2017 (9) TMI 1096 - AT - Income Tax

Addition u/s 14A r.w.s.Rule 8D - calculation of disallowance - non recording of satisfaction with reference to the books of accounts - Held that - In view of this fact and settled legal position, we are inclined to hold that invocation of provision of section 14A r.w.r.8D(2) is not justified without recording any satisfaction with reference to the books of account maintained by the assessee on the basis of which the assessee has not made any disallowance at all. However, we are of the considered view that a reasonable disallowance could be made attributing to the earning of the exempt income which in the present case is ₹ 2,50,000/-.

Summary

Issues:
1. Disallowance of expenses under section 14A of the Income Tax Act, 1961.
2. Disallowance under section 40(a)(ia) for non-payment of TDS on professional fees.

Analysis:
1. The appellant challenged the disallowance of expenses amounting to ?34,59,553 made by the Assessing Officer (AO) under section 14A of the Income Tax Act, 1961. The AO observed that the appellant earned dividend income and long-term capital gains claimed as exempt without allocating expenses related to this income. The AO issued a show cause notice, and after considering the appellant's submissions, calculated the disallowance under rule 8D. The appellant contended that no specific expenditure was incurred for earning exempt income, citing legal precedents. However, the Commissioner of Income Tax (Appeals) dismissed the appeal, stating that the AO's detailed discussion and application of Rule 8D were valid. The appellant's argument that no expenditure was incurred for earning exempt income was rejected, and the disallowance was upheld.

2. The appellant further appealed, arguing that the disallowance made by the AO was based on presumptions without specific satisfaction recorded on the books. The appellant referred to a Delhi High Court decision supporting the requirement for AO's satisfaction before invoking section 14A with rule 8D. The Tribunal noted that the AO did not record satisfaction regarding the expenditures related to exempt income, as mandated by law. Citing the Delhi High Court decision, the Tribunal held that the AO erred in invoking rule 8D without proper justification. The Tribunal also considered a lump sum disallowance of ?2 lakhs, based on the company's expenses, and allowed a partial relief of ?2,50,000, emphasizing the need for a reasonable disallowance supported by proper satisfaction recorded by the AO.

In conclusion, the Tribunal partially allowed the appeal, emphasizing the importance of the AO's satisfaction before making disallowances under section 14A and rule 8D. The judgment highlighted the necessity for a factual basis and proper justification for disallowances, ensuring adherence to legal requirements and precedents.