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2016 (7) TMI 387 - AT - Income TaxDisallowance u/s 14A - Held that - For making any disallowance u/s 14A of the Act the AO shall determine the amount of total expenditure incurred by the assessee which does not form part of total income under his Act in accordance with such method as may be prescribed i.e. under Rule 8D of the Income Tax Rule, 1962. At the same time second subsequent part of sub section (2) of Section 14A of the Act imposes precondition that before such determination of disallowance the AO has to record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of total income under the Act. But this mandatory requirement, if not fulfilled by the AO, cannot be done, to fill omission of the AO before the CIT(A). It is also pertinent to note that in the present case the assessee suo moto disallowed ₹ 31553/- and the AO has not recorded any finding to show that he is not satisfied with the correctness of the claim as well as suo moto disallowance, made by the assessee and thus the authorities below cannot validly make any disallowance and consequent addition u/s 14A Respectfully following the decision of Hon ble Jurisdictional High Court of Delhi in the case of Cheminvest Ltd. ( 2015 (9) TMI 238 - DELHI HIGH COURT ), we hold that no disallowance u/s 14A of the Act can be made where there is no exempt income. - Decided in favour of assessee
Issues:
1. Disallowance made by the Assessing Officer under section 14A read with Rule 8D. 2. Requirement of the Assessing Officer to determine the amount of expenditure incurred in relation to income not forming part of total income. 3. Recording of satisfaction by the Assessing Officer for disallowance under section 14A. 4. Applicability of section 14A in the absence of exempt income. Analysis: Issue 1: Disallowance under section 14A read with Rule 8D The appeal challenged the addition made by the Assessing Officer (AO) under section 14A read with Rule 8D. The assessee argued that no exempt income was claimed, and a suo moto disallowance was already made. The AO, without alleging the correctness of the disallowance, added the amount. The Tribunal noted that section 14A mandates the AO to determine expenditure only if satisfied with the correctness of the claim and the suo moto disallowance. The AO's failure to record dissatisfaction cannot be rectified by the CIT(A) using coterminous powers. Issue 2: Determination of expenditure by the Assessing Officer The Tribunal emphasized that the AO must determine total expenditure not forming part of total income as per Rule 8D only if unsatisfied with the claim. In this case, the AO did not question the correctness of the claim or the suo moto disallowance, rendering any further disallowance invalid. Issue 3: Recording of satisfaction by the Assessing Officer The Tribunal highlighted the mandatory requirement for the AO to record dissatisfaction with the claim before making any disallowance under section 14A. The absence of such a finding by the AO cannot be rectified by the CIT(A) during appellate proceedings. Issue 4: Applicability of section 14A in absence of exempt income The Tribunal cited a previous judgment to establish that section 14A does not apply in the absence of exempt income. Following this precedent, the Tribunal held that no disallowance can be made under section 14A if there is no exempt income, thereby allowing the appeal and demolishing the addition made by the AO and confirmed by the CIT(A). In conclusion, the Tribunal ruled in favor of the assessee, emphasizing the importance of the Assessing Officer's satisfaction for disallowance under section 14A, the necessity of determining expenditure only if unsatisfied with the claim, and the non-applicability of section 14A in the absence of exempt income.
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