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2016 (3) TMI 1218 - AT - Income TaxRevision u/s 263 - disallowance u/s.14A computation - AO proceed to apply the computation mode as specified in Rule 8D(2) of the Rules - Held that - While examining the claim of the assessee regarding expenditure incurred in earning the exempt income including a claim that no expenses were incurred, the AO is bound to take note of such absurdities and refrain from invoking the method of disallowance of expenses as prescribed by Rule 8D(2) of the Rules. It is for this reason that the satisfaction of the AO regarding expenses incurred for earning exempt income is to be objective satisfaction. It is only when no reasonable and proper parameters for making disallowance can be arrived at, that resort to Rule 8D(2) can be had by the AO. Rule 8D(2) will thus be a last resort when it becomes impossible to arrive at a just conclusion on the amount of expenses that has to be disallowed as attributable or incurred in earning exempt income. It cannot therefore be said that once the AO rejects the mode of computation of disallowance u/s.14A of the Act as made by the Assessee, he has no other option but to resort to Rule 8D of the Rules. Besides the above, we are also of the view that the AO has adopted one of the possible course open to him in law. The CIT cannot invoke jurisdiction u/s.263 of the Act just because he does not agree with the view of the AO. As u/s.263 of the Act, the CIT cannot substitute his view with that of the AO. The order of the AO was neither erroneous nor prejudicial to the interest of the revenue and therefore jurisdiction u/s.263 of the Act ought not to have been invoked - Decided in favour of assessee.
Issues:
Calculation of disallowance u/s.14A of the Income Tax Act, 1961 based on estimation by the Assessee, rejection of the same by the Assessing Officer (AO), application of Rule 8D of the Income Tax Rules, 1962 by the Commissioner of Income Tax (CIT) u/s.263, legality of CIT's order, appeal by the Assessee before the Tribunal. Analysis: The appeal before the Appellate Tribunal ITAT Kolkata involved a dispute regarding the calculation of disallowance u/s.14A of the Income Tax Act, 1961 for AY 2008-09. The Assessee, a company engaged in bakery products business, had voluntarily disallowed a sum under section 14A. However, the AO recalculated the disallowance, disagreeing with the Assessee's estimation related to the Treasury head's time spent on investment monitoring. The AO's revised disallowance was based on a different percentage of time spent by the Treasury head, resulting in a higher disallowance amount. The CIT, exercising powers u/s.263, found the AO's order erroneous and directed the application of Rule 8D for computing the disallowance. The Assessee contended that the AO's approach was valid and cited legal precedents to support their position. Despite the Assessee's arguments, the CIT maintained that if the AO rejected the Assessee's method of disallowance, Rule 8D must be applied. Consequently, the CIT set aside the AO's order, mandating the use of Rule 8D for disallowance calculation. Upon appeal, the Tribunal considered the arguments presented by both parties. The Tribunal referred to various judicial decisions, emphasizing that the AO has discretion in determining disallowances u/s.14A based on the Assessee's claim. It highlighted that the AO can reject Rule 8D and make disallowances on a reasonable basis, avoiding absurd outcomes. The Tribunal concluded that the AO's decision was lawful, and the CIT could not substitute his judgment under section 263. Citing legal support, the Tribunal ruled in favor of the Assessee, holding that the AO's order was not erroneous or prejudicial to revenue interests. Consequently, the Tribunal quashed the CIT's order under section 263 and allowed the Assessee's appeal. In summary, the Tribunal's judgment upheld the AO's discretion in determining disallowances u/s.14A, emphasizing the need for objective assessment and reasonable bases for calculations. The Tribunal rejected the CIT's intervention under section 263, ruling in favor of the Assessee and quashing the CIT's order, ultimately allowing the Assessee's appeal.
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