Proper recording of satisfaction by the Assessing Officer is essential for disallowance under Section 14A, validated through statutory methods, rejecting arbitrary estimates.

JUDGMENT

Manmeet Pritam Singh Arora, J.:

1. The present appeals have been filed under Section 260A of the Income Tax Act, 1961, (`Act').

1.1. The Assessee has impugned order dated 22nd February, 2021, passed in ITA No. 4583/Del/2017 for the Assessment Year (`AY') 2012-13 in ITA No. 77/2022.

1.2. The Assessee has impugned order dated 26th August, 2021, passed in ITA No.1876/Del/2018 for the AY 2013-14 in ITA No. 95/2022.

AY 2012-13

2. The facts giving rise to the present appeal are that the Appellant, Assessee, had filed its return of income (`ROI') for the relevant assessment year, declaring an income of Rs. 198,88,65,682/-. The Assessee earned dividend income of Rs. 5,80,00,000/-in the said year, which was claimed as exempt income under Section 10(34) of the Act. The Assessee had suo moto disallowed a sum of Rs.1,00,000/-as expenditure towards administrative expenses under Section 14A of the Act, in respect of the said tax-free income. The Assessing Officer (`AO') was not satisfied with the working of the disallowance made by the Assessee and he, therefore, determined a sum of Rs. 1,44,85,000/as the disallowance towards administrative expenses under Rule 8D(2)(iii) of the Income Tax Rules, 1962 (`IT Rules').

2.1. The Commissioner of Income Tax (Appeals) [`CIT(A)'] relying upon the judgment of this Court in ACB India Ltd. vs. ACIT, (2015) 374 ITR 108 (Del), restricted the disallowance by ascertaining the amount of total investment and limiting it to the investment from which the tax-exempt dividend was earned. The CIT(A), however, excluded the investment held by the Assessee in its subsidiary company even though it had yielded dividend. The CIT(A), therefore, restricted the disallowance under Rule 8D(2)(iii) to Rs. 26.70 Lakhs.

2.2. The Income Tax Appellate Tribunal (`Tribunal') relied upon the judgment of this Court in Assessee's own case for the AY 2010-11 to uphold the aforesaid disallowance under Rule 8D(2)(iii). However, the Tribunal modified the order of the CIT(A) to the extent it disallowed the value of Assessee's strategic investment in its subsidiaries for the purpose of computation of disallowance and added the same. The Tribunal held that the said investment held by the Assessee in the subsidiary company has to be considered for the purpose of disallowance, following the judgment of the Supreme Court in Maxopp Investment Ltd. vs. CIT, (2018) 402 ITR 640 (SC). The Tribunal concluded that the disallowance under this Rule works out at Rs. 55,12,500/-. The working of the said disallowance has been set out as under:

AY 2013-14

3. In this AY, the Tribunal upheld the disallowance made by the AO under Section 14A read with Rule 8D(2)(iii), as upheld by the CIT(A). However, for the purpose of calculation of the said disallowance the Tribunal relied upon the order passed by its coordinate bench in Assessee's own case for AY 2012-13 and has directed the AO to recompute the disallowance under Rule 8D(2)(iii) by including the investment made by the Assessee in the subsidiary company.

3.1. In this assessment year, the Assessee had earned dividend income of Rs. 7.04 Crores and had suo moto disallowed Rs.9,75,000/-under Section 14A of the Act, towards expenses pertaining to tax free income. The AO being unsatisfied with the suo moto disallowance by the Assessee towards administrative expenses, determined a sum of Rs. 11,550,027/-as the disallowance towards ad