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2017 (8) TMI 37 - HC - Income TaxAddition u/s 14A - whetehr he Assessing Officer committed serious error in applying the formula contained in sub rule (2) of Rule 8D of the Rules without recording his satisfaction rejecting the assessee s accounts reflecting that no expenditure was incurred for earning such tax exempt income? - Held that - Section 14A as well as Rule 8D require the Assessing Officer to arrive at a satisfaction that the claim of the expenditure made by the assessee is not correct. It is only then he can apply the formula under sub-rule (2) of Rule 8D. However, these statutory provisions do not require that such satisfaction must be arrived at in a particular manner. As long as there is sufficient material to enable the Assessing Officer to arrive at such a satisfaction and which is also recorded by him in the order of assessment, the requirements of the statute would be satisfied. In the present case, we have noted that the Assessing Officer has given detailed reasons for discarding the assessee s theory that to earn the assessable income the assessee incurred no expenditure whatsoever. The Tribunal confirmed such view. Decision of the Assessing Officer to apply the formula under Rule 8D was therefore correct. - Decided against assessee.
Issues:
1. Disallowance of ?9,63,355 under Section 14A of the Income Tax Act without recording mandatory satisfaction. 2. Confirmation of disallowance without finding that the assessee actually incurred such expenditure for earning exempt income. 3. Allegation of the order being passed in a mechanical manner without appreciating documentary evidence. Issue 1: Disallowance under Section 14A without recording satisfaction The assessee challenged the disallowance of ?9,63,355 under Section 14A without the Assessing Officer recording mandatory satisfaction. The Assessing Officer rejected the assessee's explanation regarding interest expenditure, noting that certain expenses are inherent in investment activities. The Commissioner (Appeals) upheld this view, leading to the appeal. The Tribunal confirmed the disallowance, emphasizing the substantial investments held by the assessee and the involvement of senior management in decision-making processes. The Tribunal found no rationale in the argument that no expenditure was incurred for tax-free income, citing Rule 8D(2)(iii) for allocation of indirect expenditure. The court dismissed the appeal, stating that the Assessing Officer's detailed reasons for rejecting the assessee's claim justified applying Rule 8D. Issue 2: Confirmation of disallowance without finding actual expenditure The second issue raised was the confirmation of disallowance without evidence of actual expenditure incurred for earning exempt income. The Tribunal observed the substantial investments made by the assessee and the involvement of senior management in investment decisions. It found the argument of nil administrative expenditure belied by the facts, citing Section 14A(3) to shift the burden of proof to the assessee. The Tribunal partially allowed the appeal, stating that the disallowance towards proportionate interest was not sustainable based on judicial precedent. Issue 3: Allegation of mechanical order without appreciating evidence The final issue pertained to the allegation that the order was passed mechanically without appreciating documentary evidence. The assessee contended that the Assessing Officer erred in applying Rule 8D without specific reference to the actual expenditure incurred. The court referenced judgments emphasizing the necessity of actual expenditure for disallowance under Section 14A. It clarified the provisions of Section 14A and Rule 8D, stating that the Assessing Officer's satisfaction with the correctness of the claim is essential before applying the formula under Rule 8D. The court upheld the Tribunal's decision, emphasizing the Assessing Officer's detailed reasons for disallowance. In conclusion, the court upheld the disallowance under Section 14A, emphasizing the necessity of the Assessing Officer's satisfaction with the correctness of the claim before applying Rule 8D. The judgment highlighted the importance of actual expenditure for disallowance and justified the confirmation of the disallowance based on the detailed reasoning provided by the Assessing Officer.
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