2022 (9) TMI 249 - AT - Income Tax

Assessment u/s 153A - Disallowance u/s 14A - HELD THAT - The assessee has responded to the show cause notice. The Assessing Officer has made elaborate discussion on the issue and has resorted to the disallowance u/s 14A of the Act. Noticeably, the assessment was framed u/s 153A where requisite information/accounts of the assessee were called for. Needless to say, the satisfaction of the AO is the assent of his mind. AO has inquired on the issue having regard to the details/information filed by the Assessee. The text and tenor of the assessment order shows that the Assessing Officer has objectively looked into the issue having regard to the details/accounts of the assessee and thus the contention of arriving at contemplated satisfaction is fulfilled. More so, opportunity was duly granted and availed by the Assessee. The facts and circumstances imply presence of satisfaction contemplated under Section 14A(2) of the Act. Noticeably, it is not a case where the assessee has offered any disallowance under Section 14A which is sought to be displaced by the Assessing Officer. Hence, Ground No. 1 of the Cross Objection of the assessee in this regard is not tenable. Disallowance under Section 14A cannot exceed the exempt income by way of dividend - The issue has been discussed by the Co-ordinate Bench in ACIT vs. Hindustan EPC Company Ltd., 2022 (8) TMI 904 - ITAT DELHI and thus no longer res integra. The CIT(A) shall accordingly restrict the disallowance to the extent of exempt income while making denovo adjudication. Hence, Ground No.2 of the Cross Objection is allowed. Disallowance under Rule 8D(2)(iii) - Since the issue has been restored to the file of the CIT(A), the assessee shall be at liberty to place such arguments and adduce such evidence as may be considered expedient in the course of fresh adjudication by the CIT(A). Hence, Ground No.3 of the Cross Objection is thus allowed for statistical purposes. Adjustment made in the book profit under Section 115JB of the Act towards disallowance under Section 14A - We find merit in the contention of the assessee that estimated disallowances computed under Rule 8D cannot be adopted for the purposes of Section 115JB of the Act. This aspect is also restored to the file of the CIT(A) for determining the book profit/loss having regard to decision of the Special Bench in ACIT vs. Vireet Investment Pvt. Ltd. 2017 (6) TMI 1124 - ITAT DELHI and in accordance with law. Hence, Ground No.4 of the Cross Objection is allowed for statistical purposes.

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Disallowance under Rule 8D of the Income Tax Rules.
3. Computation of book profit under Section 115JB of the Act.

Issue 1: Disallowance under Section 14A of the Income Tax Act, 1961:
The Assessing Officer (AO) disallowed certain amounts under Section 14A of the Act concerning exempt income earned through dividends. The CIT(A) partially allowed the appeal, leading to the Revenue and the Assessee filing respective appeals and Cross Objections. The Revenue challenged the CIT(A)'s decision to delete the additions towards proportionate interest, arguing that the CIT(A) shifted the burden to the AO to establish the nexus between investments and loan utilization. The ITAT found the CIT(A)'s decision lacking logic and reasoning, setting it aside for fresh adjudication. The ITAT also addressed the Assessee's contention regarding satisfaction under Section 14A(2), concluding that the AO had fulfilled the required satisfaction criteria. The ITAT directed a denovo adjudication on this issue.

Issue 2: Disallowance under Rule 8D of the Income Tax Rules:
The AO invoked Rule 8D of the Income Tax Rules to disallow specific amounts under normal provisions and while computing book profits under Section 115JB. The CIT(A) granted relief to the Assessee by reducing the disallowances under Rule 8D(2)(ii) and (iii). The ITAT found the CIT(A)'s order lacking in proper reasoning and set it aside for fresh adjudication. The ITAT allowed the Assessee to present additional evidence during the new adjudication process. The ITAT also directed the CIT(A) to restrict disallowances under Rule 8D to the extent of exempt income while computing book profits.

Issue 3: Computation of Book Profit under Section 115JB of the Act:
The AO made adjustments in the book profit under Section 115JB due to disallowances under Section 14A. The ITAT agreed with the Assessee that estimated disallowances computed under Rule 8D could not be adopted for Section 115JB purposes. Therefore, the ITAT set aside this issue for the CIT(A) to determine book profit/loss in line with relevant legal decisions. The ITAT allowed the Assessee to present further arguments and evidence during the fresh adjudication process.

In conclusion, the ITAT set aside the CIT(A)'s order and remanded the case for fresh adjudication on all issues, emphasizing the need for proper reasoning and adherence to legal provisions in determining disallowances and book profits under the Income Tax Act.