2024 (2) TMI 1043 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - dividend income - AO rejecting the suo-motto disallowance made by asseessee - contention of the assessee is that had the AO excluded the non-dividend bearing investments and investment made out of non-interest bearing fund no disallowance would have been called for - CIT(A) has sustained the additions to the extent of exempt income without adverting to the contentions of the assessee regarding exclusion of investments that did not earn dividend income investments that earned taxable income and investments that were made out of interest free own funds. HELD THAT - There is no ambiguity under the law that Section 14A of the Act casts statutory obligation on the Assessing Authority to verify and satisfy itself about the correctness of claim of the assessee regarding suo-motto disallowance or no disallowance at all in relation to expenditure incurred for earning of exempt income. If the AO fails to give clear finding he would be failing into statutory obligation. In the present case the AO had not adverted to the objections of the assessee and did not accept the suomotto disallowance made by the assessee. AO failed to take into account that the assessee was having interest free fund. Certain investment did not earn exempt income and some investment in foreign entities were amendable to tax in India. AO did not give any cogent reason for rejecting the suo-motto disallowance. Thus disallowance made by AO and restricted by CIT(A) to the extent of exempt income is not justified. We therefore direct the AO to delete the impugned addition. Appeal of assessee allowed.

Summary

Issues Involved:
The judgment involves the challenge to the correctness of the order passed by Ld. CIT(A)-9, New Delhi for the Assessment Year 2014-15, specifically regarding the disallowance under section 14A of the Income Tax Act.

Dispute Over Disallowance under Section 14A of the Act:
The appellant contested the disallowance made by the Assessing Officer under section 14A of the Act, arguing that no disallowance was warranted as the AO failed to record the reasons for rejecting the appellant's suo moto disallowances. The appellant further contended that the disallowance should have been limited to investments earning dividend or exempt income, rather than gross investments. The Ld.CIT(A) partly allowed the appeal, restricting the disallowance to the extent of dividend income earned by the appellant.

Judgment and Analysis:
The Tribunal heard arguments from both parties and reviewed the orders of the lower authorities. The Ld.CIT(A) had limited the disallowance to the maximum of the exempt income claimed by the appellant. However, the Tribunal found that the AO had not considered various factors, such as investments not earning dividend income, investments generating taxable income, and investments made from interest-free funds. The AO's failure to provide a clear rationale for rejecting the appellant's suo moto disallowance was noted. Consequently, the Tribunal concluded that the disallowance made by the AO and upheld by Ld.CIT(A) was not justified. Therefore, the Tribunal directed the AO to delete the impugned addition, ultimately allowing the appeal of the assessee.

Conclusion:
The Tribunal's decision focused on the statutory obligation of the Assessing Authority to verify the correctness of the claim regarding disallowance under section 14A of the Act. The judgment emphasized the importance of considering all relevant factors, including investments not yielding dividend income and investments made from interest-free funds, in determining the extent of disallowance. The Tribunal's ruling highlights the necessity for the Assessing Officer to provide clear and reasoned justifications for any disallowance made, ensuring compliance with the statutory requirements of the Act.