Learned Counsel For The Assessee Would Submit That The Tribunal Has Placed On Record The Judgment Of The Hon’ble Apex Court In The Case Of Maxopp Investment Ltd v. Cit Reported In 402 Itr 640 (Sc) In Arriving At A Decision That The Assessing

IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 25 DAY OF OCTOBER, 2021 PRESENT THE HON’BLE MRS.JUSTICE S.SUJATHA AND THE HON’BLE MR. JUSTICE E.S.INDIRESH I.T.A.No.244/2021 BETWEEN : 1 . THE PR. COMMISSIONER OF INCOME TAX BMTC COMPLEX, KORAMANGALA BANGALORE BMTC COMPLEX, KORAMANGALA BANGALORE 2 . THE ASSITANT COMMISSIONER OF INCOME TAX, CIRCLE-4 (1) (2) BANGALORE INCOME TAX, CIRCLE-4 (1) (2) BANGALORE ...APPELLANTS (BY SRI E.I.SANMATHI, ADV.) AND : M/s MPHASIS SOFTWARE & SERVICES (INDIA) PVT. LTD., BAGAMANE WORLD TECHNOLOGY CENTRE, 1 FLOOR, WING A WTC-3, K.R.PURAM MARATHALLI OUTER RING ROAD MAHADEVAPURA BANGALORE-560048 PAN: …RESPONDENT (BY SMT.MANASA ANANTHAN, ADV. A/W SRI SURYANARAYANA T., ADV.) THIS INCOME TAX APPEAL IS FILED UNDER SECTION 260-A OF INCOME TAX ACT 1961, ARISING OUT OF ORDER DATED 03.07.2020 PASSED IN ITA NO.1948/BANG/2018, FOR THE ASSESSMENT YEAR 2014-2015. PRAYING TO 1. DECIDE THE FOREGOING QUESTION OF LAW AND/OR SUCH OTHER QUESTIONS OF LAW AS MAY BE FORMULATED BY THE HON'BLE COURT AS DEEMED FIT. 2. SET ASIDE THE APPELLATE ORDER DATED 03.07.2020 PASSED IN ITA NO.1948/BANG/2018 FOR ASSESSMENT YEAR 2014-2015 (PRODUCED AS ANNEXURE-A), BY THE INCOME TAX APPELLATE TRIBUNAL, 'A' BENCH, BENGALURU. THIS APPEAL COMING ON FOR ADMISSION, THIS DAY, S. SUJATHA, J., DELIVERED THE FOLLOWING: J U D G M E N T Learned counsel Sri. T. Suryanarayana accepts notice for the respondent. This appeal is filed by the Revenue under Section 260A of the Income Tax Act, 1961 (‘Act’ for short) challenging the order dated 03.07.2020 passed in ITA No.1948/Bang/2018 by the Income Tax Appellate Tribunal, Bangalore Bench “A”, Bangalore (‘Tribunal’ for short) relating to the assessment year 2014-15. 2. The respondent – assessee, a private limited company engaged in rendering Software Development Services and Information Technology support services, filed its return of income relating to the assessment year 2014-15 which is under consideration. The assessee’s case for the year under consideration was selected for scrutiny assessment and notice under Section 143(2) of the Act was issued by the Assessing Officer and an order was passed under Section 143(3) of the Act accepting the income declared by the assessee, wherein the assessee has computed the administrative expenses amounting to Rs.3,55,660/- against the exempt dividend income and disallowed the same under Section 14A of the Act. Subsequently, the Assessing Officer initiated rectification proceedings under Section 154 of the Act and passed an order rectifying the assessment order by disallowing Rs.41,48,681/- under Section 14A of the Act as against Rs.3,55,660/- disallowed by the assessee and added same to the total income of the assessee. Being aggrieved, the assessee preferred appeal before the CIT(A) who dismissed the appeal confirming the order of the rectification. On further appeal before the Tribunal by the assessee, the Tribunal has allowed the appeal setting aside the order passed by the CIT(A) and the rectification order under Section 154 of the Act passed by the Assessing Officer. 3. Being aggrieved by the said order of the Tribunal, the Revenue has preferred this appeal raising the following substantial questions of law:- “1. Whether on the facts and in the circumstances of the case, the Tribunal is correct in law in setting aside disallowance made by assessing authority under section 14A even when the conditions for invoking said provisions are satisfied in case of assessee and as such order passed by Tribunal is perverse in nature? 2. Whether, the Tribunal, on the facts and in the circumstances of the case, that the Tribunal is right in law setting aside the order passed under section 154 of the Act even though the said order satisfied all the conditions for invoking section 154 of the Act?” 3. Being aggrieved by the said order of the Tribunal, the Revenue has preferred this appeal raising the following substantial questions of law:- “1. Whether on the facts and in the circumstances of the case, the Tribunal is correct in law in setting aside disallowance made by assessing authority under section 14A even when the conditions for invoking said provisions are satisfied in case of assessee and as such order passed by Tribunal is perverse in nature? 