2020 (8) TMI 829 - AT - Income Tax

Limited scrutiny - Disallowance u/s. 14A - conversion of the case from limited scrutiny to complete scrutiny go beyond the reasons of the limited scrutiny - limited scrutiny included for investment and income relating to securities are duly disclosed or not - HELD THAT - In the present case, the case of the assessee was picked up for limited scrutiny for the reasons stated above. The reasons did not speak about any disallowance of expenditure u/s. 14A of the Act. If the AO wanted to go beyond the reasons of the limited scrutiny, then he should have invoked the provisions of complete scrutiny by obtaining the necessary approvals. In this case, no such approval or conversion of the case from limited scrutiny to complete scrutiny was shown. Undisputedly, case of the assessee was for limited scrutiny and the reasons for picking up of the case of assessee under limited scrutiny does not include the disallowance of expenditure u/s. 14A of the Act, hence, we cannot uphold the disallowance made by the AO and confirmed by the Ld. CIT(A). In the result, we direct the Assessing Officer to delete the disallowance made u/s. 14A of the Act read with Rule 8D - Decided in favour of assessee.

Summary

Issues:
Challenge to addition made under section 14A of the Income Tax Act.

Analysis:
The appeal was filed against the order of the Ld. CIT(A) for the assessment year 2016-17, where the addition of ?28,64,419 under section 14A of the Act was confirmed. The assessee challenged this addition on the grounds that it was not only legally incorrect but also not supported by the facts of the case. The case involved limited scrutiny under CASS to verify sales turnover, disclosure of investment and income from securities transactions. The AO issued a notice under section 143(2) and during assessment proceedings, observed dividend income earned by the assessee. The AO disallowed ?28,64,419 under section 14A after applying Rule 8D, despite the assessee's explanations regarding the claimed expenditure. The Ld. CIT(A) upheld this disallowance, leading to the appeal.

The assessee argued that the limited scrutiny did not include disallowance under section 14A, and the total expenditure claimed was only ?1,03,042, making the disallowance excessive. The assessee had voluntarily disallowed STT, and only specific expenditures were related to earning exempt income. The AO and Ld. CIT(A) supported the disallowance, stating that it was within the scope of limited scrutiny. However, the ITAT found that the limited scrutiny reasons did not mention disallowance under section 14A. As such, without proper approval for complete scrutiny, the disallowance could not be upheld. The ITAT directed the AO to delete the disallowance of ?28,64,419 under section 14A of the Act read with Rule 8D. Consequently, the appeal of the assessee was allowed, reversing the orders of the lower authorities.

In conclusion, the ITAT allowed the appeal of the assessee, directing the deletion of the disallowance made under section 14A of the Income Tax Act. The judgment highlighted the importance of adhering to the specified reasons for scrutiny and the necessity of proper approvals for expanding the scope of assessment beyond the initial scrutiny parameters.