2020 (9) TMI 675 - HC - Income Tax

Addition u/s 14A - Recording of satisfaction - Whether Tribunal was right in not considering the fact that the assessee has incurred interest expenditure and made investment more than its reserves and surpluses? - HELD THAT - Bombay High Court in the case of Godrej Boyce Manufacturing Company Limited, Mumbai Vs. Deputy Commissioner of Income Tax 2010 (8) TMI 77 - BOMBAY HIGH COURT AO must, in the first instance, determine whether the claim of the assessee in that regard is correct and the determination must be made having regard to the accounts of the assessee. The satisfaction of the AO must be arrived at on an objective basis. It is only when the AO is not satisfied with the claim of the assessee, that the legislature directs him to follow the method that may be prescribed. Sub-s. (3) of s. 14A provides for the application of sub-s. (2) also to a situation where the assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under the Act. The above legal position has been rightly followed by the tribunal while deciding the assessee's case and therefore, rightly dismissed the appeal filed by the revenue. Substantial Question of Law has to be answered against the revenue and in favour of the assessee.

Summary

Issues:
1. Interpretation of Section 14A of the Income Tax Act, 1961 regarding the disallowance of expenses related to exempt income.
2. Consideration of interest expenditure and investments exceeding reserves and surpluses as business expenditure.

Interpretation of Section 14A:
The High Court considered the appeal filed by the Revenue against the order of the Income Tax Appellate Tribunal regarding the interpretation of Section 14A of the Income Tax Act, 1961. The court framed two Substantial Questions of Law for consideration. The first question focused on whether the Tribunal erred in not taking into account the fact that the assessee incurred interest expenditure and made investments exceeding its reserves and surpluses. The second question dealt with whether the Tribunal was correct in allowing the assessee's claim that interest expended for earning exempt income should be considered as business expenditure. The court referred to a previous decision in a similar case where the Bombay High Court elaborated on the principles of Section 14A, emphasizing the disallowance of expenses related to income not forming part of the total income. The court concluded that the Tribunal rightly followed the legal position and dismissed the appeal filed by the Revenue, answering the Substantial Question of Law No. 2 against the Revenue and in favor of the assessee.

Interest Expenditure and Investments:
The court acknowledged that the Revenue did not dispute the Substantial Question of Law framed for consideration in this appeal, which was previously addressed in another case. The court highlighted the relevance of the principles outlined in the decision of the Bombay High Court regarding the application of Section 14A. The court emphasized that the Assessing Officer must ensure that only expenses related to earning taxable income are allowed, and any expenditure connected to income not forming part of the total income should be disallowed. The court reiterated the importance of determining the correct amount of expenditure incurred in relation to income that does not form part of the total income, based on an objective assessment by the Assessing Officer. Ultimately, following the legal position established in the previous case and the principles of Section 14A, the court dismissed the Tax Case Appeal, answered the Substantial Questions of Law against the Revenue, and ruled in favor of the assessee, without imposing any costs.

This detailed analysis of the judgment provides a comprehensive understanding of the issues involved, the legal interpretations made by the court, and the final decision rendered in this case.