2020 (3) TMI 1024 - HC - Income Tax

Disallowance u/s 14A r.w. Rule 8D - Non recording of satisfaction - HELD THAT - To determine the amount of expenditure incurred by the assessee in relation to the income which does not form part of the total income under the Act 1961, the Assessing Officer can apply the method to calculate such expenditure as provided under Rule 8D of the Rules 1962 only if the Assessing Officer having regard to accounts of the assessee is not satisfied with the correctness of the claim made by the assessee in respect of such expenditure in relation to the exempted income under the Act 1961. Thus, precondition for applying Rule 8D of the Rules 1962, the Assessing Officer is required to be satisfied as provided in subsection 2 of Section 14A of the Act 1961. We may refer recent pronouncement of this Court in the case of Principal Commissioner of Income Tax Vs. Gujarat State Fertilizer and Chemical Ltd 2018 (10) TMI 1041 - GUJARAT HIGH COURT finding of fact that as the Assessing Officer did not record any satisfaction under Section 14A(2) OF the Act 1961 prior to invoking Rule 8D, he could not have made any disallowance by applying Rule 8D of the Rules 1962. - Decided against revenue. Disallowance u/s 14A to the book profit under Section 115JB - HELD THAT - As Question No.2(A) is answered in favour of the assessee to the effect that the Tribunal has not erred in deleting the disallowance under Section 14A of the Act 1961 read with 8D of the Rules 1962, question of making addition of disallowance made under Section 14A by the Assessing Officer to the book profit under Section 115JB of the Act 1961 would not arise. Therefore, the Question No.2(B) is also rejected.

Summary

Issues involved:
1. Disallowance under Section 14A of the Income Tax Act 1961.
2. Addition of disallowance to the book profit under Section 115JB of the Act.

Detailed Analysis:
Issue 1: Disallowance under Section 14A of the Income Tax Act 1961
The Tax Appeal was filed by the Revenue against the order of the Income Tax Appellate Tribunal, Ahmedabad Bench, regarding the disallowance of an amount under Section 14A of the Act. The Assessing Officer disallowed an amount under Section 14A, contending that the correct disallowance was higher than what the assessee had calculated. The CIT(A) upheld the disallowance, but the Tribunal found that the Assessing Officer did not record satisfaction under Section 14A(2) before applying Rule 8D for the disallowance calculation. The Tribunal allowed the appeal, deleting the disallowance made by the Assessing Officer. The High Court agreed with the Tribunal's finding that the Assessing Officer must be satisfied before applying Rule 8D for disallowance under Section 14A.

Issue 2: Addition of disallowance to the book profit under Section 115JB of the Act
The second question raised was whether the disallowance made under Section 14A should be added to the book profit under Section 115JB of the Act. Since the Tribunal had already ruled in favor of the assessee by deleting the disallowance under Section 14A, the question of adding the disallowance to the book profit did not arise. Therefore, the High Court rejected this question as well.

In conclusion, the High Court dismissed the appeal, upholding the Tribunal's decision to delete the disallowance under Section 14A and rejecting the addition of disallowance to the book profit under Section 115JB. The Court emphasized the importance of the Assessing Officer being satisfied before applying Rule 8D for disallowance calculation under Section 14A of the Income Tax Act 1961.