2021 (8) TMI 118 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - HELD THAT - AO, without recording objective satisfaction as to why the assessee s computation were not acceptable, proceeded to compute disallowance as per Rule 8D. It is settled legal position that the application of Rule 8D is not automatic as held by Hon ble Supreme Court in Godrej Boyce Manufacturing Co. Ltd. V/s DCIT 2017 (5) TMI 403 - SUPREME COURT . Upon perusal of assessment order, we find that Ld. AO has failed to record any objective satisfaction as to why the assessee s stand was not acceptable having regards to the accounts of the assessee as per the mandate of Sec.14A. This jurisdictional requirement was not satisfied by Ld. AO in the present case and Ld.AO straightway proceeded to compute disallowance as per Rule 8D. The application of Rule 8D, in our considered opinion, was not mechanical or automatic. AO has mechanically applied the provisions of Rule 8D(2)(iii) while making the aforesaid disallowance without establishing any nexus of expenditure claimed by the assessee with that of exempt income earned during the year. In the absence of such recorded satisfaction, the additional disallowance as made in assessment order could not be sustained in the eyes of law. Accordingly, we are inclined to delete the additional disallowance as made by Ld. AO while computing income under normal provisions as well as while computing Book Profits u/s 115JB.

Summary

Issues: Disallowance u/s 14A for AY 2015-16 & 2016-17

Issue 1: Disallowance u/s 14A for AY 2015-16
The appellant contested the disallowance u/s 14A for AY 2015-16, arguing that the Assessing Officer (AO) did not record objective satisfaction before applying Rule 8D. The appellant also claimed that disallowance should only apply to investments yielding exempt income. The AO computed additional disallowance of &8377; 38.99 Lacs under Rule 8D(2)(iii) despite the appellant's explanations. The appellant's methodology for disallowance was accepted in a previous appellate order. The Tribunal found that the AO mechanically applied Rule 8D without establishing a nexus between expenditure and exempt income. Citing legal precedents, the Tribunal held that satisfaction of the AO is necessary before applying Rule 8D. Consequently, the additional disallowance was deleted, and the appeal was partly allowed.

Issue 2: Disallowance u/s 14A for AY 2016-17
For AY 2016-17, the AO made additional disallowance of &8377; 42.36 Lacs, which was challenged by the appellant. Following the analysis for AY 2015-16, the Tribunal directed the deletion of the additional disallowance for AY 2016-17 as well. The Tribunal emphasized that the AO must establish a connection between expenditure and exempt income before applying Rule 8D. Consequently, the appeal for AY 2016-17 was partly allowed in line with the decision for AY 2015-16.

Conclusion
Both appeals were partly allowed, with the additional disallowances made by the AO for AY 2015-16 and 2016-17 being deleted. The Tribunal stressed the importance of the AO's satisfaction before applying Rule 8D and upheld the appellant's contentions regarding the disallowance u/s 14A. The judgments were pronounced on 2nd August 2021 by the ITAT Mumbai.