2018 (8) TMI 744 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - suo moto disallowance made by assessee - Held that - AO has not at all recorded the satisfaction for rejecting the claim of expenditure suo moto disallowed by assessee in relation to exempt income. Once this is the position, we are of the view that the CIT(A) has rightly deleted the disallowance. - Decided against the revenue.

Summary

Issues involved:
Appeal against deletion of disallowance of expenses related to exempt income under section 14A of the Income Tax Act, 1961.

Analysis:
1. The appeals by Revenue challenge the Commissioner of Income Tax (Appeals)'s decision to delete the disallowance of expenses related to exempt income under section 14A of the Act read with Rule 8D of the Income Tax Rules. The AO had required the assessee to explain why the disallowance should not be considered higher than the suo moto disallowance made by the assessee. The assessee argued that due to the provisions of section 115JB, no disallowance under section 14A could be made. The CIT(A) observed that the AO did not record any satisfaction regarding the correctness of the claim of the assessee, leading to the deletion of the disallowance.

2. The CIT(A) highlighted that as per section 14A(2), the AO can determine the disallowable amount only if not satisfied with the assessee's claim. The AO's failure to record reasons for not accepting the assessee's disallowance led the CIT(A) to conclude that the disallowance made by the assessee was justified and based on scientific working. The CIT(A) found no justification for further disallowance under Rule 8D(2) and accepted the assessee's disallowance.

3. The Hon'ble Supreme Court's decision in Maxopp Investment Ltd. vs. CIT emphasized the need for the AO to record positive satisfaction before making a disallowance under section 14A. In this case, the AO did not record any satisfaction for rejecting the assessee's disallowance, leading to the affirmation of the CIT(A)'s decision to delete the disallowance.

4. The Tribunal affirmed the CIT(A)'s order, dismissing the appeals of Revenue for both assessment years. The consistent view was taken due to identical facts and circumstances in both years, with the AO and CIT(A) relying on the assessment order for one year. The Tribunal upheld the deletion of the disallowance, confirming the CIT(A)'s decision.

In conclusion, the Tribunal upheld the CIT(A)'s decision to delete the disallowance of expenses related to exempt income under section 14A, emphasizing the importance of the AO recording positive satisfaction before making such disallowances. The appeals by Revenue were dismissed for both assessment years.