2024 (5) TMI 1112 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - expenditure incurred on exempt income - as argued assessee company had sufficient self-owned funds for sourcing its exempt income yielding investment therefore no disallowance of any part of the interest expenditure that was claimed as deduction was called for in its case - HELD THAT - When the assessee company in the present case had claimed that no part of the administrative/other expenses claimed by it as a deduction were incurred in relation to the income which did not form part of its total income then the A.O only after being satisfied that having regard to the accounts of the assessee as placed before him it was not possible for him to generate the requisite satisfaction with regard to the correctness of the claim of the assessee thus only after rejecting the said claim of the assessee after complying with the aforesaid statutory obligation as stood cast upon him could have validly proceeded with and determined the amount of such other/administrative expenditure incurred in relation to the income which did not form part of its total income. We however find that in the case of the present assessee company the AO had carried out the disallowance of the other/administrative expenditure u/s 14A in a mechanical manner as per the methodology provided in Rule 8D(2)(ii). The general observations of the AO can by no means partake the color and character as that of a satisfaction which as per the mandate of law is required to be arrived at by him with regard to the correctness of the claim of the assessee in respect of the administrative/other expenses claimed to have been incurred in respect of income which did not form part of the total income of the assessee company having regard to the accounts of the assessee as were placed before him. Thus being of the considered view that as the A.O had summarily carried out the disallowance of the administrative/other expenses u/s 14A as per the methodology provided in Rule 8D(2)(ii) without satisfying the statutory requirement of first arriving at a satisfaction as required by the mandate of law having regard to the accounts of the assessee as placed before him therefore am unable to persuade myself to uphold the disallowance which had been sustained by the CIT(A). The order of the CIT(A) sustaining the disallowance u/s 14A is thus set aside. Decided in favour of assessee.

Summary

Issues Involved:
1. Sustainability of disallowance u/s 14A r.w.r. 8D.
2. Validity of jurisdiction assumed by the A.O for making disallowance u/s 14A.
3. Requirement of satisfaction by the A.O regarding the correctness of the claim of the assessee.

Summary:

Issue 1: Sustainability of disallowance u/s 14A r.w.r. 8D

The assessee company challenged the addition of Rs. 28,98,519 on account of disallowance u/s 14A r.w.r. 8D upheld by the CIT(A). The A.O observed that the assessee had raised substantial interest-bearing unsecured loans and invested in a partnership firm yielding exempt income but had not made any suo-motto disallowance of corresponding interest expenditure u/s 14A. The A.O calculated the disallowance as follows:

- Expenditure directly relating to exempt income: Rs. 26,75,556
- 1% of annual average of monthly averages of investment: Rs. 2,22,963
- Total disallowance: Rs. 28,98,519

The CIT(A upheld the A.O's decision without independent reasoning, relying on the observations of the A.O and legal precedents.

Issue 2: Validity of jurisdiction assumed by the A.O for making disallowance u/s 14A

The assessee argued that it had sufficient interest-free self-owned funds of Rs. 4.36 crore, which were more than the investment in the partnership firm, thus no disallowance of interest expenditure u/s 14A was justified. The assessee cited several judicial pronouncements, including Pr. CIT Vs. Binani Industries Ltd. (2022), Pr. CIT Vs. Godrej & Boyce Mfg Co. Ltd. (2023), and South Indian Bank Ltd. Vs. CIT (2021), supporting the claim that if sufficient interest-free funds are available, no disallowance u/s 14A should be made.

The Tribunal agreed with the assessee's contention but directed the A.O to verify the factual position. If the claim of sufficient self-owned funds is found in order, no disallowance u/s 14A r.w.r. 8D would be warranted.

Issue 3: Requirement of satisfaction by the A.O regarding the correctness of the claim of the assessee

The Tribunal found that the A.O failed to record dissatisfaction regarding the assessee's claim that no part of the expenditure claimed as deduction was attributable to earning exempt income. The Tribunal cited the judgment of the Hon'ble Supreme Court in Maxopp Investment Ltd. v. CIT (2018), which mandates that the A.O must record dissatisfaction before assuming jurisdiction for disallowance u/s 14A.

The Tribunal vacated the disallowance of Rs. 2,22,963 for administrative/other expenses u/s 14A r.w.r. 8D due to the A.O's failure to comply with the statutory requirement of recording dissatisfaction.

Conclusion:

The appeal of the assessee was partly allowed for statistical purposes. The Tribunal directed the A.O to verify the availability of sufficient self-owned funds and, if confirmed, to refrain from making any disallowance u/s 14A. The disallowance of administrative/other expenses was set aside due to the A.O's failure to record dissatisfaction as required by law.