2019 (7) TMI 755 - HC - Income Tax

Disallowance u/s 14A r.w.r. 8D - AO has not shown any dissatisfaction with the disallowance u/s 14A read with Rule 8D offered suo motu by the assessee - HELD THAT - As held in the case of Pr. CIT Vs. Gujarat State Fertilizer and Chemicals Ltd . 2019 (7) TMI 473 - GUJARAT HIGH COURT the language of Section 14A of the Act is plain and clear. Before invoking Rule 8D, the AO is obliged to indicate that having regard to the accounts of the assessee, he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to the income which does not form part of the total income under the Act. The condition precedent of recording the requisite satisfaction which is a safeguard provided in Section 14A should not be overlooked before going to Rule 8. In such circumstances court are not impressed by the submission canvassed on behalf of the Revenue that once there are mixed funds, Rule 8 would be attracted automatically. In view of the above, this appeal fails and is hereby dismissed. - Decided against revenue

Summary

Issues:
1. Interpretation of Section 14A of the Income Tax Act, 1961 regarding disallowance on expenditure for earning exempt income without a claim of exempt income.
2. Deletion of addition made under Section 14A of the Income Tax Act read with Rule 8D of the Income Tax Rules.

Analysis:
1. The tax appeal under Section 260A of the Income Tax Act, 1961 was filed by the Revenue against the order of the Income Tax Appellate Tribunal, Ahmedabad. The main issue raised was whether the disallowance under Section 14A can be made on expenditure for earning exempt income even in the absence of a claim of exempt income. The tribunal allowed the appeal by the assessee, deleting the disallowance under Section 14A read with Rule 8D. The tribunal noted that the Assessing Officer did not express any dissatisfaction with the disallowance offered by the assessee. The decision of the High Court in a previous case was cited to support the deletion of the impugned disallowance.

2. The Revenue proposed two questions of law related to the deletion of the addition made under Section 14A of the Income Tax Act. The Court referred to previous decisions, including one involving the Supreme Court, to analyze the issue. Arguments were presented regarding the applicability of Rule 8D in cases of mixed funds, i.e., interest-free and interest-bearing funds. The Court emphasized the importance of the Assessing Officer recording satisfaction before applying Rule 8D and clarified that the mere presence of mixed funds does not automatically trigger the application of Rule 8D. The Court also highlighted the necessity of the Assessing Officer providing reasons for not accepting the assessee's voluntary disallowance under Section 14A.

3. The judgment discussed the interpretation of Section 14A and Rule 8D in light of previous court decisions. The Court emphasized the requirement for the Assessing Officer to be satisfied before applying Rule 8D and rejected the notion that mixed funds automatically invoke Rule 8D. The judgment reaffirmed the importance of recording satisfaction and providing reasons in such cases. The appeal was dismissed based on the detailed analysis and interpretation of the relevant legal provisions and precedents.