2019 (1) TMI 1639 - HC - Income Tax

Disallowance u/s 14A - disallowance made with regard to expenditure for earning of income which was exempt - HELD THAT - The issue pertains to disallowance to be made under Section 14A towards the expenditure incurred by the assessee to earn exempt income. The Tribunal, by the impugned judgment, while allowing the assessee's appeal came to the conclusion that the Assessing Officer had not recorded satisfaction with respect to the correctness of the claim of the assessee in respect of such expenditure. This is a requirement flowing from sub-section (2) of Section 14A of the Act. Only when sub-section (2) of Section 14A is made applicable, the question of having resorted to Rule 8D(2) of the Income Tax Rules would arise. In the result, we do not find any error in the view of the Tribunal.

Summary

Issues:
Disallowance under Section 14A of the Income Tax Act, 1961.

Analysis:
The case involves an appeal by the Revenue against a judgment of the Income Tax Appellate Tribunal regarding the disallowance under Section 14A of the Income Tax Act, 1961. The main question for consideration was whether the Tribunal was justified in restricting the disallowance made by the Assessing Officer to a lower amount than what was originally disallowed. The issue revolves around the expenditure incurred by the assessee to earn exempt income. The Tribunal concluded that the Assessing Officer did not record satisfaction regarding the correctness of the claim of the assessee in respect of such expenditure, as required by sub-section (2) of Section 14A. Consequently, the Tribunal found no error in its decision and dismissed the Tax Appeal.

In detail, the Tribunal's judgment was based on the requirement that satisfaction must be recorded by the Assessing Officer with respect to the correctness of the claim of the assessee in relation to the expenditure incurred to earn exempt income, as mandated by sub-section (2) of Section 14A of the Income Tax Act, 1961. The Tribunal found that the Assessing Officer had not fulfilled this requirement, leading to the conclusion that the disallowance made by the Assessing Officer could not be upheld. Consequently, the Tribunal allowed the assessee's appeal and determined that the Assessing Officer had not followed the proper procedure in making the disallowance under Section 14A.

Moreover, the judgment highlighted that the applicability of Rule 8D(2) of the Income Tax Rules would only arise when sub-section (2) of Section 14A is made applicable. Since the Assessing Officer did not comply with the requirements of sub-section (2) of Section 14A, there was no basis for resorting to Rule 8D(2) to calculate the disallowance. Therefore, the Tribunal's decision to dismiss the Tax Appeal was based on the lack of satisfaction recorded by the Assessing Officer and the consequent failure to apply the prescribed method for disallowance under Section 14A.