2022 (7) TMI 1362 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - Necessity to record satisfaction - disallowance of expenses relatable to exempt income claimed u/s.10(34) of the Act, by invoking the provisions of Sec.14A - HELD THAT - Where the assessee makes a claim that there is expenditure relatable to exempt income and he makes disallowance i.e. suo moto disallowance u/s.14A of the Act, if the AO proposed to invoke Sec.14A, he has to record satisfaction. That this satisfaction cannot be plain or simple satisfaction or simply invoking the formula prescribed u/r.8D(2), but it is to be done with regard to the analysis carried out on the accounts of the assessee. Hon ble jurisdictional High Court in the case of Marg Ltd. 2020 (10) TMI 102 - MADRAS HIGH COURT had considered the issue on satisfaction and held that the disallowance u/r.8D of the Rules r.w.s.14A of the Act, can be computed only after recording satisfaction by the AO in terms of provisions of Sec.14A r.w.r.8D of the Rules. As noted from the assessment order and the order of the CIT(A) that there is no discussion about any expenditure which is relatable to exempt income and how the AO recorded the satisfaction and in our considered view, the AO has not carried out any analysis of the accounts or he has not gone into the accounts despite complete books of accounts were produced before him and has not rejected the disallowance suo moto offered by the assessee. According to us, the mandate given by the provisions of Sec.14A(2) and Rule 8D(2) of the Rules, as regards to recording of satisfaction by the AO qua correctness of the accounts of the assessee for the expenditure claimed qua exempt income is absent and hence, on this very issue, we reverse the order of the lower authorities and allow this jurisdictional issue in favour of the assessee.

Summary

Issues Involved:
1. Recording of satisfaction by the Assessing Officer (AO) under Section 14A(2) read with Rule 8D(1) of the Income Tax Rules, 1962.
2. Disallowance of expenses related to exempt income under Section 14A read with Rule 8D of the Income Tax Rules, 1962.
3. Applicability of Rule 8D for computation of disallowance.

Issue-wise Detailed Analysis:

1. Recording of Satisfaction by the Assessing Officer (AO) under Section 14A(2) read with Rule 8D(1):

The primary issue in the appeal was whether the AO recorded satisfaction as required under Section 14A(2) read with Rule 8D(1) before disallowing expenses related to exempt income. The assessee contended that the AO did not record his satisfaction regarding the correctness of the assessee's claim of expenses related to exempt income. The AO simply applied the formula under Rule 8D without analyzing the accounts or providing reasons for dissatisfaction with the assessee's computation. The Tribunal emphasized that the AO must record satisfaction regarding the correctness of the assessee's claim based on an analysis of the accounts. The Tribunal referred to the Supreme Court ruling in Maxopp Investment Ltd. v. CIT, which mandates that satisfaction must be recorded before applying the apportionment theory. The Tribunal found that the AO failed to record such satisfaction and, therefore, the disallowance was not justified.

2. Disallowance of Expenses Related to Exempt Income under Section 14A read with Rule 8D:

The assessee had made a suo moto disallowance of Rs.10,66,916/- towards expenses related to exempt income. The AO, however, disallowed an additional amount using the formula under Rule 8D(2)(i) and (iii), totaling Rs.37,17,04,365/-. The Tribunal noted that the AO did not provide any analysis or reasons for not accepting the assessee's computation. The Tribunal highlighted that the AO must first be satisfied with the correctness of the assessee's claim before resorting to the Rule 8D formula. The Tribunal concluded that the AO's failure to record satisfaction invalidated the disallowance made under Rule 8D.

3. Applicability of Rule 8D for Computation of Disallowance:

The Tribunal examined whether Rule 8D was correctly applied by the AO. The Tribunal reiterated that Rule 8D can only be invoked after the AO records satisfaction regarding the correctness of the assessee's claim. The Tribunal referred to various judicial precedents, including the Bombay High Court's decision in Godrej & Boyce Mfg. Co. Ltd. v. DCIT and the Delhi High Court's decision in Indiabulls Financial Services Ltd. v. DCIT, which emphasized the necessity of recording satisfaction. The Tribunal found that the AO did not follow the prescribed procedure and, therefore, the disallowance under Rule 8D was not sustainable.

Conclusion:

The Tribunal allowed the assessee's appeal on the grounds that the AO did not record the required satisfaction before making the disallowance under Section 14A read with Rule 8D. Consequently, the Tribunal reversed the orders of the lower authorities and held that the disallowance made by the AO was not justified. The Tribunal did not address the merits of the case, as the appeal was allowed on the jurisdictional issue of non-recording of satisfaction by the AO. The appeals in ITA Nos. 941 & 942/Chny/2020 were partly allowed.