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2021 (8) TMI 683 - AT - Income TaxAddition u/s 14A r.w.r.8D - non-satisfaction with the correctness of the claim suo-moto disallowed by the Appellant u/s. 14A - as argued AO without recording his dissatisfaction as regards the correctness of the assessee s claim for disallowance u/s 14A of the Act, had wrongly assumed jurisdiction and substituted the same by the amount of disallowance that was computed by him as per the methodology prescribed in Rule 8D - HELD THAT - We find, that the A.O had most arbitrarily bypassed the Note on disallowance u/s 14A at Sr.No. 1.2 that was submitted by the assessee in order to support his claim that as sufficient own funds and interest free funds of ₹ 10.93 crore were available with it, therefore, no disallowance of any part of the interest expenditure was called for in its hands. In the totality of the aforesaid facts, the A.O in our considered view without recording his dissatisfaction as regards the correctness of the suo motto disallowance under Sec. 14A that was offered by the assessee in its return of income could not have dislodged and substituted the same by an amount that was computed by him by triggering the mechanism provided in Rule 8. The material aspect, viz. validity of the disallowance made by the A.O as per the mechanism provided in Rule 8D without recording of an objective satisfaction with regard to the incorrectness of the suo-motto claim of disallowance that was offered by the assessee u/s 14A of the Act, we find, despite having been specifically raised by the assessee before him was however not addressed and therein answered by the CIT(A) in the right perspective We are of the considered view, that as the A.O having regard to the accounts of the assessee, as were placed before him, had failed to record his dissatisfaction as regards the correctness of the suo motto disallowance that was offered by it under Sec. 14A in its return of income, therefore, he could not have validly resorted to sub-section (2) and (3) of Sec. 14A and computed the said disallowance as per the mechanism contemplated in Rule 8D. Accordingly, not being persuaded to accept the view taken by the CIT(A), we herein set-aside his order and vacate the additional disallowance made by the A.O. Appeal filed by the assessee is allowed.
Issues Involved:
1. Validity of disallowance under Section 14A read with Rule 8D without recording dissatisfaction with the assessee's claim. 2. Appropriateness of disallowing proportionate interest expenditure under Section 14A read with Rule 8D(2)(ii). 3. Appropriateness of disallowing proportionate administrative expenditure under Section 14A read with Rule 8D(2)(iii). 4. Inclusion of investments in Gold Bar for computing average value of investments under Section 14A read with Rule 8D(2). 5. Inclusion of investments that did not generate exempt income for calculating average value of investments under Section 14A read with Rule 8D(2). Detailed Analysis: 1. Validity of Disallowance under Section 14A read with Rule 8D without Recording Dissatisfaction: The primary issue was whether the Assessing Officer (A.O) could disallow the assessee’s claim under Section 14A read with Rule 8D without recording any dissatisfaction with the correctness of the assessee's disallowance. The Tribunal observed that the A.O had arbitrarily disallowed the assessee’s claim without recording any dissatisfaction as required by law. The A.O's failure to record dissatisfaction rendered the disallowance invalid. The Tribunal relied on the judgments of the Hon’ble Supreme Court in the cases of Godrej & Boyce Manufacturing Company Ltd. Vs. DCIT and Maxopp Investment Ltd. Vs. CIT, which mandate that an A.O must record dissatisfaction before invoking Rule 8D. Consequently, the Tribunal set aside the additional disallowance made by the A.O. 2. Appropriateness of Disallowing Proportionate Interest Expenditure: The assessee contended that it had sufficient own funds and interest-free funds to make the investments that yielded exempt income, and thus no disallowance of interest expenditure was warranted. The Tribunal noted that the A.O had summarily dismissed the assessee’s explanation without proper examination. The Tribunal found that the A.O's action of disallowing interest expenditure without considering the availability of sufficient interest-free funds was inappropriate. 3. Appropriateness of Disallowing Proportionate Administrative Expenditure: The assessee argued that the A.O had disallowed administrative expenses without dislodging the assessee’s claim of ?27,382 attributed to earning exempt income. The Tribunal found that the A.O had mechanically substituted the assessee’s disallowance without providing any reason for not accepting the assessee’s computation. This action was deemed arbitrary and contrary to the provisions of the Act. 4. Inclusion of Investments in Gold Bar for Computing Average Value of Investments: The assessee contended that investments in Gold Bar should not be included for computing the average value of investments under Section 14A read with Rule 8D. The Tribunal observed that the A.O had included these investments without proper justification. The Tribunal found this inclusion to be incorrect and contrary to the provisions of the Act. 5. Inclusion of Investments that Did Not Generate Exempt Income: The assessee argued that investments which did not generate any exempt income should not be included for calculating the average value of investments under Section 14A read with Rule 8D. The Tribunal noted that the A.O had included such investments without proper examination. The Tribunal found this action to be contrary to the provisions of the Act. Conclusion: The Tribunal concluded that the A.O had failed to record the necessary dissatisfaction with the assessee’s claim under Section 14A before invoking Rule 8D, rendering the disallowance invalid. The Tribunal set aside the additional disallowance made by the A.O and allowed the assessee’s appeal. Other contentions raised by the assessee were left open as the primary issue of jurisdiction was decided in favor of the assessee. Order pronounced in the open court on 26.07.2021.
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