2022 (1) TMI 995 - HC - Income Tax

Disallowance u/s 14A r.w.r.8D - mandation of recording satisfaction - whether rule 8D of the Income Tax Rules, 1962 could have been invoked by the AO without examining the correctness of the assessee s claim of expenditure in relation to exempt income and without recording reasons as to why such a claim was not correct or acceptable? - HELD THAT - The provisions of Section 14A has to be interpreted, particularly, the words that in relation to the income that does not form part of total income. Therefore, it was held that the principle of apportionment of expenses comes into play as that is the principle which is incorporated in Section 14A of the Act. With regard to as to how the power under Section 14A(2) read with rule 8D of the Rules could be invoked it was pointed out that the assessing officer needs to record satisfaction that having regard to the kind of the assessee suo motu disallowance under Section 14A was not correct and it will be in those cases where the assessee in his return has himself apportioned but the assessing officer was not accepting the said apportionment. In any event, the assessing officer will have to record its satisfaction to the said effect. AO has not recorded satisfaction and when this was pointed out before CIT(A) the same was not decided by the CIT(A), the issue was also not decided by the Tribunal when the assessee raised the same, though the grounds have been noted. The Tribunal has not rendered any decision on the said point but granted partial relief to the assessee with regard to the interest alone. See ASHISH JHUNJHUNWALA 2015 (12) TMI 905 - CALCUTTA HIGH COURT and BRITANNIA INDUSTRIES LIMITED 2018 (9) TMI 152 - CALCUTTA HIGH COURT See Godrej and Boyce Manufacturing Company Limited 2010 (8) TMI 77 - BOMBAY HIGH COURT wherein it was held that the law postulates the recording of satisfaction as the requirement to be complied with by the assessing officer. Thus the appeals are allowed and substantial questions of law are answered in favour of the assessee, and the matter stands remanded to the Tribunal to decide the aforementioned issue namely with regard to whether the assessing officer has recorded his satisfaction as required to be done under Section 14A(2) before invoking the computation mode as specified in Rule 8D(2)(iii). As observed earlier, the relief granted to the assessee by the Tribunal for assessment years 2008-2009 and 2009-2010 by the CIT (A) for the assessment years 2011-2012 with regard to the interest portion shall stand affirmed. Tribunal while remanding the matter to the assessing officer particularly directed consideration of the investment which yielded dividend income to the assessee for computing the disallowance under Section 14A read with R. 8D (2) of the Rules. Whatever relief has been granted to the assessee by the Tribunal under the said head shall remain intact

Summary

Issues:
1. Invocation of rule 8D without examining correctness of assessee's claim of expenditure for exempt income.
2. Mechanical application of rule 8D for computing disallowance under Section 14A.

Analysis:
The judgment by the High Court of Calcutta involved appeals challenging orders passed by the Income Tax Appellate Tribunal related to the invocation of rule 8D of the Income Tax Rules, 1962 without examining the correctness of the assessee's claim of expenditure for exempt income and the mechanical application of rule 8D for computing disallowance under Section 14A of the Income Tax Act, 1961. The Assessing Officer had disallowed specific amounts for the assessment years 2008-09 and 2009-10 without properly examining the assessee's claims and reasons for disallowance. The CIT(A) and the Tribunal had not adequately addressed the concerns raised by the assessee regarding the application of rule 8D.

The High Court referred to the decision of the Hon'ble Supreme Court in the case of Maxopp Investment Ltd. vs. Commissioner of Income Tax, emphasizing the need for the Assessing Officer to record satisfaction before invoking rule 8D for disallowance under Section 14A. The Court highlighted the importance of examining the correctness of the assessee's claim before applying the computation method provided in rule 8D. The Court also cited previous decisions emphasizing the requirement for the Assessing Officer to record satisfaction and the need for a proper examination of the assessee's claim before resorting to rule 8D.

The High Court allowed the appeals, answering substantial questions of law in favor of the assessee. The matter was remanded to the Tribunal to determine whether the Assessing Officer had recorded satisfaction as required under Section 14A(2) before invoking the computation mode specified in rule 8D(2)(iii). The relief granted to the assessee regarding the interest portion was affirmed. The Tribunal was directed to consider the investment yielding dividend income for computing disallowance under Section 14A and to ensure compliance with the recording of satisfaction by the Assessing Officer as mandated under the law.

In conclusion, the High Court's judgment provided a detailed analysis of the issues related to the invocation of rule 8D without proper examination of the assessee's claim and the mechanical application of rule 8D for computing disallowance under Section 14A. The judgment emphasized the importance of the Assessing Officer recording satisfaction and examining the correctness of the assessee's claim before applying rule 8D, in line with relevant legal precedents and the provisions of the Income Tax Act.