2023 (8) TMI 328 - AT - Income Tax

Disallowance u/s 14A r.w. Rule-8D - Mandation to record satisfaction - HELD THAT - Assessee furnished the complete details of the availability of the own funds in its kitty to prove the fact that investments were made only out of the own funds of the assessee and not borrowed funds. The assessee had also given breakup of suo moto disallowance of expenses made by it before the AO. We find that the AO had completely disregarded the entire contentions of the assessee and not even bothered to record his objective satisfaction with cogent reasons having regard to the accounts of the assessee as to why the suo moto disallowance made by the assessee is incorrect. This is the mandate provided in provisions of section 14A(2) of the Act r.w. Rule 8D(1) of the Rules. Without recording such objective satisfaction for rejection of the claim of the assessee, the disallowance made by the Ld. AO u/s 14A of the Act would have no legs to stand in the eyes of law. Our view is further fortified by the decision of Maxopp Investment Ltd. 2018 (3) TMI 805 - SUPREME COURT and, hence, we direct the Ld. AO to delete the disallowance made u/s 14A in the assessment. Accordingly, grounds raised by the assessee are allowed.

Summary

Issues involved:
The judgment involves the challenge of disallowance made under section 14A of the Income Tax Act read with Rule 8D of the Income-tax Rules.

Disallowance under section 14A of the Act read with Rule 8D of Income-tax Rules, 1962:
The appellant contested the additional disallowance of Rs 36,07,446 under section 14A of the Act read with Rule 8D of the Income-tax Rules, over and above the suo moto disallowance of Rs 9,00,000. The appellant argued that the basis adopted for computing the disallowance was not considered by the Hon'ble CIT(A). Furthermore, the disallowance of interest expenditure of Rs 48,186 under Rule 8D(2)(ii) and the disallowance of Rs 44,59,260 under Rule 8D(2)(iii) were also challenged. The appellant contended that the investments were made from its own funds and not borrowed funds. Each ground of appeal was submitted independently without prejudice to the others.

The delay in filing the appeal was addressed by the appellant, explaining that it was due to inadvertence by the Chartered Accountant. The delay of 23 days was condoned, and the appeal was admitted for adjudication.

The main issue in this appeal was the challenge against the disallowance made under section 14A of the Act read with Rule-8D of the IT Rules.

After considering the submissions and the material on record, it was noted that the appellant was involved in digital cinema distribution and other related businesses. The appellant had declared its total income for the relevant assessment year and had earned exempt dividend income from a subsidiary company. The appellant had suo moto disallowed an amount under section 14A of the Act for the purpose of earning exempt income and had provided detailed explanations and workings to support its position. Despite this, the Ld. AO proceeded to make disallowances under Rule 8D(2) of the Rules without adequately considering the appellant's contentions. The Ld. CIT(A) upheld the disallowance but directed the Ld. AO to consider only investments that had yielded exempt income. The tribunal found that the Ld. AO did not provide objective reasons for rejecting the appellant's claim, as required by the law. Citing the decision of the Hon'ble Supreme Court, the tribunal directed the Ld. AO to delete the disallowance made under section 14A of the Act.

Therefore, the appeal filed by the appellant was allowed, and the disallowance under section 14A of the Act was directed to be deleted.