Assessee’s claim regarding administrative expenses of Rs. 3 lakhs arises in ITA 349 of 2015. Mr Raghvendra Singh is not entirely right in his submission that there is no question framed about the failure by the AO to record his satisfaction. In ITA 349 of 2015, the question framed by this Court by the order dated 15th October 2015 is in fact in two parts: viz., (i) Whether the AO recorded a proper satisfaction in terms of Section 14A (2) and Rule 8 (D) of the Rules and (ii) in calculating the disallowance at 0.5% of average value of investments as per clause (Hi) of Rule 8 D (2) of the Rules?

33. The contention of Mr. Singh is that if there was a valid recording of satisfaction by the AO as required by Rule 8D (1), then there was no option available to the AO other than to apply Rule 8D (2) of the Rules. Therefore, even according to the Revenue, the applicability of Rule 8D (2) hinges on the recording of the AO in terms of Rule 8D (1) that he was not satisfied with the Assessee’s claim regarding expenditure incurred to earn the exempt income.

34. The Assessee had explained that Rs. 3 lakhs was being disallowed voluntarily as an “expenditure which could be attributable for earning the said income.” The Assessee explained that the disallowance had been determined on the basis of cost of finance department in the ratio of exempt income to total turnover. On that basis the disallowance in AY2005-06 was upheld by CIT (A) at Rs.l lakh. The disallowance for this AY was worked out as Rs.1,42,404/- and since the Assessee had already made a disallowance of Rs.3 Lacs, no further disallowance was called for.

35. In order to disallow this expense the AO had to first record, on examining the accounts, that he was not satisfied with the correctness of the Assessee’s claim of Rs. 3 lakhs being the administrative expenses. This was mandatoriiy necessitated by Section 14 A (2) of the Act read with Rule 8D (1) (a) of the Rules.

36. In para 3.2 of the assessment order, the AO records that, in answer to the query posed by the AO requiring it to produce calculation for disallowances, the Assessee “submitted that they have not incurred any expenditure for earning the dividend income.” Thereafter, in para 3.3, the AO records “I have considered the submissions of the Assessee and found not to be acceptable.” Thereafter, the AO proceeded to deal with the said provisions of Section 14A and Rule 8D and observed, in para 3.3.1, that making of investment, maintaining or continuing investment and time of exit from investment are well informed and well coordinated management decisions that, in relation to earning of income, are embedded in indirect expenses. It is then stated in para 3.4 that, in view of the above, the provisions of sub-section (2) of Section 14A and Rule 8D of the Rules are in operation and therefore, will strictly be adhered to by the Assessee. In para 3.6 of the assessment order, after discussing Section 14A(1) read with Rule 8D and referring to the decision of the Bombay High Court in Godrej and Boyce Mfg. Co. Ltd v. DOT (supra), the AO simply stated that “in view of the facts and circumstances and legal position on the issue as discussed above, I am satisfied that the Assessee had incurred expenses to manage its investments which may yield exempt income, and Assessee grossly failed to calculate such expenses in a reasonable manner to ascertain to ascertain the true and correct picture of its income and expenses.”

37. in the considered view of this Court, the above observations of the AO in the assessment order are of a broad general nature not with particular reference to the facts of the case on hand.

38. The Court is also unable to agree with Mr. Singh that on this aspect there are concurrent findings of both the CiT (A) as well as the ITAT. The CIT (A) disallowed the exempt expenses by merely repeating what the AO had stated about the cost that is built into so called ‘passive’ investments and simply recorded that the AO was bound to Rule 8D and, therefore, was justified in determining administrative costs at 0.5%. Here again, the CIT (A) failed to note that without the mandatory requirement, under Section 14A of the Act and Rule 8D of the Rules, of satisfaction being recorded being met, the question of applying Rule 8D (1) did not arise.

39. Turning now to the order of the ITAT, in para 33, it recorded the submission of the AR that the AO did not record any satisfaction about the Assessee not properly offering expenditure incurred in relation to the exempt income at Rs.3 lakhs. The ITAT reproduced the contents of para 3.3.1 of the assessment order, which has been extracted by this Court hereinbefore, which contains general observations regarding earning of exempt income. This cannot be accepted as a recording by the AO of satisfaction regarding the claim of the Assessee after examining its accounts. Again, in para 34 of its order, the ITAT simply reproduced para 3.3.6 of the assessment order where, again, no reasons have been provided but only a conclusion has been reached that the AO was “satisfied that the Assessee had incurred expenses to manage its investments which may yield exempt income, and Assessee grossly failed to calculate such expenses in a reasonable manner to ascertain the true and correct picture of its income and expenses.”

40. Consequently on the aspect of administrative expenses being disallowed, since there was a failure by the AO to comply with the mandatory requirement of Section 14 A (2) of the Act read with Rule 8D (1) (a) of the Rules and record his satisfaction as required thereunder, the question of applying Rule 8D (2) (Hi) of the Rules did not arise. The question framed in IT A 549 of 2015 is answered accordingly.”

18. We have also gone through the facts of the present case and particularly the assessment order passed under Section 254 read with Section 143(3) of the Act dated 31^st March, 2024 and noted that the Assessing Officer simplicitor has applied a formula without recording satisfaction. We noted that the Assessing Officer has not at all pointed out which expenditure is relatable to exempt income for applying the provisions of Rule 8D(2). Hence, on this very jurisdictional issue, we delete the addition and allow the ground raised in assessee’s appeal.

19. In the result, the appeal of the assessee is allowed and the appeal of the Revenue is dismissed.