2016 (2) TMI 827 - AT - Income Tax

Revision u/s 263 - disallowance u/s 14A - Held that - Assessing Officer while passing the assessment order is mandatorily required to record a satisfaction as to why suo moto disallowance made by the assessee of the expenditure relatable to exempt income was unreasonable and unsatisfactory, under sub-section (2) to section 14A of the Act and thereafter, resort is to be made to the provisions of Rule 8D of the Rules. In case, where the Assessing Officer is satisfied with the correctness of the claim of the assessee in respect of the expenditure relatable to the exempt income, then there is no reason to apply the method prescribed by the Rules as laid down by the jurisdictional High Court in Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT (2010 (8) TMI 77 - BOMBAY HIGH COURT ) In such circumstances, where the matter has already been considered by the Assessing Officer while completing assessment in the hands of the assessee, the Commissioner has no authority to initiate proceedings under section 263 of the Act in directing the Assessing Officer to re-look at the facts and apply the provisions of Rule 8D of the Rules in order to work out the disallowance under section 14A of the Act. We find no merit in the said directions of the Commissioner, where the Assessing Officer had applied his mind and was satisfied with the working of assessee and had not resorted to the provisions of Rule 8D of the Rules, and since one view has been taken by the Assessing Officer, the same cannot be substituted by the Commissioner in the garb of exercise of jurisdiction under section 263 of the Act. In case, where the Assessing Officer had recorded the satisfaction as required under section 14A of the Act, made enquiries and accepted the calculations of the assessee, such an order passed by the Assessing Officer cannot be said to be erroneous as the same has been passed in line with the provisions of the Act. In this regard, we find no merit in the exercise of jurisdiction by the Commissioner under section 263 of the Act and the same is held to be invalid - Decided in favour of assessee

Issues Involved:
1. Invocation of jurisdiction under section 263 of the Income-tax Act, 1961.
2. Application of Rule 8D of the Income Tax Rules, 1962 for disallowance under section 14A of the Act.

Issue-wise Detailed Analysis:

1. Invocation of Jurisdiction under Section 263 of the Income-tax Act, 1961:

The primary issue in this appeal is the exercise of jurisdiction by the Commissioner under section 263 of the Act. The assessee contended that the Commissioner erred in invoking section 263, as the Assessing Officer (AO) had already addressed the disallowance under section 14A during the assessment proceedings and had taken a possible view. The Commissioner believed that the AO's order was erroneous and prejudicial to the interests of the Revenue because the AO failed to apply Rule 8D of the Rules correctly.

The Tribunal noted that for the Commissioner to exercise powers under section 263, the assessment order must be both erroneous and prejudicial to the interests of the Revenue. The Tribunal referred to various judicial precedents, including the Hon'ble Supreme Court's decision in Malabar Industrial Co. Ltd. v. CIT, which held that an order is erroneous if it involves incorrect assumption of facts, incorrect application of law, or non-application of mind. The Tribunal emphasized that if the AO has taken one of the permissible views, the order cannot be termed erroneous merely because the Commissioner disagrees with it.

In this case, the Tribunal found that the AO had applied his mind and was satisfied with the disallowance worked out by the assessee under section 14A. The AO had recorded satisfaction and accepted the disallowance, which was a possible view. Therefore, the Tribunal concluded that the Commissioner's invocation of section 263 was not justified, as the assessment order was neither erroneous nor prejudicial to the interests of the Revenue.

2. Application of Rule 8D of the Income Tax Rules, 1962 for Disallowance under Section 14A of the Act:

The second issue revolves around the application of Rule 8D for disallowance under section 14A. The Commissioner argued that the AO should have applied Rule 8D mandatorily from the assessment year 2008-09 onwards, as per the Hon'ble Bombay High Court's decision in Godrej & Boyce Mfg. Co. Ltd. v. DCIT. The Commissioner believed that the AO erroneously accepted the pro-rata disallowance made by the assessee without applying Rule 8D, resulting in an erroneous order.

The Tribunal referred to the Hon'ble Bombay High Court's decision, which clarified that the AO must first be satisfied with the correctness of the assessee's claim regarding the expenditure related to exempt income. If the AO is satisfied, there is no need to apply Rule 8D. The Tribunal also cited the Hon'ble Delhi High Court's decision in CIT v. I.P. Support Services India (P.) Ltd., which emphasized that recording satisfaction is a mandatory requirement before applying Rule 8D.

In this case, the AO had examined the assessee's claim and was satisfied with the disallowance made under section 14A. The AO did not find it necessary to apply Rule 8D, as he was satisfied with the assessee's calculations. The Tribunal held that since the AO had applied his mind and recorded satisfaction, the Commissioner's direction to apply Rule 8D was not warranted. The Tribunal concluded that the AO's order was not erroneous, and the Commissioner's exercise of jurisdiction under section 263 was invalid.

Conclusion:

The Tribunal allowed the appeal of the assessee, holding that the Commissioner's invocation of jurisdiction under section 263 was not justified. The AO had taken a possible view after applying his mind and recording satisfaction regarding the disallowance under section 14A, and therefore, the assessment order was neither erroneous nor prejudicial to the interests of the Revenue. The Tribunal set aside the Commissioner's order and upheld the AO's original assessment.

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