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2016 (5) TMI 1425 - AT - Income TaxDisallowance u/s. 14A - non-recording of satisfaction - Held that - We find that the issue on the argument of non-recording of satisfaction deserves to be dismissed as from the perusal of the assessment order it could be seen that the AO had clearly recorded his satisfaction that interest relatable to all investment income from which does not or shall not form part of total income is to be considered and no scrip wise investment as considered by the assessee. Accordingly, he proceeded to adopt Rule 8D(2) of the Rules but it is well settled that only investment yielding exempt income are to be considered for the purpose of Rule 8D(2)(ii) and (iii) of the Rules. Accordingly, we direct the Ld. AO to restrict the disallowance u/s. 14A read with Rule 8D of the Rules after considering only investments yielding dividend income. In any case, we direct that the disallowance to be worked out thereon shall not exceed the income which does not form part of the total income. - Decided partly in favour of assessee for statistical purposes.
Issues Involved:
- Disallowance under Section 14A of the Income Tax Act, 1961. Issue-Wise Detailed Analysis: 1. Applicability of Section 14A of the Act: The primary issue in this appeal is whether the disallowance under Section 14A of the Income Tax Act, 1961, is justified given the facts and circumstances of the case. The Assessing Officer (AO) observed that the assessee had earned dividend income of ?13,83,515/-. The AO noted that the unsecured loans had been utilized for investment in shares, thereby attracting Section 14A of the Act, which mandates the disallowance of expenses related to exempt income. The assessee had calculated a disallowance of ?14,62,379/- based on a scrip-wise allocation of expenses, including interest, employee remuneration, and other admissible expenses. 2. Calculation of Disallowance: The AO rejected the assessee's calculation and adopted Rule 8D(2)(ii) of the Income Tax Rules, resulting in a disallowance of ?91,50,478/-. The AO substituted the assessee's disallowance figure with ?93,54,318/-. On appeal, the Commissioner of Income Tax (Appeals) [CIT(A)] enhanced the disallowance by ?24,53,163/-, applying Rule 8D(2)(iii) in full. 3. Non-Recording of Satisfaction by AO: The assessee argued that the AO did not record satisfaction as required under Rule 8D(1) of the Rules, thus objecting to the invocation of Rule 8D(2). The assessee relied on several Tribunal decisions, including Luccas Estates Pvt. Ltd., REI Agro Ltd., and John Distilleries Ltd., to support their contention. The assessee also argued that only investments yielding dividend income should be considered for disallowance and that the disallowance should not exceed the exempt income, citing the Delhi High Court's decision in CIT Vs. Holim India Pvt. Ltd. 4. Response by Revenue: The Departmental Representative (DR) countered that the assessee did not raise a specific ground regarding the non-recording of satisfaction, making the argument and related case laws irrelevant. The DR contended that the AO correctly applied Rule 8D(2)(ii) and that the CIT(A) rightly invoked Rule 8D(2)(iii), enhancing the assessment. The DR cited the Special Bench decision in Cheminvest, which was later reversed by the Delhi High Court. 5. Tribunal's Findings: The Tribunal dismissed the argument regarding non-recording of satisfaction, noting that the AO had clearly recorded his satisfaction in the assessment order. The Tribunal agreed with the assessee's contention that only investments yielding exempt income should be considered for disallowance under Rule 8D(2)(ii) and (iii). The Tribunal directed the AO to restrict the disallowance to investments yielding dividend income and ensured that the disallowance does not exceed the exempt income, referencing the Tribunal's decision in PDGD Investments & Trading Pvt. Ltd. Conclusion: The Tribunal partly allowed the assessee's appeal for statistical purposes, directing the AO to re-calculate the disallowance under Section 14A read with Rule 8D, considering only investments yielding dividend income and ensuring the disallowance does not exceed the exempt income. The order was pronounced in the open court on 25.05.2016.
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