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2018 (4) TMI 1766 - AT - Income TaxDisallowance u/s 14A r.w. Rule 8D - AO non arriving at a satisfaction as regards the correctness of the claim of the assessee, on the basis of its accounts - HELD THAT - The very process of determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the A.O. returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. A.O before discarding the claim of the assessee as regards the amount of expenditure incurred in relation to the exempt income, as per the mandate of law, remains under a statutory obligation to record cogent reasons as regards his dissatisfaction in respect of such claim of the assessee, before determining the amount of disallowance in accordance with the method prescribed in Section 14A r.w. Rule 8D. We find that our aforesaid view stands fortified by case of Godrej Boyce Manufacturing Company Limited 2017 (5) TMI 403 - SUPREME COURT A.O had failed to satisfy the statutory requirement of arriving at a satisfaction, that having regard to the accounts of the assessee, as placed before him, it was not possible for him generate the requisite satisfaction with regard to the correctness of the claim of disallowance made by the assessee under Sec. 14A - A.O had failed to record the requisite satisfaction, therefore, the very assumption of jurisdiction by him for dislodging the claim of disallowance made by the assessee and substituting the same by the amount worked out as per Sec. 14A r.w Rule 8D cannot be sustained - Decided in favour of assessee.
Issues Involved:
1. Jurisdiction to apply and determine disallowance under Section 14A. 2. Disallowance under Section 14A amounting to ?15,29,054. 3. General grounds for appeal. Issue-wise Detailed Analysis: 1. Jurisdiction to Apply and Determine Disallowance under Section 14A: The assessee challenged the jurisdiction of the Assessing Officer (A.O) to apply Section 14A read with Rule 8D of the Income-tax Rules, 1962, arguing that the lower authorities failed to establish their dissatisfaction with the assessee's claim regarding the expenditure incurred in relation to income not forming part of the total income. The assessee contended that the action to invoke Section 14A and determine the disallowance amount was without jurisdiction, ab initio void, and bad in law. 2. Disallowance under Section 14A Amounting to ?15,29,054: The assessee argued that the CIT(A) erred in confirming the disallowance of ?15,29,054 under Section 14A read with Rule 8D. The assessee had already disallowed ?1,52,905 in its return of income, leading to a double disallowance. The assessee requested the deletion of the disallowance by the lower authorities. Alternatively, the assessee sought that the disallowance be treated as the cost of investments or be deducted from the proceeds of consideration of investments in the year of transfer. 3. General Grounds for Appeal: The assessee sought the liberty to add, alter, amend, or vary any of the grounds of appeal. Detailed Analysis: Condonation of Delay: The appeal filed by the assessee involved a delay of 24 days. The delay was attributed to an inadvertent mistake by the assistant of the Chartered Accountant handling the case. The Tribunal condoned the delay, considering it a fair and inadvertent mistake. Facts of the Case: The assessee, engaged in manufacturing mobile crusher and screening plants, filed its return of income for the assessment year 2012-13, declaring a total income of ?34,21,640. The case was taken up for scrutiny assessment under Section 143(2). During the assessment proceedings, the A.O observed that the assessee had received dividend income of ?15,29,054 and called for details to explain why disallowance under Section 14A read with Rule 8D should not be made. The assessee had offered 10% of the dividend income (?1,52,905) as disallowance under Section 14A, but the A.O was not satisfied and worked out the disallowance to be ?24,34,101. Appeal Before CIT(A): The assessee argued before the CIT(A) that the A.O had not recorded his satisfaction regarding the correctness of the assessee's claim. However, the CIT(A) upheld the A.O's order, stating that the A.O had rightly worked out the disallowance as per the mandate of law and that the question of satisfaction did not arise since the assessee had disallowed the expenditure as a percentage of the exempt income. Appeal Before ITAT: The assessee contended that the A.O failed to record his satisfaction regarding the correctness of the claim, which is a statutory requirement before determining the disallowance under Section 14A read with Rule 8D. The assessee also argued that no disallowance was made in the preceding year under similar circumstances and that the profits were sufficient to explain the investments. Tribunal's Findings: The Tribunal observed that the A.O had not recorded his satisfaction regarding the correctness of the assessee's claim, which is a prerequisite for invoking Section 14A read with Rule 8D. The Tribunal cited the Hon'ble Supreme Court's judgment in Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT & Anr., which mandates that the A.O must record his dissatisfaction with the assessee's claim before making a disallowance under Section 14A. The Tribunal concluded that the A.O's failure to record such satisfaction rendered the disallowance unsustainable in law. Conclusion: The Tribunal set aside the disallowance of ?24,34,101 made under Section 14A by the A.O and sustained by the CIT(A) due to the lack of jurisdiction. Consequently, the Tribunal allowed the appeal of the assessee and refrained from addressing the merits of the disallowance under Section 14A. Order Pronounced: The appeal of the assessee was allowed, and the order was pronounced in the open court on 25/04/2018.
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