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2017 (9) TMI 110 - AT - Income TaxCredit of municipal taxes paid under the had income from house property denied - Held that - AR has demonstrated through documents submitted before the Assessing Officer that the municipal tax was paid by the assessee which is through the bank account of the assessee paid through its proprietor firm only. Therefore, Ground is allowed in favour of assessee. Addition u/s 14A - Assessing Officer made disallowance holding that some expenditure must have been incurred. - Held that - Assessing Officer has not made any effort to record his findings as to why the claim of the assessee that no expenditure was incurred was not correct and made disallowance just by holding that some expenditure must have been incurred. Judgment of CIT Vs. Taikisha Engineering India Ltd. 2014 (12) TMI 482 - DELHI HIGH COURT is applicable and no disallowance is warranted as it held that the Assessing Officer at the first instance must examine the disallowance made by the assessee or the claim of the assessee that no expenditure was incurred to earn the exempt income. If and only if the Assessing Officer is not satisfied on this count after making reference to the accounts, that he is entitled to adopt the method as prescribed i.e. Rule 8D of the Rules. Thus, Rule 8D is not attracted and applicable to all assessee who have exempt income and it is not compulsory and necessary that an assessee must voluntarily compute disallowance as per Rule 8D of the Rules. Also we find that the assessee was holding shares as stock in trade and not as investments as is apparent from the balance sheet of the assessee, therefore, disallowance u/s 14A was not warranted. - Decided in favour of assessee.
Issues:
1. Disallowance of municipal taxes for 'M' Block property. 2. Disallowance under section 14A for exempt dividend income. 3. Addition made by Assessing Officer under section 14A read with Rule 8D. 4. Compliance with principles of natural justice. Issue 1: Disallowance of Municipal Taxes The assessee claimed a deduction of municipal taxes paid for the 'M' Block property, but the Assessing Officer did not fully credit the amount claimed. The CIT(A) rejected the claim, stating that the appellant did not provide a valid reason for the high house tax assessment compared to the rental income. The CIT(A) found no merit in the appellant's argument, leading to the rejection of this ground. Issue 2: Disallowance under Section 14A for Exempt Dividend Income The Assessing Officer disallowed a portion of the exempt dividend income under section 14A, considering indirect expenses incurred by the appellant to earn the income. The CIT(A) acknowledged the need for disallowance but directed the AO to restrict the disallowance to a specific amount after excluding certain investments from the calculation. The CIT(A) partially allowed this ground, providing relief to the appellant. Issue 3: Addition Made by Assessing Officer under Section 14A read with Rule 8D The AO made an addition under section 14A read with Rule 8D, which the CIT(A) reviewed. The CIT(A) found the AO's computation flawed as it included the entire investment in mutual funds without considering the nature of funds generating taxable income. After adjustments, the CIT(A) directed a reduced disallowance amount, granting further relief to the appellant. Issue 4: Compliance with Principles of Natural Justice The appellant raised concerns about the orders passed by the CIT(A) and AO violating the principles of natural justice. However, the Tribunal found in favor of the appellant, allowing the appeal and emphasizing the importance of proper examination by the Assessing Officer before applying Rule 8D for disallowance. The Tribunal concluded that Rule 8D is not mandatory for all cases with exempt income, especially when the nature of investments aligns with business activities rather than passive investments. In conclusion, the Tribunal allowed the appeal of the assessee, providing relief on multiple grounds related to disallowances and assessments made by the Assessing Officer. The judgment highlighted the importance of proper assessment procedures and considerations in determining disallowances under section 14A, emphasizing the need for a thorough examination of expenses related to exempt income.
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