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2018 (10) TMI 1770 - AT - Income TaxDisallowance u/s 14A r.w.r 8D - assessee contended that the AO has applied the provisions Rule 8D without recording satisfaction against the correctness of the disallowance made by the AO - HELD THAT - The undisputed facts remain that the assessee is a trader in shares and securities and the assessee has held its entire securities as stock in trade only. The assessee did not hold any security as its investment. In the instant case, we notice that the assessing officer did not record any dissatisfaction over the amount of disallowance determined by the assessee u/s 14A of the Act, having regard to the accounts of the assessee. Further, we notice that the AO has proceeded on the erroneous presumption that the application of Rule 8D is mandatory in nature. AO has proceeded to invoke the provisions of Rule 8D of the I.T rules, without showing that he was not satisfied with the workings given by the assessee having regard to the accounts of the assessee. Further, the understanding of AO with regard to the disallowance u/s 14A of the Act is inconsistent with the principles laid down by the Hon ble High Courts and Supreme Court. We are of the view that the Ld CIT(A) was justified in holding that the AO was not justified in invoking Rule 8D to compute disallowance u/s 14A, without showing that he was not satisfied with the amount of disallowance worked out by the assessee. Accordingly we uphold the order passed by Ld CIT(A) on this issue. Ld CIT(A) that the assessing officer was not correct in law in applying the provisions of Rule 8D in both the years, since the AO has failed to show/record, having regard to the accounts of the assessee, that he was not satisfied with the disallowance computed by the assessee. We have upheld the order passed by Ld CIT(A) in setting aside the disallowance worked out by the AO. We have also noticed that the Hon ble Supreme Court has held in the Maxopp Investment Ltd 2018 (3) TMI 805 - SUPREME COURT that the disallowance u/s 14A shall be triggered if exempt income ie. earned, even if the shares are held as stock in trade. Under these set of facts, the disallowance worked out by the assessee should be considered as meeting the requirements of sec.14A of the Act. - Decided against revenue
Issues Involved:
1. Whether the disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962 was correctly applied by the Assessing Officer (AO). 2. Whether the AO recorded proper dissatisfaction with the assessee’s disallowance computation. 3. Whether shares held as stock-in-trade attract disallowance under Section 14A. Issue-wise Detailed Analysis: 1. Disallowance under Section 14A read with Rule 8D: The AO disallowed expenses under Section 14A, asserting that the assessee did not compute disallowance as per Rule 8D. The AO argued that the assessee should have disallowed expenses related to exempt income, specifically dividend income, which the assessee claimed as exempt. The AO computed disallowance as ?2015.08 lakhs for AY 2012-13 and ?3131.83 lakhs for AY 2013-14, based on Rule 8D. The AO's contention was that the assessee's disallowance was insufficient and not in accordance with Rule 8D. 2. Recording of Dissatisfaction by AO: The assessee contended that the AO did not record dissatisfaction with the assessee's computation of disallowance, a mandatory requirement under Section 14A(2). The CIT(A) agreed, noting that the AO did not express dissatisfaction over the assessee’s disallowance of ?6.01 lakhs and ?10.46 lakhs for AY 2012-13 and 2013-14, respectively. The CIT(A) held that the AO's failure to record dissatisfaction invalidated the application of Rule 8D. 3. Shares Held as Stock-in-Trade: The assessee argued that since it held shares as stock-in-trade, Rule 8D should not apply. The CIT(A) agreed, referencing the decision in India Advantage Securities Ltd. and the Karnataka High Court's decision in CCI Ltd. The CIT(A) concluded that the entire holding of shares was stock-in-trade, not investments, thus disallowance under Rule 8D was not applicable. The CIT(A) noted that the assessee’s investments did not include shares, and the entire holding was reflected as closing stock of shares. Detailed Judgments and Observations: AO's Observations: The AO argued that Rule 8D is procedural and must be applied if the assessee’s disallowance is unsatisfactory. The AO cited various judicial precedents to support the mandatory nature of Rule 8D and the need to disallow expenses related to exempt income. CIT(A)'s Observations: The CIT(A) noted that the AO failed to record dissatisfaction with the assessee’s computation, a mandatory requirement. The CIT(A) also observed that since the assessee held shares as stock-in-trade, Rule 8D’s provisions did not apply. The CIT(A) referenced the Bombay High Court's approval of the India Advantage Securities Ltd. decision and the disapproval of the HDFC Bank Ltd. decision, reinforcing that disallowance under Rule 8D was not warranted. Tribunal's Observations: The Tribunal upheld the CIT(A)’s decision, noting that the AO did not record dissatisfaction with the assessee’s computation, thus invalidating the application of Rule 8D. The Tribunal also agreed that the assessee held shares as stock-in-trade, not investments, thereby nullifying the application of Rule 8D. The Tribunal referenced the Supreme Court's decision in Maxopp Investment Ltd., affirming that disallowance under Section 14A is triggered if exempt income is earned, even if shares are held as stock-in-trade. Conclusion: The Tribunal dismissed the revenue’s appeals, upholding the CIT(A)’s decision that the AO was not justified in invoking Rule 8D without recording dissatisfaction with the assessee’s computation and that the assessee’s shares held as stock-in-trade did not attract disallowance under Rule 8D. The Tribunal affirmed that the voluntary disallowance made by the assessee met the requirements of Section 14A.
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