2016 (5) TMI 1540 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - mandation of recording satisfaction - HELD THAT - As we come to satisfaction aspect as mandated under section 14A(2) r.w. Rule 8D of the Income Tax Rules there is no dispute that the Assessing Officer in his assessment order does not record the same so as to dispute assessee s books of accounts recording no expenditure incurred for exempt income. CIT(A) upholds Assessing Officer s findings by observing that such a satisfaction need not be explicitly mentioned in assessment order as it can be deduced from the order itself. We find it to be not in tune with the specific provision in the act under section 14A(2). The legislature in its wisdom specifically envisages Assessing Officer s satisfaction before invoking expenditure disallowance that an assessee s books are not correct so far as they do not record any expenditure. We quote this statutory provision as well as the above stated case law that there has to be an explicit satisfaction and an Assessing Officer cannot simply brush aside the relevant books of accounts. Any violation thereof, in our considered opinion, would violate the legislative intent as well the legislation itself. CIT(A) s reasoning goes contrary to section 14A(2) as interpreted by various high courts hereinabove. The impugned administrative expenditure disallowance made by both the lower authorities under Rule 8D(iii) is accordingly deleted. Assessee s appeal is allowed.

Summary

Issues:
1. Correctness of administrative expenditure disallowance under Rule 8D(2)(iii) r.w.s. 14A of the Income Tax Act, 1961 for A.Y. 2009-10.

Analysis:
The case involved an appeal by the assessee regarding the correctness of administrative expenditure disallowance of ?6,94,097 made by the Assessing Officer under Rule 8D(2)(iii) r.w.s. 14A of the Income Tax Act, 1961 for the assessment year 2009-10. The assessee, a company engaged in manufacturing and trading chemicals, had filed its return admitting income of ?4,14,19,128. The dispute arose from the Assessing Officer's application of Rule 8D to disallow expenses related to the assessee's exempt income from dividends amounting to ?8,17,506. The Assessing Officer accepted some contentions of the assessee but proceeded to compute the administrative expenditure disallowance under Rule 8D(2)(iii).

The CIT(A) upheld the Assessing Officer's action, stating that the appellant's claim of no expenditure incurred for earning the dividend income was not acceptable. The CIT(A) emphasized the applicability of Rule 8D for the current year and referenced relevant case law to support the disallowance. The dispute centered around the Assessing Officer's satisfaction regarding the correctness of the assessee's books of accounts in recording no expenditure for the exempt income. The CIT(A) held that such satisfaction need not be explicitly mentioned in the assessment order and can be deduced from the order itself.

The ITAT, in its judgment, disagreed with the CIT(A)'s reasoning, emphasizing the legislative requirement of Assessing Officer's explicit satisfaction before invoking expenditure disallowance under section 14A(2) r.w. Rule 8D. The ITAT highlighted the importance of not brushing aside relevant books of accounts and concluded that the CIT(A)'s reasoning went against the legislative intent and various high court interpretations. Consequently, the ITAT deleted the administrative expenditure disallowance of ?6,94,047 made by both lower authorities under Rule 8D(iii) and allowed the assessee's appeal.