2017 (9) TMI 1285 - AT - Income Tax

Addition u/s 14A - disallowance made by assessee suo moto - Held that - Hon ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. DCIT (2010 (8) TMI 77 - BOMBAY HIGH COURT) wherein held that sub-section (2) of section 14A does not authorize or empower the AO to apply the prescribed method irrespective of the nature of the claim made by the assessee. The AO has to first consider the correctness of the claim of the assessee having regard to the accounts of the assessee. The satisfaction of the AO has to be objectively arrived at on the basis of those accounts, after considering all the relevant facts and circumstances. The application of the prescribed method arises in a situation where the claim made by the assessee in respect of expenditure which is relatable to the earning of income which does not form part of the total income under the Act is found to be incorrect. On the very first proposition, argued by the learned Counsel for the assessee in the present case before us, we are of the view that the assessee has specifically raised ground regarding disallowance u/s 14A of the Act read with rule 8D(2) of the Rules and this is merely a proposition on which the assessee is arguing this issue. He need not to raise any specific ground qua this proposition as contested by the learned Sr. DR. AO failed to adhere to the provisions of section 14A of the Act read with rule 8D of the Rules. The AO could not find any mistake in the computation of disallowance suo moto by the assessee. Accordingly, we delete the disallowance and allow this issue of the assessee s appeal. Levying interest u/s 234C - Held that - We find that the AO while computing Income Tax liability for the subject assessment year levied interest u/s 234C on the assessed income, whereas as per section 234C of the Act the interest is to be charged on the returned income. We find from the facts of the case that there is no tax due on the returned income and hence, no interest can be levied u/s 234C of the Act in the present case before us. We direct the AO to delete the levy of interest and compute levy of interest on returned income u/s 234C of the Act. We direct the AO accordingly.

Summary

Issues:
1. Disallowance under section 14A of the Income Tax Act, 1961 read with rule 8D of the Income Tax Rules, 1962.
2. Levying interest under section 234C of the Income Tax Act.

Issue 1: Disallowance under section 14A of the Income Tax Act, 1961 read with rule 8D of the Income Tax Rules, 1962:

The appeal by the assessee challenges the order of CIT(A) confirming the AO's disallowance under section 14A of the Act read with rule 8D of the Rules. The assessee had made a suo moto disallowance of a certain amount, but the AO disagreed, making a higher disallowance under rule 8D(2)(iii). The CIT(A) upheld this decision based on the Mumbai ITAT case of DCIT vs. Damani Estates and Finance Pvt. Ltd., emphasizing the need for disallowance of indirect expenditures. However, the assessee argued against this, stating that the disallowance was made on a scientific basis. The Tribunal, after analyzing the facts, highlighted the necessity for the AO to objectively assess the correctness of the claim made by the assessee before invoking Rule 8D. The Tribunal found that the AO failed to do so and deleted the disallowance, allowing the assessee's appeal.

Issue 2: Levying interest under section 234C of the Income Tax Act:

The second issue pertains to the AO levying interest under section 234C of the Act. The assessee contested this levy, arguing that no tax was due on the returned income, hence interest under section 234C should not be imposed. The Tribunal agreed with the assessee, noting that interest under section 234C is to be charged on the returned income, and since there was no tax due on the returned income, the interest levied by the AO was incorrect. Therefore, the Tribunal directed the AO to delete the interest levied under section 234C and compute the levy of interest on the returned income as per the Act.

In conclusion, the Tribunal allowed the appeal of the assessee, deleting the disallowance under section 14A and directing the AO to delete the interest levied under section 234C.