2018 (7) TMI 2135 - HC - Income Tax

Disallowance of expenditure u/s 14A invoking Rule 8D - non recording of satisfaction - HELD THAT - AO without recording required satisfaction on having regard to the accounts of the Assessee as placed before him it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the Assessee had invoked and applied Rule 8D as a mandatory provision applicable in all cases of exempt income. Action of the AO was contrary to law and therefore there is no merit in the present appeal. We have not affirmed and accepted the view expressed by the Commissioner of Income Tax (Appeals) that provisions of Section 14A and Rule 8D cannot be invoked in case the assesesee was an investment company or the shares were procured for the purpose of the strategic investments in view of the decision of Maxopp Investment Ltd. 2018 (3) TMI 805 - SUPREME COURT - Appeal is dismissed in limine.

Summary

Issues:
- Disallowance of expenditure under Section 14A of the Income Tax Act, 1961 by invoking Rule 8D of the Income Tax Rules, 1962.
- Interpretation of the applicability of Rule 8D based on the decision in Godrej & Boyce Manufacturing Company v. DCIT.
- Assessment of satisfaction required by the Assessing Officer for invoking Rule 8D.
- Clarification on the invocation of Section 14A and Rule 8D in cases of investment companies or strategic investments.

Analysis:
The High Court addressed the issue of disallowance of expenditure under Section 14A of the Income Tax Act, 1961 by invoking Rule 8D of the Income Tax Rules, 1962. The appeal by the Revenue challenged the order of the ITAT related to the assessment year 2011-2012 for M/s Hindustan Clean Energy Ltd. The question raised was regarding the disallowance of expenditure amounting to ?99,09,017/- by the Assessing Officer under Section 14A. The Court referred to the decision in Godrej & Boyce Manufacturing Company v. DCIT, emphasizing the requirement of satisfaction by the Assessing Officer for invoking Rule 8D.

The Court highlighted that the Assessing Officer must be satisfied that it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the Assessee before applying Rule 8D. In this case, the Assessing Officer did not record the necessary satisfaction but applied Rule 8D as a mandatory provision for all cases of exempt income. The Court deemed this action as contrary to the law, leading to the dismissal of the appeal.

Furthermore, the Court clarified that while dismissing the appeal, they did not agree with the view expressed by the Commissioner of Income Tax (Appeals) that Section 14A and Rule 8D cannot be invoked for investment companies or strategic investments. This clarification was based on the decision of the Supreme Court in Maxopp Investment Ltd. v. Commissioner of Income Tax. The Court dismissed the appeal in limine without issuing a notice, concluding the judgment on the grounds of the Assessing Officer's failure to meet the required satisfaction for invoking Rule 8D.