2017 (9) TMI 312 - AT - Income Tax

Disallowance u/s 14A - AO made disallowance without recording his dissatisfaction on any cogent ground - Held that - Following the decision rendered in judgment cited as Godrej & Boyce Manufacture Company Ltd. (2017 (5) TMI 403 - SUPREME COURT OF INDIA) and Hon ble Delhi High Court in HT Media Limited (2017 (8) TMI 962 - DELHI HIGH COURT), we are of the considered view that the findings returned by AO that the contention of the assessee company that it has not incurred any expenses for earning exempt income and take services of investment adviser is not acceptable do not hold good because when the assessee has come up with categoric plea that it has not incurred any expenses to earn the exempt income from mutual funds and that the assessee has itself made disallowance to the tune of ₹ 1,00,000/- which has been accepted by the AO without pointing out any defect, provisions contained u/s 14A read with Rule 8D cannot be invoked. Because sub-section (2) & (3) of section 14A with Rule 8D of the Rules has only prescribed a formula for determination of an expenditure to earn the income which does not form part of the total income under the Act, which can only be invoked if the AO is not satisfied with the claim of the assessee. Therefore the addition made by the AO and affirmed by the ld. CIT (A) is not sustainable. - Decided in favour of assessee.

Summary

Issues:
1. Disallowance under section 14A read with Rule 8D for Assessment Year 2011-12.
2. Correctness of disallowance of exempt income and application of Rule 8D.

Issue 1: Disallowance under section 14A read with Rule 8D for Assessment Year 2011-12:

The appellant, M/s. Barmalt (India) Pvt. Ltd., challenged the order passed by the Commissioner of Income-tax (Appeals)-2 for the Assessment Year 2011-12, seeking to set aside the disallowance made under section 14A read with Rule 8D. The Assessing Officer calculated a disallowance of ?3,11,355 based on the exempt income claimed by the assessee on account of dividend. The AO contended that the assessee had invested money from accumulated profits and incurred expenses for earning exempt income, thus justifying the disallowance. The ld. CIT (A) affirmed the addition, leading the assessee to appeal before the Tribunal.

Issue 2: Correctness of disallowance of exempt income and application of Rule 8D:

The arguments presented by the parties revolved around the correctness of the disallowance under Rule 8D. The assessee contended that the AO invoked Rule 8D without recording dissatisfaction with the self-disallowance of ?1,00,000. The assessee maintained that no expenses were incurred to earn exempt income and cited precedents supporting their stance. On the other hand, the Revenue argued that the disallowance was correctly worked out as per the accounts provided by the assessee. However, the Tribunal found that the AO had mechanically invoked Rule 8D without proper satisfaction, contrary to legal requirements. Citing relevant case laws, the Tribunal held that the addition made by the AO and affirmed by the ld. CIT (A) was not sustainable. The Tribunal allowed the appeal, emphasizing the necessity of the AO's satisfaction before invoking Rule 8D.

In conclusion, the Tribunal set aside the impugned order and allowed the appeal, emphasizing the importance of the AO's satisfaction before applying Rule 8D for disallowances under section 14A. The judgment highlighted the need for proper assessment and recording of dissatisfaction by the AO to justify disallowances, ensuring compliance with legal provisions and precedents.