2022 (1) TMI 790 - HC - Income Tax

Disallowance u/s 14A r.w.r. 8D in rectification proceedings under Section 154 - Mandation of recording satisfaction - expenditure incurred for earning income exempt - HELD THAT - Assessee has to make a claim with regard to expenditure incurred for earning income which is not chargeable to tax, which requires to be examined by the AO and satisfaction has to be recorded, more particularly, when the Assessing Officer has not agreed with the disallowance claim under Section 14A of the Act. For disagreeing with such disallowance, deduction of the expenditure is not to be allowed which has been incurred by the assessee in relation to the income which does not form part of the total income under the Act as per Section 14A(1) of the Act. Such expenditure which has been incurred in respect of other income which has to be treated as part of the total income has to be considered under Section 14A(2) of the Act read with Rule 8D of the Rules, but suo moto disallowance under Section 14A of the Act made by the Assessing Officer is unwarranted. Recording of satisfaction by the Assessing Officer under Rule 8D(2) of the Rules is mandatory. In the light of these provisions, the Assessing Officer invoking Section 154(2) to rectify the assessment order is wholly untenable for the reason that there is no mistake apparent on the face of the record to invoke the proceedings under Section 154 of the Act. On the other hand, the matter requires adjudication upon the issue which is a debatable issue as pointed out by the Tribunal. In such circumstances, the order passed by the Assessing Officer under Section 154 of the Act and confirmed by the CIT(A) is unsustainable. On these material aspects, the Tribunal has rightly applied its mind and has reversed the finding of the authorities which cannot be faulted with. - Decided in favour of assessee.

Summary

Issues:
Appeal filed by Revenue challenging ITAT order on assessment year 2014-15, Disallowance of administrative expenses under Section 14A, Rectification proceedings under Section 154, Tribunal setting aside CIT(A) and AO's orders, Interpretation of Section 14A and Rule 8D.

Analysis:
The appeal before the Karnataka High Court involved the Revenue challenging the ITAT order related to the assessment year 2014-15. The respondent, a private limited company engaged in Software Development and IT support services, had filed its return of income which was selected for scrutiny assessment. The Assessing Officer disallowed administrative expenses against exempt dividend income under Section 14A. Subsequently, rectification proceedings under Section 154 were initiated, increasing the disallowance amount. The CIT(A) dismissed the appeal, but the ITAT allowed it, setting aside the rectification order.

The substantial questions of law raised were whether the Tribunal erred in setting aside the disallowance under Section 14A and the order passed under Section 154. The Revenue argued that the rectification under Section 154 was justified due to the apparent mistake in the assessment order, which the Tribunal overlooked. The assessee contended that the Tribunal correctly applied the mandates of Section 14A(2) based on the Supreme Court's judgment in Maxopp Investment Ltd. v. CIT.

The High Court analyzed Section 14A, Section 154, and Rule 8D to determine the correctness of the disallowance and rectification. It emphasized that the Assessing Officer must record satisfaction under Rule 8D(2) for disallowing expenditure related to non-taxable income. The Court found that the Assessing Officer's suo moto disallowance under Section 14A was unwarranted without following Rule 8D(2). Therefore, the rectification under Section 154 was deemed untenable as no apparent mistake existed. The Tribunal's decision to reverse the lower authorities was upheld as the issue was debatable and required adjudication.

In conclusion, the High Court ruled in favor of the assessee, dismissing the Revenue's appeal. The judgment highlighted the importance of following statutory provisions like Rule 8D for disallowing expenses related to non-taxable income under Section 14A, emphasizing the need for Assessing Officers to record satisfaction before making such disallowances.