2019 (4) TMI 691 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D - disallowance suo-motu by the assessee - absence of recording of dissatisfaction on the correctness of the claim of the assessee of expenditure in relation to exempt income - CIT(A) has deleted the addition, mainly on the ground that no dissatisfaction as to the correctness of the claim of the assessee of expenditure incurred in relation to the exempt income, has been recorded either expressly or otherwise - HELD THAT - AO has noted that the assessee has not incurred any expenditure to earn the dividend income. This finding of the AO itself is not correct as while computing the addition in the computation portion of the assessment order, he himself has reduced the disallowance of ₹ 2,72,248/- out of disallowance computed on the basis of Rule 8D. Thus, it is evident that the Assessing Officer has not examined the correctness of the claim of the assessee of expenditure incurred in relation to exempt income. In absence of recording of dissatisfaction on the correctness of the claim of the assessee of expenditure in relation to exempt income, which is a prerequisite for invoking the Rule 8D of the Rules, the Assessing Officer is not justified in making the disallowance under Section 14A of the Act, invoking Rule 8D of the Rules. No infirmity in the order of the Ld. CIT(A) on the issue-in-dispute and accordingly, we uphold the same. The Grounds of the appeal of the Revenue are dismissed.

Summary

Issues:
- Disallowance under Section 14A of the Income-tax Act, 1961
- Correctness of the claim of expenditure in relation to exempt income
- Application of Rule 8D of the Income-tax Rule, 1962

Analysis:
1. Disallowance under Section 14A of the Income-tax Act, 1961:
The case involved an appeal by the Revenue and a cross objection by the assessee against the order of the Ld. CIT(A) for the assessment year 2010-11. The Assessing Officer had made a disallowance under Section 14A read with Rule 8D of the Income-tax Rule, 1962, which was challenged by the assessee. The Ld. CIT(A) deleted the addition, citing that no dissatisfaction regarding the correctness of the claim of expenditure in relation to exempt income was recorded by the Assessing Officer. The Tribunal upheld the decision of the Ld. CIT(A) as the Assessing Officer had not examined the correctness of the claim of the assessee, thereby dismissing the appeal of the Revenue.

2. Correctness of the claim of expenditure in relation to exempt income:
The key point of contention was whether the Assessing Officer had properly considered the claim of expenditure in relation to exempt income. The Ld. CIT(A) relied on precedents and held that without recording dissatisfaction on the correctness of the claim of expenditure, invoking Rule 8D of the Rules was not justified. The Tribunal agreed with this reasoning, emphasizing that the Assessing Officer's failure to examine the claim of expenditure correctly meant that the disallowance under Section 14A of the Act was not warranted.

3. Application of Rule 8D of the Income-tax Rule, 1962:
The Tribunal's decision focused on the application of Rule 8D in determining the disallowance under Section 14A. The Assessing Officer's failure to follow the procedure laid out in Rule 8D, coupled with the absence of dissatisfaction with the assessee's claim of expenditure, led to the dismissal of the Revenue's appeal. The Tribunal upheld the Ld. CIT(A)'s order, emphasizing the importance of correctly assessing the claim of expenditure in relation to exempt income before making any disallowance under Section 14A.

In conclusion, the Tribunal dismissed the appeal of the Revenue and the cross objection filed by the assessee, affirming the decision of the Ld. CIT(A) regarding the disallowance under Section 14A of the Income-tax Act, 1961. The judgment highlighted the necessity for the Assessing Officer to properly assess the claim of expenditure in relation to exempt income before invoking Rule 8D for making any disallowances.