2023 (10) TMI 32 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - disallowance of expenditure incurred in relation to earning exempt income - mandation to record satisfaction so as to justify invoking Rule 8D of the Rules for computing disallowance - HELD THAT - We are in complete agreement with the ld.counsel for the assessee that the AO had failed to comply with the conditions set out in law prior to invoking Rule 8D of IT Rules for computing disallowance of expenses u/s 14A - AO, we hold, has not recorded the requisite satisfaction about the incorrectness of the claim of the assessee. There is no dispute with regard to the interpretation of provision of section 14A(2) of the Act; that the AO can invoking rule 8D of the Rules for computing expenses disallowable u/s 14A only after rejecting assesses claim of expenses relating to exempt income. His dissatisfaction with the assesses claim being arrived at having regard to its accounts. The language of the section is also clear that the primary onus is on the AO to demonstrate that claim of the assessee was incorrect. In the present case, it is evident from the satisfaction recorded by the AO of the assesses claim of expenses relating to exempt income not being correct, that it is merely based on general observations with no reference to the accounts of the assessee. AO, we find, has expressed his dissatisfaction with the claim by giving general reasons stating that investment decisions were very complex in nature, they required substantial market research, day-to-day analysis of market trends and decisions etc. and also required huge investment in shares and consequential blocking of funds. He has not recorded any dissatisfaction having regard to the accounts of the assessee. The satisfaction of the AO, has to be an objective satisfaction, and it cannot be based on general statements made; statements which are not supported with any facts or figures. Therefore, we have no hesitation in holding, that the satisfaction recorded in the present case by the AO did not fulfill the requirements prescribed by the law u/s 14A(2) - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of expenditure incurred in relation to earning exempt income under Section 14A of the Income Tax Act, 1961.
2. Invocation of Rule 8D of the Income Tax Rules, 1962.

Summary:

Issue 1: Disallowance of Expenditure Incurred in Relation to Earning Exempt Income under Section 14A of the Income Tax Act, 1961

The assessee had earned exempt income by way of dividend amounting to Rs. 2,28,32,577/- and had suo moto disallowed expenses u/s 14A of the Act amounting to Rs. 6,56,966/-. The Assessing Officer (AO) disallowed additional expenses of Rs. 40,23,544/- by invoking Rule 8D, which was confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The assessee argued that the AO invoked Rule 8D without first complying with the conditions set out in Section 14A(2) of the Act, which requires the AO to be dissatisfied with the assessee's claim regarding expenses incurred for earning exempt income. The assessee cited various judgments, including the Hon'ble Apex Court's decision in Maxopp Investment Ltd. CIT, (2018) 402 ITR 640 (SC), to support this contention.

Issue 2: Invocation of Rule 8D of the Income Tax Rules, 1962

The AO's dissatisfaction with the assessee's claim was based on general observations rather than an objective analysis of the assessee's accounts. The assessee had provided detailed explanations and evidence that all expenses related to earning exempt income had been disallowed. The AO, however, recorded dissatisfaction in general terms, stating that investment decisions were complex and required substantial market research, without specific reference to the assessee's accounts. The Tribunal noted that the AO's dissatisfaction must be based on objective satisfaction and cannot rely on general statements unsupported by facts or figures.

The Tribunal concluded that the AO failed to comply with the statutory requirements of Section 14A(2) before invoking Rule 8D. The AO's dissatisfaction was not in accordance with the law, and the disallowance computed by invoking Rule 8D was not justified. Therefore, the Tribunal directed the deletion of the additional disallowance of Rs. 40,23,544/-.

Conclusion:

The appeal of the assessee was allowed, and the disallowance of Rs. 40,23,544/- made by invoking Rule 8D was deleted. The Tribunal emphasized the necessity for the AO to record objective satisfaction based on the assessee's accounts before invoking Rule 8D.