2013 (8) TMI 999 - AT - Income Tax

Addition u/s 14A - Held that - Assessing Officer and the CIT(A) have nowhere applied mind arriving at satisfaction qua assessee s plea that it had not incurred any expenditure in earning the impugned dividend income, we deem it fit to directing Assessing Officer to re-decide the matter after affording adequate opportunity of hearing to the assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D of the Income Tax Rules, 1962.
2. Satisfaction of the Assessing Officer regarding the expenditure incurred in earning exempt income.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:

The primary issue in this case is the disallowance of Rs. 2,58,66,515/- under Section 14A of the Income Tax Act, 1961, read with Rule 8D of the Income Tax Rules, 1962. The assessee, an investment and service company, declared exempt dividend income of Rs. 12,57,90,409/- and claimed no expenditure was incurred in earning this income. However, the Assessing Officer (AO) invoked Section 14A and computed the disallowance using Rule 8D, resulting in an addition of Rs. 2,58,66,515/- to the assessee's total income. This included Rs. 1,71,75,315/- under Rule 8D(2)(ii) and Rs. 86,91,200/- under Rule 8D(2)(iii).

The CIT(A) upheld the AO's decision, referencing the legislative intent of Section 14A and relevant judicial precedents, including the Supreme Court's decision in Commissioner of Income-tax, Mumbai v. Walfort Share & Stock Brokers (P.) Ltd. and the Bombay High Court's decision in Godrej & Boyce Mfg Co Ltd. Vs DCIT. The CIT(A) emphasized that expenses incurred can only be allowed to the extent they are relatable to earning taxable income and upheld the proportionate disallowance of interest expenditure.

2. Satisfaction of the Assessing Officer:

A critical aspect of the case is whether the AO recorded satisfaction that the assessee's claim of not incurring any expenditure to earn the exempt income was incorrect. The ITAT Chennai noted that the AO did not specifically rebut the assessee's contention or record such satisfaction before invoking Section 14A. The Tribunal referenced the Kolkata Tribunal's decision in REI AGRO Ltd. Vs. DCIT, which held that the AO must record satisfaction regarding the assessee's claim before making a disallowance under Section 14A. The Tribunal observed that the AO's failure to do so invalidated the disallowance.

The Tribunal also discussed the method of computation under Rule 8D, emphasizing that only the investments which generate exempt income should be considered. It highlighted that the AO's computation included investments that did not yield any exempt income, which was incorrect.

Conclusion:

The Tribunal concluded that the AO and CIT(A) had not applied their minds to the assessee's plea of not incurring any expenditure in earning the exempt income. Consequently, the Tribunal directed the AO to re-decide the matter after providing the assessee with an adequate opportunity of hearing. The Tribunal remitted the matter back on the legality aspect and did not address the computation aspect. The appeal of the assessee was allowed for statistical purposes.