2014 (7) TMI 1287 - AT - Income Tax

Disallowance as per Rule 8D read with Section 14A - Held that - Respectfully following the decision of ITAT, Panaji Bench in the case of Sesa Ltd, Panaji, Goa 2013 (9) TMI 233 - ITAT PANAJI AO merely observed that the administrative expenses disallowed by the assessee is very less but how they are less and how the other expenses incurred by the assessee related to dividend income has not been brought on record. AO has not pointed out expenses excluded by assessee for disallowance has proximate connection with dividend income - Assessing officer before rejecting disallowance computed by assessee must give a clear cut finding having regard to accounts of assessee how other expenditure claimed by assessee out of non exempt income related with exempt income. No discrepancy in claim of assessee was pointed out Onus of proof lies on Assessing officer - disallowance u/s 14A of Act requires a clear finding of incurring of expenditure and that no disallowance can be made on basis of presumptions Decided in favor of Assessee.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D of the Income Tax Act, 1961.
2. Calculation of disallowance under Section 94(7) for dividend income on stock in trade.
3. Calculation of disallowance under Section 14A for dividend income on stock in trade.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D of the Income Tax Act, 1961:
The assessee had income from share trading and dividend income, with dividends amounting to Rs. 54,64,777/- from trading stock and Rs. 25,27,897/- from investments in shares and mutual funds. The assessee offered a disallowance of Rs. 3,39,802/- under Section 14A. The Assessing Officer (AO) was not satisfied with this and computed the disallowance as per Rule 8D at Rs. 1,60,35,504/-. The tribunal noted that Section 14A(2) requires the AO to record dissatisfaction with the assessee's claim by examining the accounts before applying Rule 8D. The AO failed to do so, directly applying Rule 8D without recording such satisfaction. The tribunal cited the decision of ITAT Panaji Bench in the case of Sesa Goa Ltd., emphasizing that the AO must determine the correctness of the claim based on the assessee's accounts and record reasons for dissatisfaction before applying Rule 8D.

2. Calculation of disallowance under Section 94(7) for dividend income on stock in trade:
The CIT(A) confirmed the disallowance for dividend income from inventory, stock, and mutual funds but remanded the issue of dividend income on stock in trade back to the AO. The CIT(A) directed the AO to estimate the expenditure incurred on earning dividend income on stock in trade at 10% of the dividend income and verify the information submitted by the assessee before calculating the disallowance.

3. Calculation of disallowance under Section 14A for dividend income on stock in trade:
The tribunal reiterated that the AO must be satisfied with the correctness of the assessee's claim regarding the expenditure related to exempt income before applying Rule 8D. The tribunal emphasized that the AO must record reasons for dissatisfaction based on the assessee's accounts. The tribunal found that the AO did not provide a clear finding or record reasons for dissatisfaction with the assessee's claim. The tribunal followed the jurisdictional High Court's decision in the case of Godrej & Boyce Mfg. Co. Ltd. vs. DCIT, which mandates that the AO must establish a proximate cause for disallowance based on the relationship of the expenditure with the exempt income.

Conclusion:
The tribunal allowed the appeal filed by the assessee, holding that the AO did not follow the proper procedure as required under Section 14A(2) and Rule 8D. The tribunal directed the deletion of the disallowance made under Section 14A read with Rule 8D, as the AO failed to record satisfaction with the correctness of the assessee's claim based on the accounts. The appeal of the assessee was allowed, and the order was pronounced on 24.07.2014.