2013 (11) TMI 1639 - AT - Income Tax

Disallowance to be made u/s.14A r.w.r. 8D - Held that - For invoking provisions of section 14A of the Act, AO should indicate cogent reasons for holding the view that he is not satisfied with the correctness of the claim of the assessee. We find that AO had not mentioned as how and why he was not satisfied with the claim made by the asseessee. While confirming the order of the AO,FAA has also ignored this vital factor. In taxation matters, recording of satisfaction is a pre-condition for invoking certain provisions e.g. section 132 or section 148. AO has not recorded any reason as to why he was not satisfied with the explanation filed by the assessee. Mere mentioning that he was not satisfied with the correctness of the claim made by the assessee, is not sufficient. He has to mention the reason for rejecting the claim of the assessee in no uncertain terms. Therefore, we are not able to endorse the views of the AO that were confirmed by the FAA. In our opinion, considering the facts of the case under consideration, further verification is required. Therefore in the interest of justice we are remitting back the matter to the file of the AO. He is directed to pass a reasoned and speaking order after affording reasonable opportunity of hearing to the assessee. Effective ground of appeal filed by the assessee is allowed in its favour, in part.

Summary

Issues: Disallowance of indirect expenses under section 14A of the Income-tax Act, 1961.

Detailed Analysis:

Issue 1: Disallowance of &8377; 3,53,153/- towards indirect expenses under section 14A of the Act
The assessee-company challenged the order of the CIT(A) confirming the disallowance of indirect expenses under section 14A of the Income-tax Act. The AO had determined the disallowance based on the dividend income earned by the assessee and the investments made in shares and mutual funds. The FAA upheld the AO's decision, citing the necessity of incurring expenses to earn substantial dividend income. The AR argued that no borrowed funds were used for earning exempt income and that no direct expenditure was incurred for the investments. The Tribunal analyzed the provisions of section 14A and Rule 8D, emphasizing that the AO must be unsatisfied with the correctness of the claim of the assessee to determine the amount of expenditure. The Tribunal referred to the judgment of the Delhi High Court, which highlighted the importance of the AO providing cogent reasons for disallowing expenses. It was noted that the AO had not sufficiently explained why he was not satisfied with the assessee's claim, leading to the decision to remit the matter back to the AO for a reasoned order after affording a hearing to the assessee.

Conclusion:
The Tribunal allowed the effective ground of appeal in part, remitting the matter back to the AO for a reasoned order in accordance with the judgment of the Delhi High Court. The decision emphasized the necessity for the AO to provide clear reasons for disallowing expenses under section 14A, ensuring a fair and just assessment process.