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2017 (12) TMI 1328 - AT - Income TaxAddition u/s 14A - Held that - Section 14A clearly lays down that the AO has to record objective satisfaction in respect of the disallowance offered by the assessee having regard to its books of accounts. We note that the assessee had furnished separate audited books of accounts of each division. lt is noted that due explanation in support of their disallowance of 7, 74, 703/- was also furnished by the assessee. The AO however seemed to have mechanically ignored the explanation stating that the submissions was untenable in law and unacceptable. There is a lack of recording of objective satisfaction on the part of the AO before making further disallowance u/s 14A of the Act. The jurisdictional Calcutta High Court in the case of CIT Vs REI Agro Limited (2013 (12) TMI 1517 - CALCUTTA HIGH COURT) stating that in absence of any proper and objective satisfaction being recorded by the AO in the assessment order the AO s action of making disallowance under Section 14A by applying Rule 8D is bad in law. Disallowance under rule 8D(2)(ii) and 8D(2)(iii) in respect of exempted agricultural income - Held that - The assessee engaged in cultivation of agriculture for which it maintains separate set of books of accounts.The said books are duly audited by Chartered Accountants. The gross receipts from agriculture was 4, 09, 95, 906/-. The expenses incurred in this division was 3, 19, 13, 917/- and depreciation was 2, 41, 902/-. Accordingly thenet agricultural income was computed at 88, 40, 897/- by the assessee which was claimed as exempt under the Act. It is therefore evidently clear that the assessee has already disallowed the expenses incurred in relation to earning of agricultural income. That is all expenses interest and depreciation pertaining to the agricultural income were already disallowed by the assessee and only the net amount was claimed as exempt under the Act therefore considering the factual position explained above no further disallowance is required. We note that the AO has not rejected the books of accounts he has also not pointed out any infirmity or defect in the separate divisional accounts maintained by the assessee. The separate divisional accounts were duly audited by a firm of Chartered Accountants.
Issues Involved:
1. Disallowance of expenses under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962 in respect of exempted dividend income. 2. Disallowance of expenses under Section 14A read with Rule 8D(2)(ii) and 8D(2)(iii) in respect of exempted agricultural income. Detailed Analysis: Issue 1: Disallowance of expenses under Section 14A in respect of exempted dividend income Facts: - The assessee filed its return of income declaring a loss and was engaged in the business of sugar cane cultivation, sugar manufacturing, and trading in electrical appliances. - The assessee earned exempt dividend income and had offered a disallowance under Section 14A amounting to ?7,74,043/-. - The Assessing Officer (AO) recomputed the disallowance under Rule 8D, resulting in a higher disallowance of ?25,51,838/-. CIT(A) Findings: - The CIT(A) found that the AO did not record any cogent reasons for rejecting the assessee's computation of disallowance. - The CIT(A) noted that the assessee maintained separate audited books for its divisions and had already disallowed interest and other expenses related to exempt income. - The CIT(A) observed that the AO's application of Rule 8D without recording objective satisfaction was unjustified and deleted the additional disallowance. Tribunal's Decision: - The Tribunal agreed with the CIT(A), noting the absence of recorded reasons by the AO for rejecting the assessee's calculations. - It was emphasized that the AO must record objective satisfaction under Section 14A before making further disallowance. - The Tribunal upheld the CIT(A)'s order, confirming that the additional disallowance of ?25,51,838/- was not justified. Conclusion: - The appeal filed by the Revenue on this ground was dismissed. Issue 2: Disallowance under Rule 8D(2)(ii) and 8D(2)(iii) in respect of exempted agricultural income Facts: - The AO noted that the assessee claimed exemption for agricultural income but did not disallow any expenses related to it under Section 14A. - The assessee argued that agricultural income was computed after deducting related expenses and only the net income was claimed as exempt. - The AO computed a disallowance of ?4,43,02,551/- under Rule 8D, including direct and indirect expenses. CIT(A) Findings: - The CIT(A) observed that the assessee maintained separate audited books for its agricultural division and had already disallowed all expenses related to agricultural income. - The CIT(A) held that the further disallowance by the AO amounted to double disallowance and deleted it. Tribunal's Decision: - The Tribunal noted that the assessee already disallowed expenses related to agricultural income and only claimed the net amount as exempt. - It was found that the AO did not reject the books of accounts or point out any defects in the divisional accounts. - The Tribunal confirmed the CIT(A)'s order, stating no further disallowance was required. Conclusion: - The appeals filed by the Revenue on these grounds were dismissed. Order Pronouncement: - The order was pronounced in the open court on 20/12/2017.
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