2016 (2) TMI 119 - AT - Income Tax

Disallowance u/s 14A - Held that - We find from the facts of the instant case that the Learned AO has though had examined the accounts of the assessee with regard to the availability of own funds in the context of making separate disallowance of interest on borrowed capital u/s 36(1)(iii) of the Act, did not look into the accounts of the assessee in the context of Rule 8D(1) of the IT Rules and record his satisfaction as mandated thereon that the claim of the assessee that no expenditure was incurred for earning exempt income is incorrect. The assessee had claimed that no expenses were incurred by it for the purpose of earning the exempt income in the form of dividend as admittedly the said dividend income was earned out of auto swap funds which was done directly by the bank without any interference from the side of the assessee. Hence there was no need for the assessee to incur any expenditure thereon for earning the dividend income. We find that the Learned AO rejected the claim of assessee with regard to claim of assessee that no expenditure was incurred in relation to exempt income without indicating any cogent reasons for the same. We find that the Learned AO had straight away embarked upon computing disallowance under Rule 8D(2)(iii) of the Rules. Hence we hold that the action of the Learned AO in directly embarking on Rule 8D(2) of the Rules is not appreciated and hence no disallowance u/s 14A of the Act could be made in the facts of the instant case. - Decided in favour of assessee

Summary

Issues:
Application of section 14A of the Income Tax Act read with Rule 8D(2)(iii) of the IT Rules.

Analysis:
The appeal in question pertains to the applicability of section 14A of the Income Tax Act along with Rule 8D(2)(iii) of the IT Rules. The primary issue at hand was whether the provisions of section 14A could be invoked based on the circumstances of the case. The assessee, engaged in property development and rental activities, earned dividend income from mutual funds. The controversy arose when the Assessing Officer (AO) made disallowances under Rule 8D(2)(ii) and Rule 8D(2)(iii) of the IT Rules, leading to an appeal by the assessee.

The crux of the matter revolved around the necessity of the AO to record satisfaction as per Rule 8D(1) before proceeding to Rule 8D(2). The appellant contended that the AO did not fulfill this mandatory requirement, thus challenging the disallowance. The appellant argued that no expenses were incurred for earning exempt income, particularly dividend income derived from an auto swap facility in a bank account. The AO's failure to provide cogent reasons for rejecting the claim and directly applying Rule 8D(2)(iii) was a pivotal contention.

The Tribunal, after considering arguments from both sides, emphasized the significance of the AO's obligation to record satisfaction under Rule 8D(1) before moving to Rule 8D(2). Citing relevant case law, the Tribunal highlighted the necessity for the AO to provide reasoning for disallowances related to exempted income. The Tribunal concluded that the AO's direct application of Rule 8D(2) without fulfilling the prerequisites was not justified in the present case. Consequently, the disallowance under section 14A of the Act was deemed inappropriate, and the appeal of the assessee was allowed.

In summary, the judgment delves into the procedural aspects of invoking section 14A of the Income Tax Act in conjunction with Rule 8D(2)(iii) of the IT Rules. It underscores the importance of the AO's compliance with Rule 8D(1) requirements and the necessity for providing reasoned justifications for disallowances related to exempt income. Ultimately, the Tribunal ruled in favor of the appellant, highlighting the AO's failure to adhere to procedural mandates in the assessment process.