2020 (7) TMI 338 - HC - Income Tax

Disallowance u/s 14A - whether the tribunal was right in coming to the conclusion that the Assessing Officer has not recorded his mandatory satisfaction as required u/s 14A(2)? - HELD THAT - AO after going through the submission made by the petitioner pointed out that the assessee had computed the disallowance of dividend by invoking the provisions of Rule 8D, but while doing so, ignored sub rule iii of the said rule. It appears that this was pointed out to the assessee. Assessee though filed a response on 09.01.2014, the Assessing Officer states that the assessee did not address the issue of computation of the third limb of Rule 8D. The finding recorded by the AO is sufficient and a clear indication of his compliance of the procedure under Section 14A(2), the AO at the first instance has considered whether the claim of the assessee is correct and thereafter only has proceeded to determine the amount by adopting the procedure under Rule 8D. For assessment year 2011-12 - it cannot be stated to be the case where there is a failure to follow the procedure under Section 14A (2) So far as the order passed for the assessment year 2012-13 on a closer reading of impugned order, we find that though the tribunal directs the assessee to work out the expenditure component towards administrative and managerial aspect so that the same shall be disallowed in the computation of income, but has not issued any specific directions to the AO as to what has to be done after the assessee files the working sheet. Therefore, to that extent the tribunal has committed an error. Hence, we are of the considered view that the matter should be remanded for fresh consideration of the Assessing Officer in accordance with law. - Decided in favour of revenue.

Summary

Issues:
Challenging common order by Income Tax Appellate Tribunal for Assessment Years 2011-12 and 2012-13 under Section 260A of the Income Tax Act, 1961. Substantial Questions of Law: (1) Whether strategic investments attracting exempt income are subject to disallowance under Section 14A? (2) Did the Assessing Officer fulfill the mandatory requirement of Section 14A(2)?

Analysis:
1. The appeals by the revenue challenged the order of the Income Tax Appellate Tribunal. The core issue revolved around the interpretation of Section 14A of the Income Tax Act, specifically focusing on the treatment of strategic investments capable of generating exempt income. The first Substantial Question of Law addressed whether such investments are subject to disallowance under Section 14A, irrespective of being strategic or non-strategic. The Tribunal found that the Assessing Officer failed to comply with the mandatory requirement of Section 14A(2) by not specifying the basis for disallowance.

2. For the assessment year 2011-12, the Tribunal noted that the Assessing Officer directly applied Rule 8D without fulfilling the requirements of Section 14A(2) or Rule 8D(1). The Tribunal reduced the disallowance made by the Assessing Officer as the assessee voluntarily offered a specific amount for disallowance. This highlighted the importance of the Assessing Officer's compliance with statutory procedures before making disallowances under Section 14A.

3. Regarding the assessment year 2012-13, the Tribunal found that the Assessing Officer did not seek specific explanations regarding fresh investments capable of earning dividend income. The Tribunal directed the assessee to calculate the expenditure related to administrative and managerial aspects for disallowance in income computation. However, the Tribunal failed to provide clear directions to the Assessing Officer on how to proceed after receiving the working sheet from the assessee, necessitating a remand for fresh consideration.

4. The arguments presented by both parties focused on the interpretation and application of Section 14A(2) as mandated by the Act. The Assessing Officer's satisfaction regarding the correctness of the assessee's claim for expenditure related to non-taxable income is crucial before invoking Rule 8D. The High Court emphasized the objective basis for the Assessing Officer's satisfaction and the necessity to follow prescribed methods for determining such expenditures.

5. Ultimately, the High Court allowed the Tax Case Appeals, answering the Substantial Questions of Law in favor of the revenue. The matters for both assessment years were remitted to the Assessing Officer for fresh consideration in accordance with the law, emphasizing the importance of procedural compliance and objective assessment in applying Section 14A of the Income Tax Act.