2016 (5) TMI 1278 - AT - Income Tax

Disallowance u/s 14A read with rule 8D - Held that - We find that the assessee has got sufficient own funds in the form of share capital and Reserves and Surplus, which is much more than the investments made by the assessee and hence, it can be safely concluded that the investments were made only out of the own funds of the assessee The hon ble Bombay High Court in CIT v. Reliance Utilities and Power Ltd. 2009 (1) TMI 4 - BOMBAY HIGH COURT has held that where the interest-free funds far exceed the value of investments, it should be considered that investments have been made out of interest-free funds and no disallowance under section 14A towards any interest expenditure can be made. Apropos, the non-recording of satisfaction by the Ld. AO in terms of Rule 8D(1) of the Rules, we hold that the Ld. AO is supposed to record his satisfaction as to how the disallowance made by the assessee in the return of income is incorrect with specific reference to books of account of the assessee. In the instant case, the Ld. AO had not recorded the satisfaction in the required manner as per Rule 8D(1) of the Rules. Hence, we hold that Ld. AO is not entitled to mechanically apply rule 8D(2) of the Rules without recording satisfaction in terms of Rule 8D(1) of the Rules - Decided in favour of assessee

Summary

Issues:
- Delay in filing Cross Objection
- Disallowance u/s 14A read with Rule 8D
- Non-recording of satisfaction by the Ld. AO in terms of Rule 8D(1)

Delay in filing Cross Objection:
The Cross Objection by the assessee was delayed by two days, attributed to the Director being out of station on the due date. The Tribunal condoned the delay, accepting the explanation provided by the Ld. AR, and admitted the Cross Objection.

Disallowance u/s 14A read with Rule 8D:
The assessee raised an additional ground challenging the disallowance u/s 14A read with Rule 8D. The Tribunal admitted the additional ground for adjudication based on a decision of the Hon’ble Supreme Court. The assessee contended that investments were made from own funds, not borrowed funds, supported by the own funds exceeding investments. The Ld. AO had not recorded satisfaction under Rule 8D(1) before invoking Rule 8D(2) for disallowance. The Tribunal relied on a Karnataka High Court decision and a Bombay High Court decision to rule in favor of the assessee, deleting the disallowance.

Non-recording of satisfaction by the Ld. AO in terms of Rule 8D(1):
The Ld. AO failed to record satisfaction as required under Rule 8D(1) before applying Rule 8D(2) for disallowance. The Tribunal emphasized the necessity of recording satisfaction with specific reference to the books of account. Relying on a Coordinate bench decision, the Tribunal held that without such satisfaction, the Ld. AO cannot make a further disallowance under section 14A.

In conclusion, the Cross Objection of the assessee was allowed, and the Tribunal dismissed the appeal, emphasizing the importance of recording satisfaction before disallowing expenses under section 14A. The judgment highlighted the necessity of proper adherence to procedural rules and legal precedents in tax matters.