2024 (4) TMI 407 - HC - Income Tax

Addition u/s 14A r.w.r.8D - AO mandation to record dis-satisfaction with the correctness of the Assessee's claim regarding expenditure related to exempt income - HELD THAT - We agree with the finding of the CIT(A) and the ITAT that though the AO has stated that Assessee s explanation is not acceptable, he has not given reasons why it was not acceptable to him. Subsection (2) of Section 14A and Rule 8D provides that if the AO is not satisfied with the correctness of the claim in respect of expenditure made by Assessee in relation to income which does not form part of the total income under the Act, he shall determine the amount of expenditure in relation to such income in accordance with the provisions prescribed. The most fundamental requirement, therefore, is the Assessing Officer should record his dissatisfaction with the correctness of the claim of Assessee in respect of the expenditure and to arrive at such dissatisfaction, he should give cogent reasons. See JSW Energy Limited. 2023 (6) TMI 1223 - BOMBAY HIGH COURT The order of the ITAT (Panaji Bench) in the case of Sesa Goa Limited 2013 (9) TMI 233 - ITAT PANAJI has been upheld by the Goa Bench of this Court in CIT, Goa v. Sesa Goa Limited, Panaji, Goa 2021 (5) TMI 466 - BOMBAY HIGH COURT where the Division Bench concurred with the view taken by the ITAT that the AO did not record his satisfaction why the disallowance made by Assessee was incorrect. Assessee appeal allowed.

Summary

Issues Involved:
1. Deletion of disallowance made u/s 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules.
2. Satisfaction of the Assessing Officer with reference to the correctness of the claim of the assessee in respect of the expenditure incurred in relation to exempt income.

Summary:

Issue 1: Deletion of Disallowance Made u/s 14A read with Rule 8D

The appeal u/s 260A of the Income Tax Act, 1961 challenged the order of the ITAT, which had upheld the CIT(A)'s decision to delete the disallowance made by the AO u/s 14A read with Rule 8D. The AO had disallowed Rs. 18,46,00,000/- by applying Rule 8D, but the CIT(A) deleted this disallowance, stating that the AO did not record his findings about the correctness of the claim of the assessee in respect of such expenditure. The CIT(A) emphasized that Rule 8D is not automatic and requires the AO to provide reasons for dissatisfaction. The ITAT concurred with the CIT(A) and relied on the decision in Sesa Goa Ltd. v. JCIT.

Issue 2: Satisfaction of the Assessing Officer

The AO's satisfaction with the correctness of the claim is a fundamental requirement u/s 14A(2). The AO must record dissatisfaction with the claim and provide cogent reasons. In this case, the AO merely stated that the assessee's explanation was not acceptable without providing reasons. The court referred to multiple judgments, including Principal Commissioner of Income Tax (Central) v. JSW Energy Limited, which emphasized that the AO must first record dissatisfaction with the claim before invoking Rule 8D. The court found that the AO did not express his dissatisfaction adequately and relied on non-existent assessment orders, indicating non-application of mind.

Conclusion:

The court agreed with the CIT(A) and ITAT that the AO failed to record valid reasons for dissatisfaction with the assessee's claim. The appeal was dismissed as no substantial question of law arose.