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2017 (6) TMI 345 - AT - Income TaxDisallowance of expenses u/s 14A - necessity of recording of satisfaction - Held that - AO while proceeding with disallowing the expenses has not recorded any satisfaction as required u/s 14A(2) of the Act. As per Sec.14A(2), for invocation of Rule 8D, the AO has to record satisfaction about the correctness of the claim of the assessee, in respect of the expenditure incurred in relation to the income which does not form part of total income. In the present case, we find that no satisfaction has been recorded by the AO while disallowing the expense u/s 14A of the Act, thus disallowance u/s 14A r.w.r. 8D was unjustified. See Punjab Tractors Ltd., Vs. CIT 2017 (2) TMI 647 - PUNJAB AND HARYANA HIGH COURT - Decided in favour of assessee.
Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act. 2. Satisfaction recording by the Assessing Officer (AO) under Section 14A(2). Detailed Analysis: 1. Disallowance under Section 14A of the Income Tax Act: The primary issue in this case is the disallowance of expenses under Section 14A read with Rule 8D of the Income Tax Act. The assessee, a company running a Diagnostic Centre, filed its return of income for the assessment year 2009-10, initially declaring a total income of ?15,12,596/- and later revising it to nil taxable income. The case was selected for scrutiny, and the AO determined a total loss of ?1,70,18,310/-. During the assessment proceedings, the AO noted that the assessee had derived exempt income and asked for the working of disallowance under Section 14A. The assessee worked out the disallowance at ?1,46,964/-, which the AO accepted. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's order, stating that the appellant had earned exempt income of ?7,37,340/- from mutual fund investments and had not made any suo moto disallowance under Section 14A. The CIT(A) emphasized that indirect expenses are also to be allocated to the exempt income, and therefore, the disallowance under Section 14A read with Rule 8D was justified. The assessee argued that no expenditure was incurred to earn the exempt income and that the AO had not recorded any satisfaction as required under Section 14A(2). The assessee also contended that the investments in National Housing Bank and Rural Electrification Company Limited should be excluded from the computation of tax-free investments as the interest income from these investments is taxable. 2. Satisfaction Recording by the Assessing Officer (AO) under Section 14A(2): The Tribunal noted that for invoking Rule 8D, the AO must record satisfaction about the correctness of the assessee's claim regarding the expenditure incurred in relation to exempt income, as per Section 14A(2). In this case, the AO did not record any such satisfaction. The Tribunal referred to the decision of the Punjab and Haryana High Court in the case of Punjab Tractors Ltd. Vs. CIT, which held that the AO must record satisfaction that the claim regarding expenditure is not satisfactory. The Tribunal also cited the decision of the Co-ordinate Bench of the Tribunal, Pune, in the case of ACIT Vs. Magarpatta Township Development & Construction Company Limited, where it was held that disallowance under Section 14A read with Rule 8D was unjustified if the AO did not record any satisfaction as required by Section 14A(2). Conclusion: The Tribunal concluded that no disallowance under Section 14A is called for in this case since the AO did not record any satisfaction for disallowing the expenses under Section 14A. Therefore, the grounds of the assessee were allowed, and the appeal was decided in favor of the assessee. Order Pronounced: The appeal of the assessee was allowed, and the order was pronounced on the 2nd day of June, 2017.
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