2020 (8) TMI 99 - HC - Income Tax

Addition u/s 14A - suo motu disallowance by assessee - as argrued absence of any cogent satisfaction for disregarding the voluntary disallowance made by the appellant - whether the disallowance made by AO was proper? - whether the assessee was right in contending that there were no cogent reasons recorded by AO with regard to his satisfaction as to the correctness of the voluntary disallowance made by the assessee? - HELD THAT - Issuance of show cause notice calling upon the assessee to explain pre-supposes a prima facie opinion formed by the Assessing Officer with regard to the accounts of the assessee. Once a show cause notice is issued, the assessee is informed about the prima facie view of the Assessing Officer. However, the AO cannot have a closed mind while issuing a show cause notice. The assessee rightly understood the prima facie opinion formed by the Assessing Officer with regard to the expenses claimed by the assessee attributable for earning exempt income and precisely for such a reason, the assessee submitted a reply dated 18.12.2012. AO considered the explanation offered by the assessee vide letter dated 18.12.2012 and recorded his satisfaction as to how the disallowance voluntarily made by the assessee was not acceptable. Hence, we find that the Assessing Officer had rightly followed the procedure under Section 14A(2) of the Act and only thereafter, recorded his dis-satisfaction on the correctness of the claim made by the assessee and having regard to the accounts of the assessee, proceeded to follow the procedure under Rule 8D of the Rules. There is full compliance of what is required to be done by the Assessing Officer as pointed out in the case of Maxopp Investment Ltd. 2018 (3) TMI 805 - SUPREME COURT - For the above reasons, we hold that the assessee has not made out a case for interference in the order passed by the Tribunal. - Decided in favour of revenue.

Summary

Issues Involved:
1. Confirmation of disallowance under Section 14A of the Income Tax Act.
2. Satisfaction recorded by the Assessing Officer regarding the correctness of voluntary disallowance made by the assessee.

Issue-wise Detailed Analysis:

1. Confirmation of Disallowance under Section 14A of the Income Tax Act:

The Revenue's appeal was directed against the Tribunal's order, which confirmed the disallowance made by the Assessing Officer under Section 14A of the Income Tax Act, read with Rule 8D of the Income Tax Rules, 1962. The assessee, a manufacturing company, had investments in shares and mutual funds amounting to ?1,32,39,84,480/- and earned a dividend income of ?11,48,08,342/-, which was claimed as exempt. The assessee voluntarily disallowed ?1,44,000/- as expenditure for earning the exempt income. However, the Assessing Officer was not satisfied with this disallowance and invoked Rule 8D, resulting in a disallowance of ?52,72,554/-.

The CIT(A) and the Tribunal upheld the Assessing Officer's decision, noting that the assessee's disallowance was insufficient given the volume of investments and the amount of exempt income earned. The Tribunal found that the disallowance computed by the Assessing Officer using Rule 8D(2)(iii) was appropriate and did not require interference.

2. Satisfaction Recorded by the Assessing Officer:

The primary question was whether the Assessing Officer recorded proper satisfaction regarding the correctness of the voluntary disallowance made by the assessee. The assessee argued that the satisfaction must be objectively arrived at based on the accounts and relevant facts. The Assessing Officer issued a show cause notice, indicating his prima facie dissatisfaction with the assessee's disallowance. The assessee responded, explaining that the dividend income was earned from surplus funds, and only minimal costs were incurred.

The Assessing Officer rejected this explanation, noting that the assessee's investments required managerial skills and that a portion of managerial and directors' remuneration should be attributed to earning the dividend income. The CIT(A) and the Tribunal affirmed this view, stating that the Assessing Officer had recorded his satisfaction based on the assessee's accounts and the substantial investments held.

The Tribunal also noted that the assessee's calculation of ?1,44,000/- was not scientifically based and lacked evidence. The Tribunal and CIT(A) distinguished the decisions cited by the assessee and upheld the Assessing Officer's application of Rule 8D.

Conclusion:

The High Court held that the Assessing Officer had followed the required procedure under Section 14A(2) of the Act, recording his dissatisfaction with the assessee's voluntary disallowance based on the accounts. Consequently, the court found no reason to interfere with the Tribunal's order, dismissing the assessee's appeal and answering the substantial question of law against the assessee.