2016 (2) TMI 381 - AT - Income Tax

Disallowance under section 14A - Held that - Assessing Officer can invoke Rule 8D only when he records satisfaction in regard to the correctness of the claim of the assessee, having regard to the accounts of the assessee. The condition precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. 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 has to indicate cogent reasons for the same. Therefore, it is all the more necessary that Assessing Officer has to examine the accounts of assessee first and then if he is not satisfied with the correctness of the claim, only he can invoke Rule 8D. Neither such examination was made nor any satisfaction was recorded by Assessing Officer in this case. It is noticed that the Assessing Officer has not considered the claim of the assessee at all and he has straightway embarked upon computing disallowance under Rule 8D on the presumption that the assessee might have incurred some expenses. Disallowance under section 14A required finding of incurring of expenditure and where it was found that for earning exempted income no expenditure had been incurred, disallowance under section 14A could not stand. We notice that assessee itself disallowed for earning the interest income. The Assessing Officer has not examined any expenditure claimed in P & L account so as to relate to exempt income, nor gave a finding that assessee claim is not correct for any reason. Rule 8D cannot be invoked directly without satisfying about the claims or otherwise. - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules.
2. Satisfaction of the Assessing Officer regarding the correctness of the assessee's claim.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:
The primary issue in this case was the disallowance of Rs. 5,40,531/- under Section 14A of the Income Tax Act, 1961, read with Rule 8D of the Income Tax Rules. The assessee had suo-moto disallowed expenses of Rs. 1,59,356/- related to earning exempt income and claimed that no other expenses were incurred for earning the tax-free dividend income of Rs. 47,96,497/-. The Assessing Officer (AO) made a disallowance at the rate of 0.5% of the average value of the investment, without recording any satisfaction regarding the correctness of the assessee's claim.

2. Satisfaction of the Assessing Officer:
The tribunal emphasized that for invoking Rule 8D, the AO must record satisfaction regarding the correctness of the assessee's claim. This satisfaction must be based on the accounts of the assessee. The tribunal cited various judicial precedents, including the Hon'ble jurisdictional High Court in Godrej & Boyce Mfg. Ltd., which upheld the constitutionality of Section 14A and Rule 8D but stressed that the AO must be objectively satisfied with the claim of the assessee before applying Rule 8D.

Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:
The tribunal noted that the AO neither recorded any satisfaction for making the disallowance nor indicated any other expenses claimed by the assessee. The tribunal referred to the Hon'ble jurisdictional High Court's decision in Godrej & Boyce Mfg. Ltd. and other judicial precedents which clarified that Rule 8D is applicable prospectively from the assessment year 2008-09. The tribunal also referred to the judgment in Maxopp Investment Ltd. v. CIT, which stated that the AO must record dissatisfaction with the correctness of the assessee's claim before determining the amount of expenditure under Rule 8D.

2. Satisfaction of the Assessing Officer:
The tribunal highlighted that the AO must first examine the accounts of the assessee and if not satisfied with the correctness of the claim, only then can invoke Rule 8D. The tribunal referred to several judicial decisions, including CIT vs. Hero Cycles Ltd., which held that disallowance under Section 14A could not stand where it was found that no expenditure was incurred for earning exempted income. The tribunal also cited the case of Justice Sam P Bharucha vs. Addl. CIT, which emphasized that no disallowance can be made under Section 14A if the expenditure incurred is directly related to taxable income and there is no proximate cause for disallowance related to exempt income.

The tribunal concluded that the AO did not examine the assessee's claim or record any dissatisfaction, and thus, the disallowance under Rule 8D was not permissible. The tribunal allowed the appeal of the assessee, stating that the AO must first be satisfied with the correctness of the claim before applying Rule 8D.

Conclusion:
The tribunal allowed the appeal of the assessee, emphasizing that the AO must record satisfaction regarding the correctness of the assessee's claim before invoking Rule 8D. The disallowance under Section 14A was not sustainable as the AO did not examine the assessee's claim or provide cogent reasons for dissatisfaction. The tribunal's decision aligns with various judicial precedents that stress the need for the AO to be objectively satisfied with the assessee's claim before determining the amount of expenditure under Rule 8D.