2019 (3) TMI 1032 - AT - Income Tax

Addition u/s 14A - Expenses incurred for earning dividend income - assessee itself suo moto made the disallowance - recording proper satisfaction - HELD THAT - The undisputed position that emerges is that the assessee had offered suo-moto disallowance of ₹ 3 Lacs against the exempt income. AO, without recording proper satisfaction as envisaged by Section 14A read with Rule 8D, proceeded to apply Rule 8D, which was not in accordance with law. The onus was on AO to reject the assessee s computations and record a finding, having regard to accounts of the assessee, as to how those computations were not satisfactory. The failure to do so oust the jurisdiction of AO to apply Rule 8D. Another factor to be noted is that the said disallowance, considering exempt income yielding investments works out to ₹ 3.75 Lacs, against which the assessee has already offered suo-moto disallowance of ₹ 3 Lacs. Therefore, the net additional disallowance of ₹ 5.52 Lacs could not be sustained. - Decided in favour of assessee.

Summary

Issues:
- Disallowance of expenses incurred for earning dividend income invoking section 14A read with rule 8D(2)(iii).
- Proper application of Rule 8D for disallowance calculation.
- Jurisdiction of the Assessing Officer to apply Rule 8D without proper rejection of assessee's computations.

Analysis:
1. The appeal contested the disallowance of expenses incurred for earning dividend income by invoking section 14A read with rule 8D(2)(iii). The appellant argued that the disallowance was not in accordance with the prescribed rules and should not have been confirmed by the Commissioner of Income-tax (Appeals) as it was not in line with section 14A and rule 8D(2)(iii).

2. The assessment for the relevant year determined the income of the assessee after disallowance under section 14A. The disallowance made by the Assessing Officer under rule 8D was the main subject of the appeal. The AO calculated an aggregate disallowance which included interest and expense disallowance. The first appellate authority deleted the interest disallowance but confirmed the expense disallowance, leading to the further appeal.

3. The Authorized Representative for the Assessee argued that the Assessing Officer applied Rule 8D mechanically without proper rejection of the assessee's computations. It was contended that the disallowance based on exempt income yielding investments should have been lower. The Departmental Representative, however, supported the computations as per Rule 8D.

4. The Tribunal noted that the AO did not properly reject the assessee's computations and proceeded to apply Rule 8D without proper satisfaction as required by Section 14A. The failure to do so undermined the jurisdiction of the AO to apply Rule 8D. Additionally, the net additional disallowance was deemed unsustainable as the assessee had already offered a suo-moto disallowance. Hence, the Tribunal allowed the appeal, emphasizing the need for proper assessment and rejection procedures.

5. In conclusion, the Tribunal allowed the appeal, highlighting the importance of following proper procedures and assessments in determining disallowances under section 14A and rule 8D. The judgment was pronounced on 18th March 2019.