2016 (6) TMI 1086 - AT - Income Tax

Revision u/s 263 - mandation for the AO to apply Rule 8D - According to CIT the AO ought to have made disallowance u/s 14A of the Act in terms of Rule 8D of the Rules - Held that - Invoking of Rule 8D of Rules is not automatic and that the AO u/s 14A of the Act has the discretion to substitute the computation of disallowance u/s 14A as made by the assessee is under estimation. The satisfaction contemplated u/.s 14A (2) of the Act is not merely restricted to rejecting the claim made by the assessee and the disallowance to be made u/s 14A of the Act but also includes substituting the claim made by the assessee on any other reasonable basis as the AO deem it fit. In such circumstances the correctness of the AO s judgment can be reviewed but it cannot be said that the AO had no jurisdiction to do so and AO ought to resort only to the provision of Rule 8D of the Rules. In other words Rule 8D is not automatic and can be resorted to by the AO only as a measure of last resort. For the reasons given above, We quash the order u/s 263 and allow the appeal of the assessee.

Summary

Issues:
1. Correct application of Section 14A of the Income Tax Act, 1961 for disallowance of expenses incurred in earning exempt income.
2. Interpretation of Rule 8D of the Income Tax Rules, 1962 for computation of disallowance under Section 14A.
3. Jurisdiction of Assessing Officer (AO) to make disallowances under Section 14A without invoking Rule 8D.
4. Review of AO's judgment and discretion in substituting the computation of disallowance made by the assessee.

Analysis:

Issue 1: The appeal concerned the correct application of Section 14A of the Income Tax Act for disallowance of expenses incurred in earning exempt income. The Assessing Officer (AO) estimated the expenditure related to earning exempt dividend income, leading to a dispute between the Assessee and the Commissioner of Income Tax (CIT).

Issue 2: The CIT invoked Rule 8D of the Income Tax Rules, 1962, stating that the AO should have made disallowance under Section 14A based on Rule 8D. The CIT argued that the AO's failure to apply Rule 8D resulted in under-assessment of income, thus justifying the exercise of powers under Section 263.

Issue 3: The Tribunal deliberated on the jurisdiction of the AO to make disallowances under Section 14A without invoking Rule 8D. It was held that the AO has discretion to substitute the computation of disallowance made by the assessee if deemed necessary, and Rule 8D is not automatic. The AO's judgment can be reviewed, but it does not restrict the AO to resort only to Rule 8D.

Issue 4: The Tribunal emphasized that Rule 8D should be a measure of last resort when arriving at a just conclusion on the disallowance of expenses becomes impossible. The AO's satisfaction under Section 14A(2) includes the authority to substitute the claim made by the assessee on a reasonable basis. Consequently, the Tribunal quashed the order under Section 263 and allowed the appeal of the assessee.

In conclusion, the Tribunal's decision highlighted the importance of the AO's discretion in making disallowances under Section 14A, emphasizing that Rule 8D should not be applied automatically and should be considered only when other reasonable parameters for disallowance are unavailable. The judgment provided clarity on the interpretation and application of Rule 8D in computing disallowances under Section 14A of the Income Tax Act.