2020 (10) TMI 1202 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - CIT(A) deleting the disallowance - HELD THAT - CIT(A) has decided the issue on the basis of the decision of Hon ble ITAT in the assessee s own case for the A.Y. 2012-13 2013-14. It is specifically mentioned that the AO had recorded the similar reason while disallowing the expenditure to earn the exempt income in all the three years. The assessee filed an appeal before the CIT(A) who confirmed the order of the AO but the assessee filed an appeal before the Hon ble ITAT in which the expenditure was restricted to the extent of expenditure which has been declared by assessee. CIT(A) has reproduced the judgment of the Hon ble ITAT in his order. The CIT(A) has also discussed the several law including the India Advantage Securities Ltd 2015 (6) TMI 140 - BOMBAY HIGH COURT and Maxopp Investment Ltd. 2018 (3) TMI 805 - SUPREME COURT The facts are not distinguishable at this stage. Needless to say that the AO nowhere recorded the satisfaction to arrive at this conclusion of reasonable expenditure incurred to earn the exempt income. No books of accounts were examined in this regard. We nowhere found any illegality and infirmity in the order passed by the CIT(A) in question. - Decided against assessee.

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Applicability of Rule 8D for computing disallowance.
3. Requirement of Assessing Officer's satisfaction with the correctness of the assessee's claim.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The main issue in this case pertains to the disallowance of ?31,79,51,492/- under Section 14A of the Income Tax Act, which was deleted by the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) relied on the decision of the Bombay High Court in the case of India Advantage Securities Ltd. The revenue argued that the CIT(A) erred in this reliance, given the Supreme Court's judgment in Maxopp Investment Ltd. vs. Commissioner of Income-tax, which held that expenditure incurred to earn exempt income must be disallowed under Section 14A, regardless of the purpose for holding the shares.

2. Applicability of Rule 8D for Computing Disallowance:
The Assessing Officer (AO) applied the provisions of Section 14A read with Rule 8D to assess the expenditure for earning exempt income. The AO added ?31,79,51,492/- to the income of the assessee. The CIT(A), however, restricted the addition to ?41,49,114/- as declared by the assessee, arguing that the AO did not record any dissatisfaction with the assessee's computation of disallowance.

3. Requirement of Assessing Officer's Satisfaction with the Correctness of the Assessee's Claim:
The CIT(A) and the ITAT emphasized that the AO must record dissatisfaction with the correctness of the assessee's claim before applying Rule 8D. The ITAT cited several judgments, including those from the Supreme Court and various High Courts, to support this requirement. The AO's failure to record such dissatisfaction rendered the application of Rule 8D unjustified.

Judgment Analysis:
1. CIT(A)'s Decision Based on Precedent:
The CIT(A) decided the issue based on the ITAT's decisions in the assessee's own cases for the A.Y. 2012-13 and 2013-14, where similar disallowances were made by the AO but were subsequently deleted by the CIT(A) and upheld by the ITAT. The CIT(A) noted that the AO used the same language in all three years without recording dissatisfaction with the assessee's computation.

2. ITAT's Observations:
The ITAT observed that the AO did not record any dissatisfaction over the amount of disallowance determined by the assessee. The AO erroneously presumed that the application of Rule 8D is mandatory, which is inconsistent with judicial principles. The ITAT cited various judgments, including those from the Supreme Court and High Courts, to emphasize the need for the AO to record dissatisfaction before applying Rule 8D.

3. Legal Precedents Cited:
- Supreme Court in Maxopp Investment Ltd.: The AO must record satisfaction that the assessee's disallowance is incorrect before applying Rule 8D.
- Bombay High Court in Reliance Capital Asset Management Ltd.: The AO must consider the assessee's working of expenses and record dissatisfaction before proceeding with Rule 8D.
- Delhi High Court in Hero Management Services Ltd.: The AO must record dissatisfaction with the assessee's claim before invoking Rule 8D.
- Punjab & Haryana High Court in Hero Cycles Ltd.: Disallowance under Section 14A requires proof of expenditure incurred to earn exempt income.
- Calcutta High Court in REI Agro Ltd.: The AO must record dissatisfaction with the assessee's claim before disallowing expenditure under Section 14A.

4. Final Decision:
The ITAT upheld the CIT(A)'s order, stating that the AO did not record dissatisfaction with the assessee's computation of disallowance. The ITAT found no illegality or infirmity in the CIT(A)'s order and dismissed the revenue's appeal.

Conclusion:
The appeal filed by the revenue was dismissed. The ITAT upheld the CIT(A)'s decision to restrict the disallowance to ?41,49,114/- declared by the assessee, as the AO did not record any dissatisfaction with the assessee's computation of disallowance under Section 14A read with Rule 8D. The judgment emphasized the necessity for the AO to record dissatisfaction with the assessee's claim before applying Rule 8D, in line with judicial precedents.

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