2014 (10) TMI 899 - AT - Income Tax

Determination of disallowance u/s 14A - Held that - Determination of disallowance u/s 14A of the Act of ₹ 5,00,000/- was based on the employee costs and other costs involved in carrying out this activity. Further, assessee also explained that the shares which have yielded exempt income were acquired long back out of own funds and no borrowings were utilized. The mutual fund investments were claimed to be also made out of surplus funds. It was specifically claimed that no fresh investments have been made during the year under consideration in shares yielding exempt income. All the aforesaid points raised by the assessee have not been addressed by the Assessing Officer and the same have been brushed aside by making a bland statement that the disallowance is not acceptable . Therefore, in our view, in the present case, the Assessing Officer has not recorded any objective satisfaction in regard to the correctness of the claim of the assessee, which is mandatorily required in terms of section 14A(2) of the Act and therefore his action of invoking rule 8D of the Rules to compute the impugned disallowance is untenable. Accordingly, the orders of the authorities below are set-aside on this aspect and the Assessing Officer is directed to retain the disallowance u/s 14A of the Act to the extent of ₹ 5,00,000/-, as returned by the assessee. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of expenditure under Section 14A of the Income Tax Act, 1961.
2. Application of Rule 8D for computing disallowance.
3. Satisfaction of the Assessing Officer regarding the correctness of the assessee's claim.

Issue-wise Detailed Analysis:

1. Disallowance of Expenditure Under Section 14A of the Income Tax Act, 1961:
The primary issue revolves around the disallowance of an additional amount of Rs. 78,84,361/- as expenditure incurred in relation to income that does not form part of the total income under Section 14A, over and above the Rs. 5,00,000/- already disallowed by the assessee. The assessee is engaged in manufacturing and sale of steel and related products. During the relevant assessment year, the assessee declared dividend income and long-term capital gains, which were claimed as exempt under sections 10(34), 10(35), and 10(38) of the Income Tax Act, 1961. The assessee had suo moto disallowed Rs. 5,00,000/- in relation to the exempt income. However, the Assessing Officer was not satisfied with this amount and invoked Rule 8D to compute the disallowance, resulting in an additional disallowance of Rs. 78,84,361/-.

2. Application of Rule 8D for Computing Disallowance:
The Assessing Officer applied Rule 8D of the Income Tax Rules to determine the disallowance under Section 14A. The computation involved calculating the average investment and applying 0.5% to this average, resulting in a total disallowance of Rs. 83,84,361/-. Since the assessee had already disallowed Rs. 5,00,000/-, the net additional disallowance was Rs. 78,84,361/-. The CIT(A) upheld this disallowance, leading to the present appeal by the assessee.

3. Satisfaction of the Assessing Officer Regarding the Correctness of the Assessee's Claim:
A crucial aspect of this case is whether the Assessing Officer recorded an objective satisfaction regarding the correctness of the assessee's claim. As per Section 14A(2), the Assessing Officer must be satisfied with the correctness of the assessee's claim before invoking Rule 8D. The Tribunal noted that the Assessing Officer did not provide specific reasons or objective satisfaction regarding the incorrectness of the assessee's disallowance of Rs. 5,00,000/-. The Tribunal referred to the decision in the assessee's own case for the A.Y. 2008-09, where a similar issue was considered, and it was held that without recording objective satisfaction, the Assessing Officer cannot invoke Rule 8D.

Tribunal's Decision:
The Tribunal found that the Assessing Officer did not record any objective satisfaction as mandated by Section 14A(2). The Tribunal emphasized that the satisfaction must be based on relevant considerations and reasons. Since the Assessing Officer merely stated that the disallowance was "not acceptable" without addressing the detailed submissions made by the assessee, the invocation of Rule 8D was deemed untenable. Consequently, the Tribunal directed the Assessing Officer to accept the disallowance of Rs. 5,00,000/- as returned by the assessee and delete the additional disallowance of Rs. 78,84,361/-.

Conclusion:
The Tribunal allowed the assessee's appeal, setting aside the orders of the lower authorities, and directed the Assessing Officer to retain the disallowance under Section 14A to the extent of Rs. 5,00,000/-. The decision underscores the importance of the Assessing Officer recording objective satisfaction before invoking Rule 8D for computing disallowance under Section 14A.

Pronouncement:
The judgment was pronounced in the open Court on 21-10-2014.