2020 (12) TMI 971 - AT - Income Tax

Disallowance of expenditure u/s 14A - suo motu disallowance made by the assessee - AO mandation of recording reasons - HELD THAT - AO has recorded his satisfaction why assessee s claim that no exempt income can be attributed to earning exempt income as well as the suo motu disallowance is not acceptable. On a perusal of the said reasoning, it is noticed that the AO has not rejected the claim of the assessee merely on the reasoning that the assessee does not maintain its account in a manner from which expenditure attributable to earning exempt income can be easily identified. AO has clearly stated that the time devoted by the investment committee and the employees as well as other overheads certainly involve a cost which is attributable to earning of exempt income. Therefore, it is not a case where the Assessing Officer has failed to record any satisfaction and mechanically proceeded to compute the disallowance under section 14A r/w rule 8D. Therefore, in our view, the condition of section 14A(2) stands satisfied in the present case. Reasonableness of disallowance computed under rule 8D(2) - AO treated the suo motu disallowance of ₹ 6,13,500, as direct expenditure under rule 8D(2)(i) - Commissioner (Appeals) has disapproved the aforesaid decision of the AO and we entirely agree with the reasoning of the first appellate authority. Disallowance made under rule 8D(2)(iii) - As noticed that the assessee had furnished a computation of such disallowance by applying certain basis. Whereas, the AO without properly examining assessee s computation has straight away applied the formula prescribed in rule 8D(2)(iii). Of course, the first appellate authority while deciding the issue has granted partial relief to the assessee by directing the AO to exclude the investments which have not yielded exempt income during the year and which in our opinion is correct. However, as far as the remaining disallowance is concerned, in our view, before applying rule 8D(2)(iii), the Assessing Officer should properly examine assessee s computation. It is observed, while deciding similar issue relating to disallowance under section 14A r/w rule 8D(2)(iii) in the assessment year 2009 10, the Tribunal has restored the issue to the Assessing Officer for fresh adjudication. Following the aforesaid decision, the Tribunal has restored identical issue to the Assessing Officer. Appeal of assessee are allowed for statistical purposes.

Summary

Issues:
Challenge to disallowance of expenditure under section 14A of the Income Tax Act, 1961.

Analysis:
1. The appeal was filed challenging the order related to the assessment year 2014-15, specifically focusing on the disallowance of expenditure under section 14A of the Income Tax Act, 1961.

2. The Assessing Officer observed that the assessee received exempt income through dividends and tax-free investments but had not disallowed any expenditure related to earning exempt income under section 14A. The Assessing Officer issued a show cause notice, and the assessee voluntarily disallowed an amount of ?6,13,500. However, the Assessing Officer rejected this amount and proceeded to compute disallowance under rule 8D(2), resulting in a total disallowance of ?79,06,890.

3. The Commissioner (Appeals) granted partial relief to the assessee and directed the Assessing Officer to consider the suo-motu disallowance made by the assessee.

4. The primary contention of the assessee was that the Assessing Officer did not record satisfaction as required under section 14A(2) while disallowing the expenditure attributable to exempt income. However, the Tribunal found that the Assessing Officer had indeed provided reasoning for the disallowance and had not mechanically proceeded to compute the disallowance under section 14A r/w rule 8D.

5. The Tribunal concluded that the condition of section 14A(2) was satisfied in this case, as the Assessing Officer had valid reasons for disallowing the expenditure.

6. The Tribunal agreed with the Commissioner (Appeals) that the Assessing Officer's treatment of the suo-motu disallowance as direct expenditure under rule 8D(2)(i) was incorrect. The Tribunal also noted that proper examination of the assessee's computation was necessary before applying rule 8D(2)(iii).

7. Citing previous decisions, the Tribunal decided to restore the issue to the Assessing Officer for fresh adjudication to ensure consistency and uniformity in decision-making. The assessee was to be given a reasonable opportunity to present their case before a decision was made.

8. The Tribunal allowed the appeal for statistical purposes, and the order was pronounced on 25.11.2020.