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2015 (3) TMI 1021 - AT - Income TaxDisallowance u/s 14A - A.R. submitted that the A.O. has made disallowance u/s 14A as per the provisions of Rule 8D without recording satisfaction which is mandatory in law and therefore, the disallowance is not sustainable - Held that - In the present case the A.O. vide questionnaire dated 22.10.2010 had asked the assessee to explain as to why disallowance in accordance with the provisions of Section 14A should not be made and thereafter holding that reply of the assessee was not satisfactory he proceeded to disallow the amount as calculated as per provisions of Rule 8D. The A.O. did not record as to how the explanation submitted by assessee was not satisfactory. The A.O. should have examined the claim of assessee and then he should have recorded his satisfaction as to why the reply of assessee was unsatisfactory. Therefore, respectfully following the order of Taikisha Engineering India Ltd. (2014 (12) TMI 482 - DELHI HIGH COURT), we delete the disallowance confirmed by Ld. CIT(A). - Decided in favour of assessee.
Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act. 2. Application of Rule 8D without recording satisfaction. Detailed Analysis: 1. Disallowance under Section 14A of the Income Tax Act: The core issue in the appeal is the disallowance made by the Assessing Officer (A.O.) under Section 14A of the Income Tax Act, which was upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. Section 14A stipulates that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income that does not form part of the total income under the Act. The A.O. determined the disallowance as per Rule 8D of the Income Tax Rules, which prescribes the method for computing the amount of expenditure incurred in relation to exempt income. 2. Application of Rule 8D without recording satisfaction: The appellant's representative argued that the A.O. applied Rule 8D without recording the necessary satisfaction as required by law. The Delhi High Court in the case of CIT Vs Taikisha Engineering India Ltd. emphasized that the A.O. must first examine the accounts of the assessee and be satisfied with the correctness of the claim regarding the expenditure related to exempt income before applying Rule 8D. The A.O. failed to record any dissatisfaction with the assessee's explanation before proceeding with the disallowance under Rule 8D. Tribunal's Findings: The Tribunal reviewed the rival submissions and the material on record. It was observed that the A.O. asked the assessee to explain why disallowance under Rule 8D should not be made but did not record any dissatisfaction with the explanation provided by the assessee. The Tribunal noted that the Delhi High Court in Taikisha Engineering India Ltd. held that the A.O. must record satisfaction regarding the correctness of the assessee's claim before invoking Rule 8D. The Tribunal found that this pre-condition was not met in the present case. Conclusion: The Tribunal concluded that the A.O. erred in invoking Rule 8D without recording the requisite satisfaction as mandated by Section 14A(2) of the Act and Rule 8D(1) of the Rules. Consequently, the disallowance confirmed by the CIT(A) was deleted, and the appeal filed by the assessee was allowed. Order Pronouncement: The order was pronounced in the open court on 25th March 2015, allowing the appeal filed by the assessee.
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