2022 (4) TMI 954 - AT - Income Tax

Disallowance u/s 14A r.w. Rule 8D - Dividend Income received from Mutual Fund - Suo moto disallowance made by assessee - mandation of recording satisfaction before making disallowance - HELD THAT - While making additional disallowance under section 14A of the Act, the Assessing Officer has not recorded any satisfaction as to how the claim of the assessee was incorrect and had resorted to the provisions under section 14A r.w. Rule 8D As against the voluntary disallowance made under section 14A of the Act by the assessee, the Assessing Officer has not recorded any satisfaction as to how the disallowance voluntarily made by the assessee is not correct and moreover, the AO has not given any findings in the assessment order with regard to the correctness in respect of expenditure incurred to earn exempt income. DR could not controvert the decision of the Hon ble Supreme Court in the case of Maxopp Investment Ltd. v. CIT 2018 (3) TMI 805 - SUPREME COURT which was followed by the Coordinate Benches of the Tribunal in the above cases to decide the issue in favour of the assessee. Thus, respectfully following the decision of the Coordinate Benches of the Tribunal in the case of Shriram Capital Limited 2022 (4) TMI 868 - ITAT CHENNAI as well as the decision of the Hon ble Supreme Court in the case of Maxopp Investment Ltd. v. CIT (supra), we hold that the Assessing Officer was not justified in making disallowance under section 14A of the Act. Thus, the ground raised by the assessee is allowed.

Issues Involved:
1. Disallowance under Section 14A read with Rule 8D.
2. Satisfaction of the Assessing Officer regarding the correctness of the assessee's disallowance under Section 14A.
3. Investments made for commercial expediency versus the intention of earning exempt income.
4. Applicability of Rule 8D(2)(ii) when investments are made out of own funds.
5. Exclusion of investments from which no exempt income was received for the purpose of computation of disallowance under Section 14A.

Detailed Analysis:

1. Disallowance under Section 14A read with Rule 8D:
The primary issue revolves around the disallowance made under Section 14A of the Income Tax Act, 1961, read with Rule 8D of the Income Tax Rules. The assessee had investments amounting to ?14,64,94,400 and received a dividend income of ?29,98,544. The assessee had suo motu disallowed ?4,900 as expenses pertaining to the exempt income. However, the Assessing Officer (AO) invoked Section 14A read with Rule 8D and determined the expenses to be ?75,16,020, which was subsequently restricted by the Commissioner of Income Tax (Appeals) [CIT(A)] to ?29,98,544.

2. Satisfaction of the Assessing Officer regarding the correctness of the assessee's disallowance under Section 14A:
The assessee argued that the AO did not record any satisfaction regarding the correctness of the voluntary disallowance of ?4,900 made by the assessee under Section 14A. The Tribunal observed that the AO had not recorded any satisfaction or provided findings on how the claim of the assessee was incorrect before resorting to the provisions of Section 14A read with Rule 8D. This principle was upheld by the Hon'ble Supreme Court in the case of Maxopp Investment Ltd. v. CIT, which mandates that the AO must record satisfaction regarding the incorrectness of the assessee's claim before making any additional disallowance.

3. Investments made for commercial expediency versus the intention of earning exempt income:
The assessee contended that the investments in subsidiary companies were made as a matter of commercial expediency and not with the intention of earning exempt income. This aspect was not specifically addressed in the Tribunal's decision, as the primary focus was on the lack of satisfaction recorded by the AO.

4. Applicability of Rule 8D(2)(ii) when investments are made out of own funds:
The assessee argued that the investments made during the year and in the earlier years were out of its own funds, and therefore, disallowance under Rule 8D(2)(ii) was not attracted. This argument was indirectly addressed by the Tribunal's reliance on the requirement for the AO to record satisfaction regarding the correctness of the assessee's disallowance.

5. Exclusion of investments from which no exempt income was received for the purpose of computation of disallowance under Section 14A:
The assessee cited various decisions, including those of the ITAT Chennai Bench and the Hon'ble Delhi High Court, which held that investments from which no exempt income was received should be excluded for the purpose of computation of disallowance under Section 14A read with Rule 8D. The Tribunal did not specifically address this argument, as the decision was primarily based on the AO's failure to record satisfaction.

Conclusion:
The Tribunal allowed the appeal filed by the assessee, holding that the AO was not justified in making the disallowance under Section 14A of the Act without recording satisfaction regarding the correctness of the assessee's voluntary disallowance. The Tribunal's decision was based on the principles laid down by the Hon'ble Supreme Court in the case of Maxopp Investment Ltd. v. CIT and followed by the Coordinate Benches of the Tribunal in similar cases. The appeal was allowed in favor of the assessee, and the disallowance made by the AO was deleted.

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