2. Whether, the Tribunal, on the facts and in the circumstances of the case, that the Tribunal is right in law setting aside the order passed under section 154 of the Act even though the said order satisfied all the conditions for invoking section 154 of the Act?” 4. Learned counsel for the Revenue argued that the Assessing Officer as well as CIT(A) have rightly considered the matter in invoking Section 154 of the Act to rectify the assessment order wherein the quantum of disallowance made by the assessee at Rs.3,55,660/- was accepted instead of Rs.41,48,681/- which is a mistake apparent on the face of the record and the same is amenable to the rectification under Section 154 of the Act. The Tribunal ignoring the material aspects of the matter vis-à-vis the provisions of Section 14A of the Act and Rule 8D of the Income Tax Rules, 1962 (‘Rules’ for short) reversed the finding of the authorities in allowing the appeal filed by the assessee. 5. Learned counsel for the assessee would submit that the Tribunal has placed on record the judgment of the Hon’ble Apex Court in the case of Maxopp Investment Ltd., vs. CIT reported in 402 ITR 640 (SC) in arriving at a decision that the assessing officer was required to follow the mandates laid down under Section 14A(2) of the Act in the light of the books of accounts of the assessee. If the Assessing Officer has not agreed with the claim of the assessee, then it was mandatory for him to record the satisfaction in terms of Rule 8D of the Rules. The proceedings initiated under Section 154 of the Act is wholly unjustifiable. Having regard to these aspects, the Tribunal has rightly allowed the appeal and the same requires to be confirmed answering the substantial questions of law in favour of the assessee and against the Revenue. 6. We have carefully considered the rival submissions of the learned counsel appearing for the parties and perused the material on record. 7. Sub-sections (2) and (3) of Section 14A of the Act inserted by the Finance Act, 2006 with effect from 01.04.2007 reads thus:- “Expenditure incurred in relation to income not includible in total income. 14A. (1) xxxxx (2)The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act.” 8. Section 154 of the Act reads thus:- “Rectification of mistake. 154.[(1)With a view to rectifying any mistake apparent from the record an income-tax authority referred to, in section 1 16 may,- The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act.” 8. Section 154 of the Act reads thus:- “Rectification of mistake. 154.[(1)With a view to rectifying any mistake apparent from the record an income-tax authority referred to, in section 1 16 may,- (a) amend any order passed by it under the provisions of this Act; provisions of this Act; (b) amend any intimation or deemed intimation under sub- section (1) of section 143; under sub- section (1) of section 143; (c) amend any intimation under sub-section (1) of section 200A; of section 200A; (d) amend any intimation under sub-section (1) of section 206CB; (1A)Where any matter has been considered and decided in any proceeding by way of appeal or revision relating to an order referred to in sub-section (1), the authority passing such order may, notwithstanding anything contained in any law for the time being in force, amend the order under that sub-section in relation to any matter other than the matter which has been so considered and decided. (2) Subject to the other provisions of this section, the authority concerned-- (a) may make an amendment under sub- section (1) of its own motion, and (b) shall make such amendment for rectifying any- such mistake which has been brought to its notice by the assessee or by the deductor or by the collector, and where the authority concerned is the Commissioner (Appeals), by the Assessing Officer also. (3) An amendment, which has the effect of enhancing an assessment or reducing a refund or otherwise increasing the liability of the assessee or the deductor or the collector, shall not be made under this section unless the authority concerned has given notice to the assessee or the deductor or the collector of its intention so to do and has allowed the assessee or the deductor or the collector a reasonable opportunity of being heard. (4) Where an amendment is made under this section, an order shall be passed in writing by the income- tax authority concerned. [(5) Where any such amendment has the effect of enhancing the assessment or otherwise reducing the liability of the assessee or the deductor or the collector, the Assessing Officer shall make any refund which may be due to such