2021 (11) TMI 921 - AT - Income Tax

Addition u/s 14A r.w.r. 8D - Mandation of recording satisfaction - whether or not the A.O had validly assumed jurisdiction and worked out the disallowance u/s 14A r.w Rule 8D? - claim of the assessee before us that the A.O without recording his dissatisfaction as regards the claim of the assessee that no expenditure was incurred for earning of the exempt dividend income had in a mechanical manner dislodged the same and worked out the disallowance u/s 14A r.w. Rule 8D - HELD THAT - It is a matter of fact borne from the record that the A.O had merely on the basis of his general observations, viz. that investment decisions are very complex in nature and require substantial market research, day-to-day analysis of market trends and decisions with regard to acquisition, retention and sale of shares at the most appropriate time etc., had dislodged the claim of the assessee that no part of the expenses claimed by him in respect of his other non-exempt income could be attributed or related to earning of the exempt dividend income. The failure on the part of the A.O to strictly comply with the aforesaid statutory obligation that was cast upon him, can safely be gathered from the fact that there is no clear finding by him with reference to the assessee s accounts as to how the other expenditure claimed by the assessee in respect of its non-exempt income were related to its exempt income. A simpliciter rejection by the A.O of the aforesaid claim of the assessee which is only backed by his general observations, surmises and conjectures can by no means justify the validity of the jurisdiction assumed by him for computing the disallowance u/s 14A r.w. Rule 8D(2)(iii) in the hands of the assessee. We, thus, not finding favor with the view taken by the CIT(A) who had upheld the validity of the jurisdiction assumed by the A.O for computing the disallowance u/s 14A r.w Rule 8D(2)(iii) set-aside his order.Accordingly, the disallowance made by the A.O u/s 14A r.w Rule 8D is vacated - Decided in favour of assessee.

Summary

Issues Involved:
1. Validity of invoking Section 14A of the Income Tax Act, 1961.
2. Appropriateness of the disallowance of ?1,07,16,643/- under Section 14A read with Rule 8D.
3. Requirement for the Assessing Officer (A.O) to record dissatisfaction with the assessee's claim.

Issue-Wise Detailed Analysis:

1. Validity of Invoking Section 14A of the Income Tax Act, 1961:
The primary issue was whether the Commissioner of Income Tax (Appeals) [CIT(A)] erred in invoking Section 14A of the Income Tax Act, 1961, leading to the disallowance of ?1,07,16,643/-. The assessee contended that the provisions of Section 14A were not applicable as the expenses were wholly and exclusively incurred for business purposes and not related to exempt income. The assessee also argued that the A.O did not record any dissatisfaction regarding the correctness of the expenditure claimed for earning exempt income, nor was any nexus shown between the expenditure and the exempt income. The A.O, however, believed that investment decisions required substantial research and day-to-day analysis, implying that some expenditure was attributable to earning exempt income. The A.O thus computed the disallowance under Section 14A read with Rule 8D(2)(iii) at ?1,07,16,643/-.

2. Appropriateness of the Disallowance of ?1,07,16,643/- under Section 14A Read with Rule 8D:
The A.O's decision to disallow ?1,07,16,643/- was based on the premise that investment decisions are complex and require substantial research, implying that some expenditure must have been incurred to earn the exempt income. However, the assessee argued that no part of the expenditure claimed was incurred for earning exempt income, as the investments were made from surplus business funds. The CIT(A) upheld the A.O's disallowance, but the assessee appealed to the ITAT, arguing that the A.O had not recorded his dissatisfaction with the assessee's claim before making the disallowance. The ITAT noted that the A.O had disallowed the claim based on general observations without providing a clear finding related to the assessee's accounts.

3. Requirement for the A.O to Record Dissatisfaction with the Assessee's Claim:
The ITAT emphasized that the A.O must record his dissatisfaction with the assessee's claim that no expenditure was incurred for earning exempt income before invoking Rule 8D. This requirement is supported by judicial pronouncements, including the Supreme Court's decisions in Godrej & Boyce Manufacturing Company Ltd. Vs. DCIT and Maxopp Investment Ltd. Vs. CIT. The ITAT found that the A.O had not provided a clear finding with reference to the assessee's accounts to justify the disallowance. The A.O's general observations about the complexity of investment decisions were insufficient to assume jurisdiction for computing the disallowance under Section 14A read with Rule 8D.

Conclusion:
The ITAT concluded that the A.O had not validly assumed jurisdiction to disallow ?1,07,16,643/- under Section 14A read with Rule 8D, as he failed to record his dissatisfaction with the assessee's claim in a clear and specific manner. The disallowance was based on general observations and lacked a proximate relationship between the expenditure and the exempt income. Consequently, the ITAT set aside the CIT(A)'s order and vacated the disallowance of ?1,07,16,643/-. The appeal filed by the assessee was allowed.