2024 (12) TMI 1212 - AT - Income Tax

Revision u/s 263 - disallowance u/s 14A read with Rule 8D - Effect of suo motu disallowance made by the assessee - HELD THAT - We are of the view that after examining the explanation of the assessee, the AO prima facie was satisfied with the correctness of the suo motu disallowance made by the assessee, having regard to its accounts. Hence, he did not discuss the issue in the body of the assessment order itself. By merely stating that the A.O. has not properly recorded his satisfaction, the revisionary authority cannot substitute the satisfaction of the A.O. with his own, that too, without making any enquiry himself. Coming to the enquiry part, ld. PCIT himself admits that assessee s case does not fall under no enquiry. According to ld. PCIT, the A.O. has made partial enquiry and has not carried the enquiry to its logical end. It is evident from the past history relating to the issue in dispute, the assessee has been consistently following a particular method for making suo motu disallowance u/s. 14A. Assessee s contention that in the past assessment years, the methodology adopted has been accepted, either at the stage of assessment or in appellate proceeding, remains uncontroverted. Therefore, if the A.O., having been satisfied with the explanation of the assessee, has accepted the suo motu disallowance, which is otherwise consistent with the methodology adopted by the assessee in past assessment years, in our view, the assessment order cannot be considered to be erroneous. Thus, assumption of jurisdiction u/s. 263 of the Act, is invalid. Decided in favour of assessee.

Summary

Issues Involved:

1. Validity of the order passed under Section 263 of the Income Tax Act, 1961.
2. Disallowance under Section 14A of the Income Tax Act read with Rule 8D.
3. Jurisdiction and satisfaction of the Assessing Officer (AO) regarding the suo motu disallowance made by the assessee.

Detailed Analysis:

1. Validity of the Order Passed Under Section 263:

The core issue in this appeal was the validity of the order issued under Section 263 by the Principal Commissioner of Income Tax (PCIT), which sought to revise the assessment order for the assessment year 2018-19. The PCIT contended that the assessment order was erroneous and prejudicial to the interests of the Revenue because the AO accepted the assessee's suo motu disallowance without applying Rule 8D for the calculation of disallowance under Section 14A. However, the Tribunal found that the AO had conducted a thorough enquiry and applied his mind to the facts and materials on record before accepting the assessee's computation. The Tribunal held that the PCIT's assumption of jurisdiction under Section 263 was invalid because the conditions for invoking this section, namely that the order must be erroneous and prejudicial to the Revenue, were not cumulatively satisfied.

2. Disallowance Under Section 14A Read with Rule 8D:

The dispute centered around the disallowance of expenses related to exempt income under Section 14A read with Rule 8D. The assessee had earned exempt income and made a suo motu disallowance of expenses. The PCIT argued that the disallowance should have been computed as per Rule 8D. However, the Tribunal noted that the AO had enquired into the assessee's method and was satisfied with the correctness of the suo motu disallowance, having regard to the accounts. The Tribunal emphasized that the AO's satisfaction regarding the disallowance is crucial, and if satisfied, there is no obligation to record this satisfaction in the assessment order.

3. Jurisdiction and Satisfaction of the AO:

The Tribunal examined whether the AO had properly exercised jurisdiction and applied his mind to the disallowance issue. It was found that the AO had issued a notice under Section 142(1) specifically questioning the disallowance, and the assessee had provided detailed responses justifying its computation. The Tribunal concluded that the AO's decision to accept the assessee's computation was a possible view and that the PCIT's revisionary authority could not substitute the AO's satisfaction with its own without conducting an independent enquiry. The Tribunal highlighted that the AO's satisfaction is paramount under Section 14A(2) and Rule 8D(1), and the PCIT failed to demonstrate that the AO's action was erroneous and prejudicial to the Revenue.

In conclusion, the Tribunal allowed the appeal, reversed the order under Section 263, and restored the original assessment order, affirming the AO's acceptance of the assessee's disallowance methodology.