2017 (12) TMI 738 - AT - Income Tax

Addition u/s 14A r.w.r. 8D - Held that - The provisions of Section 14A(2) empower the AO to resort to the prescribed provision under Rule 8D for making disallowance under Section 14A where, having regard to the account of the assessee, the AO is not satisfied with the claim of the assessee. We further note that the Hon ble Mumbai High Court in the case of CIT Vs Godrej & Boyce Mfg Co ltd vs. DCIT, Mumbai 2010 (8) TMI 77 - BOMBAY HIGH COURT and the Hon ble Delhi High Court in the case of Maxopp Investment 2011 (11) TMI 267 - Delhi High Court have held that such a lack of satisfaction should be on cogent grounds. Such provisions entailed in Section 14A are in the nature of safeguards with the intention to provide natural justice to the taxpayers before invoking the prescribed method which is only presumptive in nature. We find that in the instant case, even though the AO has given due opportunity to the assessee to explain its claim that only an amount of ₹ 17,20,346 was in the nature of expenses incurred for earning tax exempt income, however, he was not judicious in examining the claim and dismissed the same as such without any cogent reasoning or any sound basis. The assessee had given detailed explanation in respect of interest expenses and in the absence of identifying any specific expenses incurred for earning the exempt income, had disallowed relevant administrative expenses proportionately on turnover basis. No fault could be pointed out by the AO in it. In view of the above, we find that the Ld. CIT(A) has rightly held that the action of the AO of invoking the provisions of Rule 8D without on any cogent ground was unwarranted and not sustainable. - Decided against revenue.

Summary

Issues:
1. Disallowance under Section 14A of the Income Tax Act, 1961 based on Rule 8D calculation.
2. Assessment of interest expenses and administrative expenses for earning dividend income.

Analysis:
1. The case involved the Revenue appealing against the deletion of an addition of ?76,62,074 made by the Assessing Officer under Section 14A of the Income Tax Act, 1961. The Assessing Officer invoked Rule 8D for disallowance based on the assessee's investments in quoted shares and dividend income earned. The Commissioner of Income Tax (Appeals) allowed the assessee's appeal, leading to the Revenue's appeal before the Tribunal.

2. The Tribunal analyzed the facts, noting that the assessee had explained the basis for disallowance of interest and administrative expenses incurred for earning exempt income. The Assessing Officer had made disallowances under Rule 8D without sufficient reasoning, rejecting the assessee's explanations without proper examination. The Tribunal observed that the AO did not adequately consider the bank statements provided by the assessee regarding current investments and disallowances made. The Tribunal emphasized that the AO's lack of satisfaction should be based on cogent grounds, as per legal precedents.

3. The Tribunal found that the AO failed to judiciously examine the assessee's claims and dismissed them without proper reasoning. The assessee had provided detailed explanations for interest and administrative expenses, proportionately disallowing expenses based on turnover. The Tribunal agreed with the CIT(A) that the AO's invocation of Rule 8D without sufficient grounds was unwarranted and unsustainable. Consequently, the Tribunal upheld the CIT(A)'s decision to delete the addition, dismissing the Revenue's appeal.

4. In conclusion, the Tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s order. The judgment highlighted the importance of providing natural justice to taxpayers before invoking presumptive methods like Rule 8D under Section 14A of the Income Tax Act, ensuring assessments are based on cogent reasoning and thorough examination of the facts presented by the assessee.