2018 (5) TMI 493 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - Held that - It is the mandatory requirement u/s 14A of the Act, 1961 and Rule 8D of the Income Tax Rules, 1962 to record satisfaction, and if the satisfaction/reasons are not mentioned the question of applying Rule 8D did not arise. On the aspect of administrative expenses being disallowed since there was a failure by the Assessing Officer to comply with the mandatory requirement of Section 14A(2) read with Rule 8D (1) (A) of the Rules record of satisfaction is required there under. The question of re-applying Rule 8D(2) (iii) of the Rules did not arise. In the present case also, the same does not arise. AO as well as the CIT(A) have failed to take into account the expenses incurred by the assessee and there was no satisfaction recorded by the Assessing Officer regarding invocation of Rule 8D. This legal aspect was overlooked by the Assessing Officer as well as by the CIT(A). Therefore, the order of the CIT(A) does not survive. - Decided in favour of assessee.

Summary

Issues Involved:
- Disallowance under Rule 8D (2) (iii) of Income Tax Rules, 1962
- Justification of disallowance u/s 14A in absence of nexus between expenditure and exempted income

Analysis:
1. The appeal was filed against the order of CIT(A) confirming an addition under Rule 8D (2) (iii) of Income Tax Rules, 1962. The assessee, engaged in Consultancy Services, declared income for Assessment Year 2014-15. The Assessing Officer observed investments in equity shares without disallowance u/s 14A. The AO issued a show cause notice for disallowance u/s 14A, leading to a disallowance of &8377; 7,18,693. The CIT(A) partly allowed the appeal.

2. The AR argued that Section 14A is invoked when expenses directly relate to exempted income. The AR contended that Rule 8D should not apply if no direct expense is linked to exempted income. The AR emphasized the necessity of the AO recording satisfaction for invoking Section 14A. The AR cited relevant court decisions to support the argument that Rule 8D should not be applied without establishing a nexus between expenses and exempted income.

3. The DR supported the CIT(A)'s decision, stating that disallowance under Rule 8D (2) (iii) was correctly determined by the AO. The DR highlighted the lack of explanation regarding the allocation of commission and salary expenses related to investments. The DR argued that indirect expenses should not be overlooked based on the books of accounts.

4. The Tribunal noted that the assessee's investments were made from self-generated sources, and no expenses were claimed on them. The Tribunal emphasized the necessity of recording satisfaction for invoking Section 14A, which the AO failed to do. The Tribunal held that Rule 8D should not apply if satisfaction is not recorded. The Tribunal concluded that the AO and CIT(A) overlooked the expenses incurred by the assessee and failed to record satisfaction for invoking Rule 8D, leading to the allowance of the assessee's appeal.

5. In conclusion, the Tribunal allowed the appeal of the assessee, emphasizing the mandatory requirement of recording satisfaction for invoking Section 14A and applying Rule 8D. The Tribunal held that the order of the CIT(A) did not survive due to the overlooked legal aspect by the AO and CIT(A) regarding the nexus between expenses and exempted income.