2015 (10) TMI 752 - HC - Income Tax

Disallowance on account of invoking Rule 8D read with Section 14A - ITAT confirmed CIT(A)order in deleting the disallowance - Held that - AO has indeed proceeded on the erroneous premise that the invocation of Section 14A is automatic and comes into operation as soon as the dividend income is claimed exempt. See Maxopp Investment Ltd. & Others Versus Commissioner of Income Tax 2011 (11) TMI 267 - Delhi High Court wherin held the prescribed method being the method stipulated in rule 8D of the said Rules. while rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the Assessing Officer would have to indicate cogent reasons for the same. In CIT v. Taikisha Engineering India Ltd.(2014 (12) TMI 482 - DELHI HIGH COURT ), in similar circumstances, the Court disapproved of an AO invoking Section 14A read with Rule 8D (2) of the Rules without recording his satisfaction and noted that the recording of satisfaction as to why the voluntary disallowance made by the assessee was unreasonable and unsatisfactory is a mandatory requirement of the law. - Decided against revenue.

Summary

Issues:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Correctness of claim of expenditure in relation to exempt income.
3. Requirement of recording satisfaction before invoking Section 14A read with Rule 8D.

Analysis:

1. The appeal before the High Court was against the ITAT's order regarding the disallowance under Section 14A of the Income Tax Act, 1961 for the Assessment Year 2009-10. The main issue was whether the ITAT erred in affirming the order of the CIT(A) in deleting the disallowance based on Rule 8D.

2. The Assessing Officer (AO) disallowed an amount under Section 14A read with Rule 8D, as the Assessee had dividend income. However, the Assessee contended that no expenses were incurred for earning the dividend income. The CIT(A) allowed the appeal, emphasizing that the AO did not examine the Assessee's contention regarding the availability of sufficient funds without borrowing, and investments generating tax-exempt income without incurring interest expenditure.

3. The High Court found that the AO wrongly assumed the automatic invocation of Section 14A when dividend income is claimed exempt. Referring to previous judgments, the Court highlighted that the AO must be unsatisfied with the correctness of the claim before determining the expenditure related to exempt income. The Court emphasized the need for the AO to provide cogent reasons for rejecting the Assessee's claim regarding expenditure or no expenditure in relation to exempt income.

4. Citing the case of CIT v. Taikisha Engineering India Ltd., the Court reiterated the mandatory requirement for the AO to record satisfaction as to why the voluntary disallowance made by the assessee was unreasonable and unsatisfactory before invoking Section 14A read with Rule 8D. As no substantial question of law arose, the appeal was dismissed based on the above analysis and legal principles.

In conclusion, the High Court's judgment clarified the correct application of Section 14A and Rule 8D, emphasizing the necessity for the AO to be unsatisfied with the Assessee's claim before making any disallowance related to exempt income. The judgment also highlighted the importance of providing cogent reasons and recording satisfaction before invoking the relevant provisions.