2019 (4) TMI 508 - AT - Income Tax

Disallowance u/s. 14A - mandation of recording of satisfaction as envisaged u/s. 14A(2) and (3) as pre-condition before making any disallowance under Rule 8D - HELD THAT - It is a well settled law that road to Rule 8D passes through section 14A(2) and (3) of the Act. Thus, recording of satisfaction as envisaged u/s. 14A(2) and (3) is a mandatory pre-condition before making any disallowance under Rule 8D. The law has been laid down in an unambiguous manner in the case of Godrej & Boyce Manufacturing Company Limited Vs. Deputy Commissioner of Income Tax & Anr. 2017 (5) TMI 403 - SUPREME COURT OF INDIA . The manner of recording of satisfaction has not been laid down either under the Act or the Rules. The manner of recording satisfaction by the AO whether it conforms to the provisions of section 14A is a subjective assessment. The basic requirement is that the AO should express in his satisfaction the reasons for disagreeing with assessee qua suo-moto non disallowance/insufficient disallowance of expenditure incurred towards earning income exempt from tax. In the present case, the Assessing Officer before invoking the provisions of Rule 8D has issued show cause to the assessee. The assessee gave detailed reply citing various decisions. The Assessing Officer after considering the reply of assessee negated the same giving reasons and thereafter made disallowance under Rule 8D. After perusal of the assessment orders for the impugned assessment years, it is satisfied that the AO has recorded his satisfaction as envisaged u/s. 14A(3). No merit in the submissions and grounds raised by the assessee assailing the invoking of provisions of section 14A. - Decided against assessee.

Summary

Issues:
Challenge against disallowance made under section 14A of the Income Tax Act, 1961.

Analysis:

1. Identical Issue in Appeals:
The appeals for assessment years 2013-14 and 2014-15 were filed against the orders of the Commissioner of Income Tax (Appeals)-1, Aurangabad, both dated 19-03-2018, with the solitary issue being disallowance under section 14A of the Income Tax Act, 1961.

2. Assessee's Argument:
The Assessing Officer invoked Rule 8D without recording satisfaction as required under section 14A(2) and (3) of the Act. The exempt incomes for the relevant periods were share in profit from a partnership firm and dividend income. The assessee contended that the recording of satisfaction is a pre-condition before applying Rule 8D, citing the Supreme Court's decision in Godrej & Boyce Manufacturing Company Limited case.

3. Revenue's Defense:
The Department defended the impugned order, stating that the Assessing Officer did record satisfaction before making the disallowance under section 14A and Rule 8D.

4. Tribunal's Decision:
The Tribunal noted that satisfaction under section 14A(2) and (3) is mandatory before invoking Rule 8D, as established by the Supreme Court. While the Act and Rules do not specify the manner of recording satisfaction, it is a subjective assessment by the Assessing Officer. In this case, the Assessing Officer issued a show cause to the assessee, who responded with various decisions. After considering the reply, the Assessing Officer made the disallowance under Rule 8D, satisfying the requirements of section 14A(3). The Tribunal found no merit in the assessee's arguments challenging the disallowance.

5. Conclusion:
No other aspect challenging the disallowance under section 14A was raised by the assessee. The Tribunal upheld the impugned orders for both assessment years and dismissed the appeals of the assessee, resulting in the dismissal of both appeals.

In summary, the judgment focused on the mandatory requirement of recording satisfaction under section 14A(2) and (3) before making any disallowance under Rule 8D. The Tribunal emphasized the need for the Assessing Officer to express reasons for disagreeing with the assessee regarding the disallowance of expenditure towards tax-exempt income. The decision was based on the principles established by the Supreme Court and the specific circumstances of the case, ultimately leading to the dismissal of the appeals.