2021 (3) TMI 1100 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - assessee had made suo motu disallowance on proportionate basis by taking proportion of personnel and administrative expenses which can held to be relatable for earning of the exempt income - HELD THAT - Admittedly, no interest expenditure is attributable for earning of exempt income. The only dispute is with regard to indirect expenditure under Rule 8D (2)(iii). Once the investment has been made in the earlier years and only if the dividend amount has been credited, then the only rational basis at the most could be the proportion of salary and administrative expenses. AO thereafter having regard to the accounts maintained by the assessee and the nature of expenses incurred was required to record his satisfaction that expenditure claimed by the assessee for earning of exempt income is incorrect or the expense disallowed by the assessee is not reasonable. It is only after recording of such satisfaction that Assessing Officer can proceed to make a disallowance under the prescribed method of Rule 8D and this is the mandate of Section 14A(2). In this case, the Assessing Officer has mechanically applied Rule 8D by stating that the expenditure incurred by the assessee towards exempt income, whether direct or indirect has to be disallowed in view of method provided under Rule 8D. There is no specific satisfaction of Assessing Officer as to how the claim made by the assessee is not tenable having regard to the nature of account maintained by the assessee and the nature of expenditure debited in the P L account, especially when the dividend has come from old investments and not fresh investment. Exactly on the same reasoning, this Tribunal in assessee's own case for all the earlier years right from Assessment Years 2005-06 to 2011-12 has deleted the disallowance made under Rule 8D(2)(iii). Thus, respectfully following the precedent in assessee's own case for the earlier years, we do not find any reason to sustain the disallowance which has been made by the Assessing Officer by mechanically applying Rule 8D. Accordingly, the appeal of the assessee is allowed.

Summary

Issues:
1. Disallowance of accrued interest on advances
2. Compliance with Section 145 of the Income Tax Act
3. Disallowance under Section 14A read with Rule 8D

Analysis:

Issue 1: Disallowance of Accrued Interest on Advances
The appeal involved cross appeals by the assessee and the Revenue against an order related to the quantum of assessment passed for the Assessment Year 2012-13. The Revenue challenged the deletion of accrued interest on advances to certain companies, arguing against the application of res judicata in Income Tax proceedings. However, the Tribunal dismissed the Revenue's appeal due to the tax effect being below the prescribed limit, as per CBDT Circular No. 17/2019. Thus, the appeal filed by the Revenue was dismissed.

Issue 2: Compliance with Section 145 of the Income Tax Act
Regarding compliance with Section 145 of the Income Tax Act, the assessee raised concerns about the disallowance of expenses incurred in earning tax-free income under Section 14A read with Rule 8D. The assessee had earned dividend income claimed as exempt, but the Assessing Officer disallowed certain expenses under Rule 8D, resulting in an addition to the assessment. The assessee contended that the disallowance was not justified as the Assessing Officer did not record satisfaction regarding the expenses incurred for earning exempt income. The Tribunal noted that the Assessing Officer mechanically applied Rule 8D without proper satisfaction, leading to the disallowance. Citing precedent from earlier years, the Tribunal allowed the assessee's appeal, emphasizing the need for proper assessment before disallowing expenses under Rule 8D.

Issue 3: Disallowance under Section 14A read with Rule 8D
The Tribunal found that the Assessing Officer failed to provide specific satisfaction regarding the disallowance of expenses related to earning exempt income, especially when the dividend income was from old investments. As the disallowance was made without proper assessment, following the precedent set in the assessee's earlier cases, the Tribunal allowed the assessee's appeal and dismissed the Revenue's appeal. The Tribunal emphasized the importance of recording satisfaction before disallowing expenses under Rule 8D.

In conclusion, the Tribunal allowed the appeal of the assessee and dismissed the Revenue's appeal, emphasizing the need for proper assessment and satisfaction before disallowing expenses under Section 14A read with Rule 8D.