2018 (1) TMI 1029 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D(2) of the Rules - Held that - It is the duty of the Ld. AO first to record satisfaction having regard to accounts of the assessee that the claim made by the assessee with regard to non-incurrence of any expenditure for the purpose of earning income, is incorrect with cogent reasons thereon. Without recording such satisfaction, the Ld. AO cannot proceed to make disallowance u/s14A of the Act read with Rule 8D of the Rules. In these facts and circumstances, we hold that no disallowance u/s 14A of the Act could be made in the instant case. Accordingly, ground no. 1 raised by the assessee is allowed. Disallowance made towards leave encashment - Held that - Hon ble Calcutta High Court in the case of Exide Industries Ltd vs Union of India reported in (2007 (6) TMI 175 - CALCUTTA High Court) had struck down the provisions of section 43B(f) of the Act. Hon ble Supreme Court 2008 (9) TMI 921 - SUPREME COURT had not stayed the judgement of the Calcutta High Court during Leave proceedings. But the Hon ble Supreme Court had only passed an interim order on the impugned issue. Hence we deem it fit and appropriate , in the interest of justice and fair play, to set aside this issue to the file of the ld AO to pass orders based on the outcome of the main appeal on merits by the Hon ble Supreme Court as stated supra. Accordingly Ground No. 2 raised by the assessee is allowed for statistical purposes.

Summary

Issues involved:
1. Disallowance made under section 14A of the Income Tax Act.
2. Disallowance of leave encashment under section 43B of the Income Tax Act.

Detailed Analysis:

1. Disallowance under section 14A of the Income Tax Act:
The appeal dealt with the disallowance made by the Assessing Officer (AO) under section 14A of the Income Tax Act, read with Rule 8D of the Rules. The Assessee, engaged in various businesses, had declared dividend income as exempt in the return of income. The AO made a disallowance without raising queries or recording proper satisfaction regarding the expenditure incurred for earning exempt income. The Commissioner of Income Tax (Appeals) (CIT(A)) upheld the disallowance. However, the Appellate Tribunal found that the AO had not followed the necessary procedures and did not record proper satisfaction as required by law. The Tribunal referenced decisions of the High Court emphasizing the importance of the AO recording satisfaction before making such disallowances. As the AO failed to do so in this case, the Tribunal held in favor of the Assessee, allowing the appeal on this ground.

2. Disallowance of leave encashment under section 43B of the Income Tax Act:
The second issue pertained to the disallowance of leave encashment claimed as an allowable expenditure by the Assessee. The AO disallowed it under section 43B(f) of the Act, a provision that was initially struck down by the Calcutta High Court as unconstitutional. However, the matter was taken to the Supreme Court, which issued interim orders regarding the enforcement of the provision. Considering the legal uncertainties and pending appeals, the Tribunal decided to set aside this issue and directed the AO to pass orders based on the outcome of the main appeal by the Supreme Court. Consequently, the Tribunal allowed the appeal on this ground for statistical purposes.

In conclusion, the Appellate Tribunal's judgment addressed the procedural lapses in the disallowance under section 14A and the legal uncertainties surrounding the disallowance of leave encashment under section 43B(f) of the Income Tax Act. The Tribunal provided detailed reasoning based on legal precedents and statutory provisions to decide in favor of the Assessee on both issues, ensuring a fair and just outcome in accordance with the law.