2023 (1) TMI 1401 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - Mandation to record satisfaction in not accepting suo moto disallowance made by the assessee - Appellant had suo-moto disallowed u/s 14A computed based on a detailed scientific working as certified by an independent Chartered Accountant - HELD THAT - We note that in identical case this ITAT in assessee s own case for AY 2015-16 2022 (8) TMI 1529 - ITAT DELHI held that provisions of section 14A of the Act contemplates recording of satisfaction by the Assessing Officer having regard to the accounts of the assessee if he is not satisfied with the claim of the assessee in respect of expenditure in relation to income which does not form part of total income. On reading of the assessment order we find that the AO having regard to the suo moto disallowance made by the assessee has not recorded any objective satisfaction as to why the allocation of indirect expenses made by the assessee is not sufficient to meet the expenses attributable for earning exempt dividend income. Thus AO has not recorded any objective satisfaction in not accepting suo moto disallowance made by the assessee. Thus we direct the AO to accept the suo moto disallowance made by the Assessing Officer in respect of disallowance under Rule 8D(2)(iii) read with section 14A. Also disallowance u/s 14A r.w.r. 8D only those investment should be considered which has not yielded exempt income. Accordingly we set-aside the order of the authorities below and decide the issue in favour of the assessee.

Summary

Issues:
1. Disallowance under section 14A of the Income Tax Act, 1961 along with Rule 8D computation.
2. Proper satisfaction of the Assessing Officer in not accepting suo moto disallowance made by the assessee.

Issue 1: Disallowance under section 14A of the Income Tax Act, 1961 along with Rule 8D computation:

The appeal was against the order of the ld. CIT (Appeals) for the Assessment Year 2016-17, specifically challenging the disallowance under section 14A of the Act amounting to Rs. 54,98,682. The appellant had initially suo-moto disallowed an amount under section 14A based on a detailed scientific working certified by an independent Chartered Accountant. However, the AO invoked Rule 8D of the Income Tax Rules, 1962, and made an additional disallowance. The AO was not satisfied with the disallowance calculated by the assessee, stating that the apportionment of costs was not correctly done, and indirect costs such as rent were not considered. The AO computed the total disallowance under section 14A using the procedure prescribed under Rule 8D, resulting in a further disallowance. The Ld. CIT(A) confirmed the AO's action, leading to the appeal before the tribunal.

Issue 2: Proper satisfaction of the Assessing Officer in not accepting suo moto disallowance made by the assessee:

The tribunal analyzed whether the Assessing Officer had recorded proper satisfaction in not accepting the suo moto disallowance made by the assessee. Referring to a previous decision in the assessee's own case for AY 2015-16, the tribunal observed that the AO did not record any objective satisfaction as to why the allocation of indirect expenses made by the assessee was not sufficient to cover the expenses attributable to earning exempt income. Citing a decision by the Hon'ble Supreme Court, the tribunal emphasized that the AO needs to record satisfaction before applying the theory of apportionment, especially when the assessee has already apportioned in the return. As the AO had not recorded any objective satisfaction in not accepting the suo moto disallowance, the tribunal directed the AO to accept the disallowance made by the assessee. Additionally, the tribunal referred to a Special Bench decision for disallowance under section 14A r.w.r. 8D, stating that only investments not yielding exempt income should be considered for computation.

In conclusion, the tribunal allowed the appeal of the assessee, holding that the additional disallowance made by the Revenue was not sustainable. The tribunal decided in favor of the assessee, directing the AO to accept the suo moto disallowance and considering only investments not yielding exempt income for computation under Rule 8D. The order was pronounced on 9th January 2023.