2019 (6) TMI 1216 - AT - Income Tax

Disallowance of expenses u/s 14A read with rule 8D - recording of prima facie satisfaction of the AO - HELD THAT - As relying on H.T. MEDIA LIMITED VERSUS PRINCIPAL COMMISSIONER OF INCOME TAX-IV, NEW DELHI 2017 (8) TMI 962 - DELHI HIGH COURT AO has simply made observations that there must be some expenses for earning of the exempt income. AO could not pointed out which are expenses relatable to exempt income or there is prima facie satisfaction of the AO which is mandated by the provisions of section 14A(iii) of the Act. Hence, we are of the view that in the absence of any satisfaction, the AO has erred in making addition and CIT(A) erred by confirming the same. We set aside the orders of the lower authorities and allow this appeal of assessee.

Summary

Issues:
- Disallowance of expenses relatable to exempt income under section 14A of the Income-tax Act.

Analysis:
1. The appeal was filed by the assessee against the order of the Commissioner of Income Tax (Appeals) regarding the disallowance of expenses related to exempt income under section 14A of the Act. The assessment was framed for the A.Y. 2013-14 under section 143(3) read with section 153A of the Income-tax Act, 1961.

2. The primary issue in this appeal was the disallowance of expenses amounting to ?21,83,516 under section 14A of the Act read with Rule 8D of the Rules, concerning the exempt income earned by the assessee. The appellant challenged the CIT(A)'s decision to uphold the disallowance.

3. The Assessing Officer (AO) required the assessee to explain why disallowance cannot be made under section 14A of the Act, as the assessee had not disallowed any expenses relatable to exempt income. The AO invoked provisions of section 14A(2) and 14A(3) due to the lack of clarity in the accounts regarding the correctness of expenditure related to exempt income.

4. The AO made a disallowance under Rule 8D(2)(iii) based on the average value of investment. The CIT(A) restricted the disallowance to the extent of exempt income earned by the assessee, citing a jurisdictional ITAT decision. The appellant contended that the AO did not record any satisfaction for making the disallowance under section 14A, invoking relevant case laws to support their argument.

5. The ITAT observed that the AO failed to establish a direct link between the expenses and the exempt income, as required by section 14A(iii) of the Act. In the absence of proper satisfaction, both the AO and CIT(A) erred in making and upholding the disallowance. Consequently, the ITAT allowed the appeal of the assessee.

6. The ITAT's decision emphasized the necessity for the AO to establish a clear nexus between expenses and exempt income before making any disallowance under section 14A of the Act. The judgment highlighted the importance of recording proper satisfaction as mandated by the law to ensure a valid disallowance.