2016 (4) TMI 463 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D - Held that - We find that the assessee has earned exempt income to the tune of ₹ 17,56,369/- and has suo motu disallowed ₹ 61,666/- u/s 14A of the Act. We find that the AO has invoked Rule 8D without pointing out any reason for not being satisfied with the computation made by the assessee in respect of expenditure incurred for earning exempt income. The Hon ble jurisdictional High Court in CIT vs. Tikisha Engineering India Ltd. (2014 (12) TMI 482 - DELHI HIGH COURT ) has held that without recording the objective satisfaction as required under sub-section (2) to section 14A that the AO is not satisfied with the correctness of the claim of the assessee in respect of expenditure in respect of exempt income, the AO cannot invoke Rule 8D to compute the said disallowance under the said Rule. Therefore, we find substance in the argument of the ld. AR and so, we find that without recording satisfaction as envisaged by the statute before invoking the computation provided for under Rule 8D has vitiated the impugned order. Therefore, we direct deletion of the addition made by the AO and which was sustained by the CIT (A) in his impugned order. - Decided in favour of assessee

Summary

Issues:
Disallowance under section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962.

Analysis:
The case involved a dispute regarding the disallowance made by the Assessing Officer (AO) under section 14A of the Income-tax Act, 1961, read with Rule 8D of the Income-tax Rules, 1962. The assessee, engaged in the sale and purchase of shares and securities, declared NIL income with a loss of &8377; 14,18,360/- for the assessment year 2010-11. The AO computed a disallowance of &8377; 1,13,77,730/-, representing 0.5% of the average value of investments, as the assessee had earned exempt dividend income. The Commissioner of Income Tax (Appeals) upheld the AO's decision, citing precedents where disallowance under section 14A was deemed necessary even if no exempt income was realized.

The assessee contended that the dividend income was incidental to its activities aimed at capital appreciation and earning taxable income. The assessee claimed to have incurred expenses of &8377; 61,666/- for earning the exempt income, including salary and DMAT charges. The AO, however, disregarded the assessee's submissions and applied Rule 8D for the disallowance. The Tribunal noted that the AO did not record satisfaction before invoking Rule 8D, as required by law. The Tribunal also observed that the disallowance amount of &8377; 1,13,77,730/- was disproportionate to the exempt income of &8377; 17,56,369/-, contravening the principle that only expenditure related to tax-exempt income should be disallowed.

Citing the decision in CIT vs. Taikisha Engineering India Ltd., the Tribunal emphasized that the AO must be satisfied with the correctness of the claim of expenditure related to exempt income before resorting to Rule 8D. The Tribunal found merit in the assessee's argument that the disallowance cannot exceed the tax-free income. Relying on legal precedents and the lack of objective satisfaction by the AO, the Tribunal directed the deletion of the disallowance made by the AO and upheld by the CIT (A). Consequently, the Tribunal allowed the appeal of the assessee, emphasizing the importance of recording satisfaction before applying Rule 8D and ensuring that disallowances are proportionate to tax-exempt income.

In conclusion, the Tribunal's decision highlighted the necessity for the AO to establish objective satisfaction before invoking Rule 8D for disallowances under section 14A. The judgment underscored the principle that disallowances should be limited to expenditure directly related to tax-exempt income and should not exceed the amount of tax-free income. The Tribunal's ruling favored the assessee, emphasizing the importance of adherence to statutory requirements and proportionality in disallowance calculations under section 14A.