2014 (4) TMI 1287 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - assessee has submitted that neither the assessee had earned any exempt income nor any expenditure had been incurred for earning of the exempt income - HELD THAT - As in the case of Godrej Boyce Manufacturing Co. Ltd. 2010 (8) TMI 77 - BOMBAY HIGH COURT has held that Rule 8D r.w.s. 14A(2) is not arbitrary or unreasonable but can be applied only if the assessee's method is not satisfactory. It has been further held that Rule 8D is not retrospective and applies from A.Y. 2008-09. As further observed that u/s 14A resort can be made to Rule 8D of the Income Tax Rules for determining the amount of expenditure in relation to exempt income, if, the AO is not satisfied with the correctness of the claim made by the assessee in respect of such expenditure. A perusal of the assessment order reveals that the AO without recording any dissatisfaction with regard to the claim of the assessee that no expenditure was incurred by the assessee for earning the exempt income, straightway applied Rule 8D against the mandate of the provisions of section 14A - CIT(A) also ignored the contentions raised by the assessee while confirming the disallowance. We restore this issue back to the file of the AO with a direction that the AO will examine the contentions of the assessee made in this regard. AO will be at liberty to call for any record/evidences or statement etc. from the assessee as may be required by him for deciding the issue under consideration. After going through the details provided by the assessee, if the AO will be satisfied with the contentions or working, if any, made by the assessee then he will assess the income accordingly - if the AO does not agree with the computation made by the assessee and in that event, he will have to record his dissatisfaction with reasoning for the same by way of a speaking order, then he will be at liberty to resort to the provisions of Rule 8D. Needless to say, the assessee will co-operate and promptly supply the necessary details etc. to the AO for deciding the issue under consideration. Appeal of the assessee is allowed for statistical purposes.

Summary

Issues:
Confirmation of disallowance under section 14A of the Income Tax Act.

Analysis:
The appeal was filed against the Commissioner of Income Tax (Appeals) order confirming the disallowance of Rs.29,84,949 under section 14A of the Income Tax Act. The Assessing Officer had made the disallowance as the assessee had made investments for earning exempt income. In the appeal before the CIT(A), the assessee argued that no expenditure was incurred for earning the dividend income and that the investments were incidental to the business. However, the CIT(A) upheld the disallowance invoking section 14A. The Tribunal noted that the AO did not record any dissatisfaction with the claim that no expenditure was incurred for earning exempt income and directly applied Rule 8D. The Tribunal, citing the case of 'Godrej & Boyce Manufacturing Co. Ltd.', emphasized that Rule 8D can be applied only if the assessee's method is unsatisfactory. Therefore, the Tribunal set aside the CIT(A)'s order and directed the AO to re-examine the contentions of the assessee. The AO was instructed to call for any necessary records or evidence and assess the income accordingly if satisfied with the assessee's contentions. If not, the AO must record dissatisfaction with reasoning before resorting to Rule 8D. The assessee was directed to cooperate by providing necessary details.

In conclusion, the Tribunal allowed the appeal of the assessee for statistical purposes, emphasizing the need for the AO to follow proper procedures and consider the contentions raised by the assessee regarding the disallowance under section 14A.