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2022 (2) TMI 286 - HC - Income TaxDisallowance u/s 14A read with Rule 8D - no satisfaction had been recorded by AO to the effect that the disallowance proposed by the appellant was incorrect - HELD THAT - It is well settled in law that assessing officer has to record reasons for disagreeing with the claim of the assessee that it had incurred no expenditure for earning such exempt income. Even Rule 8D(1) requires the assessing officer to mandatorily record his satisfaction that the claim made by the assessee that no expenditure has been incurred in earning the exempt income is incorrect. See 'GODREJ BOYCE MANUFACTURING COMPANY LTD. 2017 (5) TMI 403 - SUPREME COURT From the perusal of the order passed by the assessing officer it is evident that the assessing officer has failed to record its satisfaction with regard to the claim of the assessee that it had incurred any expenses in earning the exempt income except a sum of ₹ 1,61,035/-. Therefore, in the absence of any satisfaction recorded by the assessing officer, the substantial question of law has to be answered in the negative. As fairly stated by learned Senior counsel that disallowance to the extent of ₹ 1,61,035/- which was proposed by the assessee itself has to be upheld. Therefore, the disallowance under Section 14A of the Act read with Rule 8D of the Rules is confined to the extent of ₹ 1,61,035/-. To the aforesaid extent, the orders passed by the Income Tax Appellate Tribunal, Commissioner of Income Tax (Appeals and the Assessing Officer are modified. The Assessing Officer is directed to disallow a sum of ₹ 1,61,035/- under Section 14A of the Act read with Rule 8D of the Rules. .
Issues:
1. Disallowance under Section 14A of the Income Tax Act, 1961 read with Rule 8D of the Rules without assessing officer's satisfaction on correctness of claim. 2. Correctness of disallowance made by the assessing officer beyond the voluntary disallowance by the assessee. 3. Interpretation of Section 14A of the Act and Rule 8D in relation to expenditure incurred in earning exempt income. Analysis: 1. The appeal involved a substantial question of law regarding the disallowance under Section 14A of the Act read with Rule 8D of the Rules without the assessing officer recording satisfaction on the correctness of the claim made by the assessee. The assessee, engaged in the business of processing and trading of ophthalmic lenses, received exempt dividend income. The assessing officer disallowed a significant amount under Section 14A, leading to subsequent appeals and remittance back to the assessing officer for fresh examination. 2. The Commissioner of Income Tax (Appeals) and the tribunal upheld the disallowance made by the assessing officer, prompting the assessee to appeal to the High Court. The senior counsel for the assessee argued that no further disallowance beyond the voluntary disallowance of a specific amount could be made without the assessing officer's satisfaction on the incorrectness of the claim. The counsel relied on relevant case laws to support the argument. 3. The High Court analyzed the provisions of Section 14A of the Act and Rule 8D, emphasizing the requirement for the assessing officer to record satisfaction on the correctness of the claim of the assessee regarding expenditure incurred in earning exempt income. The Court observed that the assessing officer failed to record satisfaction beyond the voluntary disallowance made by the assessee. Consequently, the Court held that the disallowance under Section 14A read with Rule 8D should be confined to the extent of the voluntary disallowance made by the assessee, directing the assessing officer to disallow that specific amount. 4. In conclusion, the High Court disposed of the appeal by modifying the orders of the lower authorities, limiting the disallowance under Section 14A of the Act read with Rule 8D to the amount voluntarily disallowed by the assessee. The judgment clarified the importance of the assessing officer's satisfaction in disallowing expenditures related to earning exempt income, in accordance with the provisions of the Income Tax Act and relevant case laws.
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