2016 (11) TMI 1369 - HC - Income Tax

Disallowance u/s 14A r.w.r. 8D - Held that - The language of Section 14A presupposes that the AO has to adduce some reasons if he is not satisfied with the amount offered by way of disallowance by the assessee. At the same time Section 14A (2) as indeed Rule 8D(i) leave the AO equally with no choice in the matter inasmuch as the statute in both these provisions mandates that the particular methodology enacted should be followed. In other words, the AO is under a mandate to apply the formulae as it were under Rule 8D because of Section 14A(2). If in a given case, therefore, the AO is confronted with a figure which, prima facie, is not in accord with what should approximately be the figure on a fair working out of the provisions, he is but bound to reject it. In such circumstances the AO ordinarily would express his opinion by rejecting the disallowance offered and then proceed to work out the methodology enacted. In this instance the elaborate analysis carried out by the AO as indeed the three important steps indicated by him in the order, shows that all these elements were present in his mind, that he did not expressly record his dissatisfaction in these circumstances, would not per se justify this Court in concluding that he was not satisfied or did not record cogent reasons for his dissatisfaction to reject the AO s conclusion. To insist that the AO should pay such lip service regardless of the substantial compliance with the provisions would, in fact, destroy the mandate of Section 14A. Thus this Court is satisfied that the disallowance which is otherwise in accord with Rule 8D(c) was justified.

Summary

Issues:
1. Disallowance of expenses under Section 14A of the Income Tax Act, 1961 without recording dissatisfaction.
2. Interpretation of Section 14A and Rule 8D regarding disallowance of expenses.

Issue 1: Disallowance of expenses under Section 14A without recording dissatisfaction:
The appeal under Section 260A of the Income Tax Act, 1961 concerns the disallowance of expenses amounting to &8377; 3,87,10,146 under Section 14A of the Act. The appellant argues that without the AO recording his dissatisfaction before conducting the exercise under the said provisions, further disallowance was not permissible. The AO had disallowed the amount after analyzing the provisions and Rule 8D, concluding that the disallowance was necessary. The Commissioner of Income Tax (Appeals) opined that the AO had not carried out the preliminary stage of recording satisfaction with respect to the amount offered by the assessee as disallowance, which would have allowed the calculation of disallowance under Rule 8D. The Tribunal, however, reversed the CIT(A)'s decision, stating that the AO's opinion justified the disallowance made.

Issue 2: Interpretation of Section 14A and Rule 8D regarding disallowance of expenses:
The ITAT's decision was challenged by the assessee, arguing that the ITAT erred in basing its conclusion on Rule 8D(iii) without the AO providing good and cogent reasons to reject the amount offered as expenses. The Court referred to the Consolidated Photo & Finvest Ltd. case, emphasizing that the AO must take an overall view rather than a piecemeal decision on the disallowance. The Court highlighted that the AO is mandated to follow the methodology under Rule 8D if the figure offered by the assessee does not align with the provisions. In this case, the AO's elaborate analysis and steps indicated in the order demonstrated that he considered all elements, even though he did not expressly record his dissatisfaction. The Court concluded that the disallowance in accordance with Rule 8D(c) was justified, dismissing the appeal as no substantial question of law arose.

In summary, the judgment addressed the disallowance of expenses under Section 14A without recording dissatisfaction and interpreted the provisions of Section 14A and Rule 8D regarding the calculation of disallowance. The Court emphasized the importance of the AO taking an overall view and following the mandated methodology under Rule 8D, even if dissatisfaction was not expressly recorded. Ultimately, the Court found the disallowance justified and dismissed the appeal.