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2014 (8) TMI 160 - AT - Income Tax


Issues Involved:
1. Disallowance under Section 14A read with Rule 8D of the Income Tax Act, 1961.
2. Calculation of disallowance under Section 94(7) of the Income Tax Act, 1961.
3. Calculation of disallowance under Section 14A on earning of dividend income on stock in trade.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D of the Income Tax Act, 1961:
The appeal concerns the disallowance of Rs. 26,26,985/- as per Rule 8D read with Section 14A of the Income Tax Act, 1961. The Assessing Officer (AO) noted that the assessee had income from share trading and dividends, receiving Rs. 12,44,545/- on trading shares and Rs. 29,000/- on shares and mutual funds. The assessee offered a disallowance of Rs. 3,81,969/- in its computation of income under Section 14A. However, the AO was not satisfied with the assessee's explanation and computed the disallowance as per Rule 8D at Rs. 58,85,112/-. The Tribunal observed that Section 14A(2) requires the AO to record a finding of non-satisfaction with the assessee's claim based on the accounts before applying Rule 8D. The AO did not provide such satisfaction, which is necessary before directly applying Rule 8D. This view aligns with the ITAT Panaji Bench's decision in the case of Sesa Goa Ltd., where it was emphasized that the AO must be satisfied with the correctness of the claim of the assessee having regard to the accounts of the assessee. The Tribunal held that the AO must record reasons for non-satisfaction before applying Rule 8D, and in this case, the AO failed to do so. Therefore, the disallowance made by the AO was not justified.

2. Calculation of disallowance under Section 94(7) of the Income Tax Act, 1961:
The CIT(A) set aside the case to the AO for calculating disallowance under Section 94(7) on earning of dividend income on stock in trade. The Tribunal noted that the CIT(A) directed the AO to estimate the expenditure incurred on earning dividend income on stock in trade at 10% of the dividend income earned on stock in trade. The assessee was to submit the necessary information to the AO, who would verify and calculate the disallowance accordingly. The Tribunal did not find any error in this direction and upheld the CIT(A)'s order on this point.

3. Calculation of disallowance under Section 14A on earning of dividend income on stock in trade:
Similar to the previous issue, the CIT(A) set aside the case to the AO for calculating disallowance under Section 14A on earning of dividend income on stock in trade at 10% in addition to the disallowance made under point no.1. The Tribunal reiterated that the AO must be satisfied with the correctness of the claim of the assessee regarding the expenditure incurred in relation to the dividend income before applying Rule 8D. The Tribunal emphasized that the AO must record a clear finding with reference to the accounts of the assessee, which was not done in this case. Therefore, the Tribunal allowed the assessee's appeal on this ground as well.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, holding that the AO failed to record the necessary satisfaction before applying Rule 8D for disallowance under Section 14A. The Tribunal also upheld the CIT(A)'s direction to the AO for calculating disallowance under Section 94(7) and Section 14A on earning of dividend income on stock in trade at 10%. The appeal was allowed in favor of the assessee.

 

 

 

 

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