2020 (1) TMI 614 - AT - Income Tax

Disallowance u/s 14A - Suomoto disallowance made by the assessee - HELD THAT - As in assessee's own case for the A.Y. 2011-12 AO did not point out in clear terms as to why the suomoto disallowance made by the assessee is not correct with reference to the books of accounts of the assessee. AO all along stated in the assessment order that only partial application of Rule 8D has been applied by the assessee and he has not pointed the incorrectness of the suomoto disallowance made by the assessee or as to why this is not adequate disallowance u/s. 14A of the Act to meet the expenses attributable for earning dividend income. In the circumstances, respectfully following the said decision, we direct the Assessing Officer to restrict the disallowance u/s. 14A of the Act only to the suomoto disallowance already made by the assessee and delete the balance disallowance.

Summary

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D of the Income Tax Act.
2. Satisfaction of the Assessing Officer regarding the correctness of the assessee's claim.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D of the Income Tax Act:
The appeal concerns the disallowance made under Section 14A of the Income Tax Act, which pertains to the expenditure incurred in relation to income not includible in total income, specifically dividend income. The Tribunal in the first round of appeal had directed the Assessing Officer (AO) to verify the correctness of the assessee's suomoto disallowance of ?1,16,36,172/- under Section 14A while computing its income. In the consequential assessment, the AO restricted the disallowance to ?37,89,019/- over and above the suomoto disallowance, but did not provide clear reasons for rejecting the assessee's suomoto disallowance with reference to its books of accounts. The AO merely stated that only partial application of Rule 8D was applied by the assessee without pointing out the incorrectness of the suomoto disallowance.

2. Satisfaction of the Assessing Officer regarding the correctness of the assessee's claim:
The assessee's counsel argued that the AO did not record objective satisfaction in invoking Rule 8D, despite the assessee's suomoto disallowance. The Tribunal in the assessee's own case for the A.Y. 2011-12 had restricted the disallowance under Section 14A to the suomoto disallowance made by the assessee, observing that the AO must record satisfaction regarding the incorrectness of the assessee's claim before invoking Rule 8D. The AO had failed to do so and mechanically applied Rule 8D without examining the accounts of the assessee and the correctness of the claim.

The Tribunal reiterated that the AO must record satisfaction under Section 14A(2) regarding the incorrectness of the assessee's claim before invoking Rule 8D. The AO's failure to comply with this statutory requirement invalidated the additional disallowance made over and above the assessee's suomoto disallowance. The Tribunal upheld the decision of the CIT(A), which had deleted the additional disallowance made by the AO, and directed the AO to restrict the disallowance under Section 14A to the suomoto disallowance made by the assessee.

Conclusion:
The appeal of the assessee was allowed, and the Tribunal directed the AO to restrict the disallowance under Section 14A to the suomoto disallowance already made by the assessee. The Tribunal emphasized the necessity for the AO to record satisfaction regarding the incorrectness of the assessee's claim before invoking Rule 8D. The order was pronounced in the open court on January 10, 2020.