2019 (1) TMI 476 - HC - Income Tax

Disallowance u/s 14A r.w.r 8D - best judgment determination - Held that - Rule 8D cannot be invoked and applied unless the Assessing Officer records his dissatisfaction regarding correctness of the claim made by the assessee in relation to expenditure incurred to earn exempt income. This is the mandate and precondition imposed by sub-section (2) to Section 14A. Rule 8D is in the nature of best judgment determination i.e. determination in default and on rejection of the explanation of the assessee in relation to expenditure incurred to earn exempt income. Rule 8D is not applicable by default but only if and when the Assessing Officer records his satisfaction and rejects the explanation of the assessee regarding the disallowance of expenditure. In the present case the assessment order proceeds on a wrong assumption that Rule 8D would applies to all cases and is mandatory. Finding of the Tribunal affirming the order of the Commissioner of Income Tax (Appeals) is in accordance with the law. Legal principle and ratio is no longer res integra and is settled by the judgment of the Supreme Court in Godrej & Boyce Manufacturing Co. Ltd. Vs. Deputy Commissioner of Income-Tax and another 2017 (5) TMI 403 - SUPREME COURT OF INDIA determination is to be made on application of the formula prescribed under Rule 8-D or in the best judgment of the assessing officer, what the law postulates is the requirement of a satisfaction in the assessing officer that having regard to the accounts of the assessee, as placed before him, it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It is only thereafter that the provisions of Sections 14-A(2) and (3) read with Rule 8-D of the Rules or a best judgment determination, as earlier prevailing, would become applicable.

Summary

Issues:
1. Application for condonation of delay in filing the appeal.
2. Disallowance under Section 14A of the Income-tax Act 1961.

Issue 1: Application for Condonation of Delay
The application for condonation of delay of 59 days in filing the appeal was made, and it was not opposed by the respondent's counsel. The court allowed the application, and the delay was condoned.

Issue 2: Disallowance under Section 14A of the Income-tax Act 1961
The appeal by the Revenue under Section 260A of the Income-tax Act 1961 pertained to the assessment year 2010-2011 and involved the disallowance under Section 14A. The respondent assessee had earned exempted dividend income of ?8.97 crores under Section 10(34) of the Act, with a self-disallowance of ?9,07,453. The assessing officer invoked Rule 8D without examining the disallowance made by the assessee, leading to a dispute.

The Commissioner of Income-Tax (Appeals) deleted the addition, citing the assessing officer's failure to record objective satisfaction for invoking Rule 8D. The Commissioner observed that Rule 8D can only be applied if the assessing officer is not satisfied with the correctness of the claim made by the assessee regarding the expenditure related to income not forming part of the total income.

The Commissioner also noted that the disallowance was worked out mechanically without considering submissions or accounts of the assessee. Upon examination, it was found that the assessee had not used interest-bearing funds for tax-free income investments. The Commissioner held that the rejection of the appellant's claim under Section 14A was not supported by material evidence and was not in accordance with the law.

The Tribunal upheld the first appellate authority's findings, emphasizing that Rule 8D cannot be applied universally and mandatorily without the assessing officer recording dissatisfaction with the claim made by the assessee. The Tribunal affirmed that Rule 8D is a best judgment determination and not applicable by default.

Referring to the Supreme Court judgment in Godrej & Boyce Manufacturing Co. Ltd. Vs. Deputy Commissioner of Income-Tax, the court highlighted the requirement for the assessing officer to be satisfied with the claim of the assessee before applying Rule 8D. The court concluded that as the legal issue was settled, no substantial question of law arose for consideration, and the appeal was dismissed.

This detailed analysis covers the issues of the application for condonation of delay and the disallowance under Section 14A of the Income-tax Act 1961, providing a comprehensive understanding of the judgment delivered by the court.