2021 (10) TMI 573 - HC - Income Tax

Disallowance u/s 14A - Addition amount of expenditure incurred in relation to an exempt income - assessee has claimed before the Assessing Officer that it has not incurred any expenditure towards earning exempt income - HELD THAT - AO can determine the amount of expenditure incurred in relation to an exempt income if the Assessing Officer having regard to accounts of the assessee is not satisfied with the correctness of the claim of the assessee but it has not incurred any expenditure in order to earn exempt income. AO is therefore, required to record its satisfaction that it has not incurred any expenditure in order to earn exempt income. Assessee has claimed before the AO that it has not incurred any expenditure towards earning exempt income, which has been reproduced by the Assessing Officer in para 5 of its order - from scrutiny of the order passed by the Assessing Officer, it is evident that the Assessing Officer has not recorded satisfaction with regard to claim of the assessee that it has not incurred any expenditure in order to earn exempt income. Therefore, the condition precedent for invoking Rule 8D of the Rules as per Section 14A of the Act is not fulfilled. For the aforementioned reasons, the first substantial question of law is answered in favour of the assessee and against the revenue. Assessee not earned any exempt income - In the instant case, the assessee had not received any share or profit from the partnership firm during the year and in fact the partnership firm had incurred the loss and no exempt income was earned by the assessee. In the absence of any exempt income during the year, there could not be any disallowance u/s 14A. Capital contribution in the firm of M/s Lakshmi Estate due to business expediency cannot be treated as investment in accordance with Section 14A - The assessee had made fake advances to M/s Lakshmi Estate and later became a partner to the extent of 75% share in the partnership firm from the year 2003 onwards. It is claimed by the assessee that it had not borrowed funds for the purpose of making original advances to M/s Lakshmi Estate, requires adjudication of facts and therefore, in the facts and circumstances of the case, we deem it appropriate to remit the matter to the Assessing Officer to decide the claim of the assessee whether or not it had used borrowed funds for the purposes of making original advances to M/s Lakshmi Estate for the Assessment Year 2008-09. Therefore, it is not necessary for us to answer the fourth substantial question of law.

Summary

Issues:
1. Justification of tribunal's decision on Section 14A satisfaction
2. Confirmation of disallowance under Section 14A with Rule 8D
3. Disallowance under Section 14A due to partnership firm loss
4. Treatment of capital contribution as investment under Section 14A

Analysis:
1. The appeal concerned the assessment year 2008-09 under the Income Tax Act, focusing on the tribunal's decision regarding Section 14A satisfaction. The appellant contested the tribunal's justification, arguing that the Assessing Officer did not record satisfaction as required by Section 14A. The court noted that the Assessing Officer failed to fulfill the condition precedent for invoking Rule 8D, as no satisfaction was recorded regarding the appellant's claim of not incurring any expenditure for earning exempt income. Consequently, the first substantial question of law was answered in favor of the appellant.

2. Regarding the disallowance under Section 14A with Rule 8D, the appellant contended that no exempt income was earned due to the partnership firm's loss. The court observed that disallowance under Section 14A is necessitated even if no tax-free income is received. However, as the appellant did not receive any share or profit from the partnership firm during the year, and the firm incurred a loss, the court ruled that in the absence of exempt income, no disallowance under Section 14A should apply. Therefore, the second and third substantial questions of law were also resolved in favor of the appellant.

3. The appellant claimed that borrowed funds were not utilized for the original advances made to a partnership firm. The court deemed it necessary to remit the matter to the Assessing Officer for further examination to determine whether borrowed funds were indeed used for the advances. Consequently, the court did not address the fourth substantial question of law, opting to remit the matter for detailed assessment.

4. In conclusion, the court disposed of the appeal by remitting the matter to the Assessing Officer for a thorough examination of whether borrowed funds were utilized for making original advances to the partnership firm. The decisions of the lower authorities were set aside, and the appellant's claim was to be re-evaluated based on the findings regarding the use of borrowed funds for the specified advances.