2021 (12) TMI 1254 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - Mandation of recording satisfaction - HELD THAT - Section 14A(2), read with rule 8D of the Rules provides that before applying the theory of apportionment in form of Rule 8D. Assessing Officer needs to record his satisfaction that having regard to the kind of the assessee, it is incorrect that assessee has not incurred any expenditure in relation to exempt income. Unless that satisfaction is shown from the assessment order, the ld AO cannot jump to the stage of apportionment by applying Rule 8 D. As in present case Id AO has considered all the expenses debited in the profit and loss account including depreciation allowance for disallowance u/s 14A of the Act. In view of our finding that the learned assessing officer has failed to record any satisfaction about the correctness of the claim of the assessee, orders of lower authorities are reversed. Therefore, we direct the learned assessing officer to delete the disallowance made under section 14A of the Act. Accordingly, we reverse the order of the lower authorities and allow the appeal of the assessee.

Summary

Issues:
Disallowance under section 14A - Incorrect calculation and recording of satisfaction by assessing officer, interpretation of rule 8D(2), delay in filing appeal due to Covid-19 lockdown.

Analysis:
1. The appeal was filed against the disallowance of ?2,97,991 76/- under section 14A for the assessment year 2018-19. The assessing officer determined the disallowance based on the exempt income earned by the assessee from investments in partnership firms and dividend income. The disallowance was confirmed by the Commissioner of Income-tax (Appeals).

2. The delay in filing the appeal was attributed to the Covid-19 lockdown, leading to an 18-day delay. The Tribunal condoned the delay considering the exceptional circumstances.

3. The authorized representative argued that the assessing officer did not record satisfaction regarding the correctness of the claim that no expenditure was incurred for earning exempt income before quantifying the disallowance under rule 8D(2). It was contended that only investments generating tax-free income should be considered for disallowance. The CIT (A) upheld the disallowance without providing reasons, which was challenged.

4. The departmental representative supported the lower authorities, stating that the interpretation of the old rule 8D was being referenced, not the amended rules.

5. The Tribunal observed that the assessing officer failed to record satisfaction on the claim of no expenditure for earning exempt income. The disallowance of ?2,97,99,176/- was found to be incorrect as only a portion of the total expenditure could be considered for disallowance. The Tribunal reversed the lower authorities' decision and directed the assessing officer to delete the disallowance under section 14A.

6. Consequently, the appeal of the assessee was allowed, and the order was pronounced on 23.12.2021.