2018 (3) TMI 949 - AT - Income Tax

Disallowance u/s 14A r.w.s. 8D(2)(iii) - no expenditure was incurred for earning exempt income - Held that - We find that the AO is supposed to record satisfaction in an objective manner with cogent reasons having regard to the accounts of the assessee in order to refute the claim made by the assessee that no expenditure was incurred for earning exempt income. This is the mandate provided in section 14A(2) of the Act read with Rule 8D(1) of the Rules. Respectfully following the same we direct the ld. AO not to make any disallowance u/s 14A of the Act in the instant case. Accordingly, ground no. 1 raised by the assessee is allowed and ground no. 1 raised by the Revenue is dismissed. Disallowance of provision for leave encashment by applying the provision of 43B(f) - Held that - We find that though the Hon ble Calcutta High Court in the case of Exide Industries Ltd vs Union of India 2007 (6) TMI 175 - CALCUTTA High Court struck down the provisions of section 43B(f) of the Act as unconstitutional, the revenue had carried the matter further to the Hon ble Supreme Court 2008 (9) TMI 921 - SUPREME COURT which had not stayed the judgment of the Calcutta High Court during Leave proceedings. But the Hon ble Supreme Court had only passed an interim order on the impugned issue. Hence we deem it fit and appropriate , in the interest of justice and fair play, to set aside this issue to the file of the ld AO to pass orders based on the outcome of the main appeal on merits by the Hon ble Supreme Court as stated supra. Accordingly Ground No. 2 raised by the assessee is allowed for statistical purposes.

Summary

Issues:
1. Disallowance under section 14A of the Income Tax Act.
2. Disallowance of provision for leave encashment under section 43B of the Act.

Issue 1: Disallowance under section 14A of the Income Tax Act:
The dispute revolves around the disallowance under section 14A of the Act read with Rule 8D(2)(iii) of the Rules. The Assessing Officer (AO) observed that the assessee had earned exempt dividend income but had not disallowed any amount under section 14A. The AO proceeded to make a disallowance under Rule 8D, which was contested by the assessee. The Commissioner of Income Tax (Appeals) (CIT(A)) partially upheld the disallowance. The assessee argued that no expenditure was incurred for earning exempt income. The Tribunal referred to previous decisions and held that the AO must record satisfaction with cogent reasons before making a disallowance under section 14A. As the AO failed to do so, the Tribunal directed not to make any disallowance under section 14A in the instant case.

Issue 2: Disallowance of provision for leave encashment under section 43B of the Act:
The assessee had made a provision for leave encashment and claimed it as allowable expenditure. However, the AO disallowed it under section 43B(f) of the Act. The CIT(A) upheld the disallowance. The Tribunal noted that the Hon'ble Calcutta High Court had initially struck down section 43B(f) as unconstitutional, but the matter was pending before the Supreme Court. In light of the Supreme Court's interim order, the Tribunal set aside the issue to the AO for further consideration based on the outcome of the main appeal on merits. Consequently, the Tribunal allowed the appeal of the assessee for statistical purposes.

In conclusion, the Tribunal ruled in favor of the assessee by directing not to make any disallowance under section 14A of the Act due to the AO's failure to record satisfaction with cogent reasons. Additionally, the issue of disallowance of provision for leave encashment under section 43B was set aside for further consideration based on the pending Supreme Court appeal.