2022 (7) TMI 293 - HC - Income Tax

Disallowance u/s 14A r.w.r. 8D - mandation of recording satisfaction - As argued AO has failed to give cogent reasons of dissatisfaction regarding the computation of the disallowance - HELD THAT - In the case on hand, we have perused the assessment order and we find that no satisfaction has been recorded by the assessing officer as the assessing officer merely comes to the conclusion that the disallowance made suo moto by the assessee is not convincing. This finding does not satisfy the tests laid down by the Hon'ble Supreme Court in the decision in MAXOPP INVESTMENT LTD 2018 (3) TMI 805 - SUPREME COURT referred to above. Therefore, we find that the Tribunal was right in rejecting the appeal filed by the Revenue. - Decided against revenue.

Summary

Issues:
1. Appeal against order dated November 9, 2021, passed by the Income Tax Appellate Tribunal for the assessment year 2013-14.
2. Disallowance under section 14A of the Income Tax Act.
3. Interpretation of section 14A read with rule 8D of the Income Tax Rules.
4. Consideration of Circular no. 05/2014 issued by the Board.
5. Application of the dominant purpose test in determining disallowance of expenses.
6. Requirement of recording satisfaction by the Assessing Officer under section 14A(2) read with rule 8D of the Rules.

Analysis:
The High Court of Calcutta heard the appeal filed by the Revenue challenging the order of the Income Tax Appellate Tribunal regarding the disallowance under section 14A of the Income Tax Act for the assessment year 2013-14. The substantial questions of law raised included the justification of the Tribunal's actions in deleting the addition made by the Assessing Officer, the non-compliance with section 14A read with rule 8D, and the consideration of Circular no. 05/2014 issued by the Board. The Court referred to the decision in Kesoram Industries Ltd. v. Principal Commissioner of Income-Tax, emphasizing the interpretation of section 14A and the necessity for the Assessing Officer to record satisfaction before invoking the provisions. The Court highlighted the importance of the dominant purpose test and the principle of apportionment of expenses in disallowing expenditure related to non-taxable income.

Furthermore, the Court noted that the Assessing Officer failed to record satisfaction as required by law, merely stating that the disallowance made by the assessee was not convincing. This lack of compliance with the prescribed procedure led the Court to uphold the Tribunal's decision in rejecting the Revenue's appeal. The Court also referenced previous judgments, including CIT v. Ashish Jhunjhunwala and Godrej and Boyce Manufacturing Co. Ltd. v. Dy. CIT, emphasizing the necessity of objective satisfaction by the Assessing Officer before applying computation modes like rule 8D(2) of the Rules.

In conclusion, the High Court dismissed the appeal, answering the substantial questions of law against the Revenue. The stay application was also dismissed accordingly. The judgment reaffirmed the importance of following the prescribed procedures and recording satisfaction by the Assessing Officer in matters concerning disallowance under section 14A of the Income Tax Act.