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2021 (1) TMI 1005 - AT - Income TaxAddition u/s 14A - Non recording of satisfaction by AO - HELD THAT - A.O while dislodging the claim of the assessee that as no part of the expenses debited in the profit and loss account was relatable to earning of the exempt dividend income, thus no disallowance under Sec. 14A was called for in its hands, had failed to record his satisfaction as regards the correctness of such claim, having regard to the accounts of the assessee. Rather, we find that the A.O had dislodged the claim of the assessee that no disallowance under Sec. 14A was liable to be made in its hands by holding a conviction that it was beyond comprehension that no expense incurred by the assessee could be related to earning of exempt dividend income. We are of the considered view that in the backdrop of the judgment in the case of Godrej Boyce Manufacturing Co. Ltd. 2017 (5) TMI 403 - SUPREME COURT it was obligatory on the part of the A.O to have recorded his satisfaction, having regard to the accounts of the assessee, as to why the latter claim that no expenditure was attributable to earning of the exempt dividend income was not to be accepted. - Decided in favour of assessee.
Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962. 2. Application of Rule 8D when actual expenses are available. 3. Disallowance of DEMAT charges under Rule 8D(2)(i). 4. Partial upholding of the Assessing Officer's disallowance by the Commissioner of Income Tax (Appeals). Issue-wise Detailed Analysis: 1. Disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962: The assessee challenged the disallowance of ?7,58,612/- made by the DCIT under Section 14A read with Rule 8D on the grounds that the reasons given by the Assessing Officer (AO) were insufficient and contrary to the facts and evidence on record. The AO computed the disallowance under Rule 8D(2)(iii) despite the assessee's explanation that all investments were made from internal accruals without any borrowings, and no administrative expenses were incurred for earning the dividend income. The AO's reliance on the decision of the Hon'ble Bombay High Court in Godrej Boyce & Mfg. Co. Ltd. vs. ACIT was noted. 2. Application of Rule 8D when actual expenses are available: The assessee argued that Rule 8D should only be applied when actual expenses are not available. In this case, the actual expenses incurred were available, and thus, the formula in Rule 8D should not be applied merely because it results in a higher disallowance. The AO, however, did not accept this explanation and proceeded with the disallowance under Rule 8D(2)(iii). 3. Disallowance of DEMAT charges under Rule 8D(2)(i): The assessee had suo motu made a disallowance of ?12,436/- on account of DEMAT charges, which is covered by Rule 8D(2)(i). Despite this, the AO included this amount in the overall disallowance under Section 14A read with Rule 8D, leading to the assessee's contention that this was incorrect as the amount had already been disallowed while computing taxable income. 4. Partial upholding of the Assessing Officer's disallowance by the Commissioner of Income Tax (Appeals): The CIT(A) partly allowed the appeal, directing the AO to rework the average value of investment for computing the disallowance under Rule 8D(2)(iii) after excluding the investment in IDFC Super Saver Income Fund-Growth Plan, which does not earn tax-free income. The CIT(A) found merit in the appellant's claim regarding this specific investment. Tribunal's Observations and Decision: The Tribunal referred to its earlier decisions in the assessee's own cases for AY 2005-06, AY 2010-11, and AY 2011-12, where it had held that the AO must record satisfaction regarding the correctness of the assessee's claim that no expenditure was incurred for earning exempt income. The Tribunal noted that the AO had failed to record such satisfaction in the present case and had made the disallowance as a mere routine without considering the merits of the assessee's submissions. The Tribunal emphasized the requirement of recording satisfaction as per the judgment of the Hon'ble Supreme Court in Godrej & Boyce Manufacturing Co. Ltd. vs. DCIT & Anr. Conclusion: The Tribunal set aside the order of the CIT(A) and deleted the disallowance made under Section 14A read with Rule 8D. The appeal filed by the assessee was allowed, and the order was pronounced in the open Court on 27/01/2021.
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