2022 (8) TMI 584 - AT - Income Tax

Disallowance u/s 14A r.w.r. 8D - Mandation of recording satisfaction - HELD THAT - Section 14A of the Act provides that no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does in form part of the total income under this Act., if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred in relation to income which does in form part of the total income, the Assessing Officer can determine the amount of such expenditure after having regard to the accounts of the assessee. The satisfaction as required to be recorded under the provisions of section 14A is not limited to merely disagreeing with the submission of the assessee and requires that the AO should also provide the basis for reaching such conclusion, after having regard to the accounts of the assessee. In the present case, assessee is an investor in shares as well as also does trading in shares under proprietary firm i.e. M/s Gaurav Trading Company. Assessee claimed to have maintained separate books of account for the aforesaid two activities. Dividend income was earned by the assessee in his personal account. The assessee has also claimed to have incurred expenditure in his personal account. The expenditure incurred on personal account by the assessee was not claimed as deduction and thus, no question arises of disallowing any part of such expenditure. As during assessment 2011-12, AO only took into account the exempt income forming part of the personal account, for the purpose of invoking the provisions of section 14A - Assessing Officer as well as learned CIT(A) though alleged that common pool of human and financial resources have been utilised to earn the income, however, failed to appreciate that the assessee has already recorded expenditure incurred in personal account, which has also not been claimed as deduction by the assessee. Therefore, no basis for upholding the disallowance made by the Assessing Officer under section 14A read with Rule 8D - Decided in favour of assessee.

Summary

Issues Involved:
1. Condonation of delay in filing the appeals.
2. Disallowance under section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962 for assessment years 2011-12 and 2013-14.

Issue-wise Detailed Analysis:

1. Condonation of Delay in Filing the Appeals:

The appeals filed by the assessee were delayed by 411 days. The assessee requested condonation of delay due to old age and medical problems, supported by an affidavit. The Departmental Representative did not raise serious objections. The Tribunal, after considering the reasons provided and the supporting affidavit, found sufficient cause for the delay and condoned it, allowing the appeals to be decided on merits.

2. Disallowance under Section 14A read with Rule 8D:

Assessment Year 2011-12:

The assessee, an individual engaged in trading securities and holding investments, filed a return declaring a total income of Rs. 32,41,597. The assessee received exempt income in the form of dividends and long-term capital gains but did not allocate any expenses towards earning this income. The Assessing Officer (AO) disallowed Rs. 11,94,665 under section 14A read with Rule 8D, attributing a portion of the expenses to the tax-free income. The CIT(A) upheld this disallowance.

The Tribunal noted that the AO did not record specific satisfaction as required under section 14A(2) regarding the correctness of the assessee's claim of no expenditure for earning exempt income. The Tribunal emphasized that the AO must provide a basis for such a conclusion after examining the accounts. Since the assessee maintained separate accounts for personal and business activities and did not claim personal account expenses as deductions, the Tribunal found no basis for the disallowance. The Tribunal directed the AO to delete the disallowance, allowing the assessee's appeal.

Assessment Year 2013-14:

In this year, the AO considered the entire exempt income, both from trading and personal accounts, for disallowance under section 14A read with Rule 8D. The assessee had suo-moto offered Rs. 7,144 as expenditure for earning dividend income in the trading account, which the AO rejected, disallowing Rs. 16,62,672 instead.

The Tribunal observed that the AO included the entire salary expenses in the trading account for disallowance, which was illogical as it implied no salary expenditure for the business. The Tribunal also noted that the direct salary expenditure was nominal compared to the business income. The AO's rejection of the suo-moto disallowance offered by the assessee lacked basis. Following the same reasoning as for the earlier year, the Tribunal found no justification for the disallowance and directed the AO to delete it, allowing the assessee's appeal.

Conclusion:

The appeals for both assessment years 2011-12 and 2013-14 were allowed, with the Tribunal directing the deletion of the disallowances made under section 14A read with Rule 8D. The Tribunal emphasized the necessity for the AO to record specific satisfaction and provide a basis for disallowance after examining the accounts of the assessee.