2018 (1) TMI 1497 - AT - Income Tax

Addition u/s 14A r.w.r. 8D - expenses relatable to exempt income - HELD THAT - We are of the view that the AO has not recorded any satisfaction while disbelieving the claim of the assessee regarding expenses relatable to exempt income. Once this is not been done, no disallowance can be made, in view of the proposition of law settled by Hon ble Bombay High Court in the case of Godrej Boyce Mfg. Co. Ltd. 2010 (8) TMI 77 - BOMBAY HIGH COURT . In view of the above, we reverse the orders of the lower authorities and allow the claim of the assessee.

Summary

Issues:
Disallowance of expenses relatable to exempt income under Rule 8D(2)(iii) of the Income Tax Rules 1962.

Analysis:
The appeal arose from the order of the Commissioner of Income Tax (Appeals) confirming the disallowance of expenses relatable to exempt income under Rule 8D(2)(iii) of the Income Tax Rules 1962. The Assessing Officer (AO) had disallowed expenses under Rule 8D(2)(iii) based on 0.5% of the average value of investments, which the assessee contested. The assessee argued that certain strategic investments should be excluded from the computation. The Commissioner directed the AO to exclude specific investments while computing the disallowance. The assessee further appealed to the Tribunal challenging the disallowance.

During the Tribunal proceedings, the assessee's counsel argued that the AO did not provide a basis for rejecting the assessee's self-disallowance of expenses. Citing the decision of the Bombay High Court, the counsel contended that the AO must first determine the correctness of the assessee's claim before applying Rule 8D. The counsel emphasized the importance of the AO being satisfied with the claim before making any disallowance.

The Tribunal noted that the AO did not record any satisfaction regarding the correctness of the assessee's claim for expenses related to exempt income. In line with the legal principle established by the Bombay High Court, the Tribunal held that without the AO's satisfaction, no disallowance could be justified. Therefore, the Tribunal reversed the lower authorities' orders and allowed the assessee's claim, ultimately allowing the appeal.

In conclusion, the Tribunal's decision revolved around the requirement for the AO to be satisfied with the correctness of the assessee's claim before disallowing expenses related to exempt income under Rule 8D(2)(iii). The absence of recorded satisfaction by the AO led to the Tribunal allowing the assessee's appeal and reversing the lower authorities' orders.