assessee or the deductor or the collector. (6) Where any such amendment has the effect of enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee or the deductor or the collector, theAssessing Officer shall serve on the assessee or the deductor or the collector, as the case may be a notice of demand in the prescribed form specifying the sum payable, and such notice of demand shall be deemed to be issued under section 156 and the provisions of this Act shall apply accordingly. (7) Save as otherwise provided in section 155 or sub- section (4) of section 186, no amendment under this section shall be made after the expiry of four years from the end of the financial year in which the order sought to be amended was passed. [(8) Without prejudice to the provisions of sub-section (7), where an application for amendment under this section is made by the assessee or by the deductor or by the collector on or after the 1[st]day of June, 2001 to an income-tax authority referred to in sub-section (1), the authority shall pass an order, within a period of six months from the end of the month in which the application is received by it,- (a) making the amendment; or (b) refusing to allow the claim.” 9. Rule 8D of the Rules reads thus: “Method for determining amount of expenditure in relation to income not includible in total income. 8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with- (a) the correctness of the claim of expenditure made by the assessee; or pass an order, within a period of six months from the end of the month in which the application is received by it,- (a) making the amendment; or (b) refusing to allow the claim.” 9. Rule 8D of the Rules reads thus: “Method for determining amount of expenditure in relation to income not includible in total income. 8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with- (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred, 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). (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely.- (i) the amount of expenditure directly relating to income which does not form part of total income; and relating to income which does not form part of total income; and (ii) an amount equal to one per cent of the annual average of the monthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income. annual average of the monthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income. Provided that the amount referred to in clause (i) and clause (ii) shall not exceed the total expenditure claimed by the assessee. ” 10. Reading of these provisions would make it clear that the assessee has to make a claim with regard to expenditure incurred for earning income which is not chargeable to tax, which requires to be examined by the Assessing Officer and satisfaction has to be recorded, more particularly, when the Assessing Officer has not agreed with the disallowance claim under Section 14A of the Act. For disagreeing with such disallowance, deduction of the expenditure is not to be allowed which has been incurred by the assessee in relation to the income which does not form part of the total income under the Act as per Section 14A(1) of the Act. However, such expenditure which has been incurred in respect of other income which has to be treated as part of the total income has to be considered under Section 14A(2) of the Act read with Rule 8D of the Rules, but suo moto disallowance under Section 14A of the Act made by the Assessing Officer is unwarranted. In other words, recording of satisfaction by the Assessing Officer under Rule 8D(2) of the Rules is mandatory. In the light of these provisions, the Assessing Officer invoking Section 154(2) to rectify the assessment order is wholly untenable for the reason that there is no mistake apparent on the face of the record to invoke the proceedings under Section 154 of the Act. On the other hand, the matter requires adjudication upon the issue which is a debatable issue as pointed out by the Tribunal. In such circumstances, the order passed by the Assessing Officer under Section 154 of the Act and confirmed by the CIT(A) is unsustainable. On these material aspects, the Tribunal has rightly applied its mind and has reversed the finding of the authorities which cannot be faulted with. 11. For the aforesaid reasons, we answer the substantial questions of law raised by the Revenue in favour of the assessee and against the Revenue. Resultantly, the appeal stands dismissed. Learned counsel for the respondent is permitted to file power by two weeks. Sd/- JUDGE Sd/- JUDGE PMR