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2017 (5) TMI 1150 - AT - Income TaxDisallowance u/s 14A r.w.Rule 8D(2)(iii) computation - Held that - We are of the considered view that the assessee did offer the suo motu disallowance but did not relate the same to the accounts of the assessee as is contemplated u/s 14A(2) of the 1961 Act and in the absence thereof the AO applied Rule 8D of the 1962 Rules r.w.s. 14A of the 1961 Act to make disallowance of expenditure incurred in relation to income which does not form part of the total income Assessee has conceded that if one more opportunity is granted the assessee will explain disallowance of expenditure incurred in relation to income which does not form part of the total income having regards to the accounts of the assessee before the AO and injustice caused to the assessee by invocation of Rule 8D of the 1962 Rules r.w.s. 14A of the 1961 Act can be removed Keeping in view facts and circumstances of the case, in our considered view the matter needs to be set aside and restored to the file of AO for re-computing the disallowance u/s. 14A of the 1961 Act of the expenditure incurred in relation to the earning of income which does not form part of the total income having regards to the accounts of the assessee. Appeal filed by the assessee allowed for statistical purposes.
Issues:
1. Disallowance of expenses under section 14A of the Income Tax Act, 1961. Detailed Analysis: The appeal was filed by the assessee against the appellate order passed by the Commissioner of Income Tax (Appeals) for the assessment year 2010-11. The issue revolved around the disallowance of ?5,58,104 under section 14A of the Income Tax Act, 1961 read with Rule 8D(2)(iii) of the Income Tax Rules, 1962. The assessee, a financial services company engaged in merchant banking, had earned dividend income claimed as exempt. The Assessing Officer invoked Rule 8D to make the disallowance, rejecting the working submitted by the assessee. The disallowance was based on the average value of investments, resulting in a confirmed disallowance of ?6,67,769. The assessee, however, voluntarily disallowed ?1,09,665, attributing it to expenses for earning exempt income. Upon appeal, the Commissioner of Income Tax (Appeals) upheld the disallowance made by the Assessing Officer, leading to the assessee filing an appeal before the Tribunal. The Tribunal observed that the primary onus is on the assessee to work out the disallowance of expenses related to earning income not forming part of the total income, as per section 14A(2) of the Act. The Tribunal noted that the assessee had offered a suo motu disallowance but failed to provide details related to the proposed disallowance as required by the Act. Consequently, the Assessing Officer applied Rule 8D for the disallowance. However, the Tribunal found that the assessee had not related the disallowance to its accounts as mandated by the Act. The Tribunal decided to set aside the matter and restore it to the Assessing Officer for re-computing the disallowance under section 14A of the Act. The Tribunal directed the assessee to produce the working of the disallowance in line with the Act's requirements. It emphasized that the burden is on the assessee to provide such working, and if the Assessing Officer is not satisfied with the working submitted, Rule 8D can be invoked. The Tribunal stressed the importance of granting the assessee a fair hearing and allowing the submission of necessary evidence. Ultimately, the appeal was allowed for statistical purposes, with the Tribunal issuing directions for the re-computation of the disallowance by the Assessing Officer.
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