2016 (2) TMI 33 - AT - Income Tax

Disallowance u/s 14A - Held that - We find from bare reading of the assessment order that AO has clearly recorded his satisfaction that the assessee s stand that no expenditure had been incurred in earning exempt income was incorrect and such arguments were completely misconceived. The observations have specifically been made in para 7.1 of the assessment order. He clearly observed that though there were no direct expenses shown by the assessee in his books of account exclusively for earning such exempt income, but it cannot be denied that the assessee had been utilizing its administrative as well as managerial machinery for earning the exempt income in a prudent manner. The claim of the assessee was that no expenditure was incurred for earning exempt income, but once the AO had recorded his satisfaction in terms of sub-section (2), then the disallowance can be made as per Rule 8D(2)(iii). We, accordingly, do not find any reason to interfere with the finding of ld. CIT(A) on this count - Decided against assessee

Summary

Issues:
1. Disallowance of expenditure under Section 14A of Income Tax Act, 1961.
2. Application of Rule 8D for computing expenditure related to exempt income.
3. Whether AO's satisfaction is required before applying Rule 8D.
4. Interpretation of Section 14A(3) in relation to claiming no expenditure incurred for exempt income.

Analysis:

Issue 1: Disallowance of expenditure under Section 14A
The appellant, engaged in the export business, claimed no expenses related to exempt income from dividends and capital gains. The AO disagreed, citing the substantial exempt income earned. The AO applied Rule 8D to compute the expenditure incurred for earning exempt income at Rs. 1,21,805. The CIT(A) upheld this disallowance, stating that the AO's satisfaction was recorded, and managerial machinery was utilized for earning exempt income, justifying the disallowance.

Issue 2: Application of Rule 8D
The AO applied Rule 8D to calculate the expenditure related to exempt income, emphasizing the importance of determining such expenses even if the assessee claims no expenditure was incurred. The computation under Rule 8D(2)(iii) led to the disallowance of Rs. 1,21,805. The CIT(A) affirmed this calculation, dismissing the appellant's argument that no expenditure was incurred for earning exempt income.

Issue 3: AO's Satisfaction for Rule 8D
The appellant contended that the AO did not record satisfaction before applying Rule 8D. However, the Tribunal found that the AO had indeed recorded satisfaction in the assessment order, as required by Section 14A(3), thereby justifying the application of Rule 8D for computing the disallowance.

Issue 4: Interpretation of Section 14A(3)
Section 14A(3) states that if an assessee claims no expenditure was incurred for exempt income, the provisions of sub-section (2) shall apply. In this case, the appellant claimed no expenditure against the exempted income, but once the AO recorded satisfaction, the disallowance could be made under Rule 8D(2)(iii). The Tribunal upheld this interpretation, dismissing the appellant's appeal.

In conclusion, the Tribunal dismissed the appellant's appeal, affirming the disallowance of expenditure under Section 14A and the application of Rule 8D for computing the expenses related to exempt income. The Tribunal found that the AO's satisfaction was duly recorded, justifying the disallowance, and interpreted Section 14A(3) to support the application of Rule 8D in such cases.