2014 (2) TMI 661 - AT - Income Tax

Income-tax Tribunal limits disallowance, rules Assessing Officer failed to justify enhancement.

The Tribunal held that the income-tax authorities were not justified in enhancing the disallowance under Section 14A to Rs.1,05,46,918. The Assessing ... Enhancement of disallowance u/s 14A of the Act – Dividend income - Held that:- The decision in GODREJ AND BOYCE MFG. CO. LTD. Versus DEPUTY COMMISSIONER OF INCOME-TAX AND ANOTHER [2010 (8) TMI 77 - BOMBAY HIGH COURT] followed - the satisfaction of the Assessing Officer with regard to the correctness or otherwise of the claim made by the assessee must be based on reasons and on relevant considerations - the invoking of rule 8D of the Rules in order to compute the disallowance u/s 14A of the Act is to be understood as being conditional on the objective satisfaction of the Assessing Officer with regard to the incorrectness of the claim of the assessee, having regard to the accounts of the assessee - Also in Maxopp Investment Ltd. & Ors. vs. CIT [2011 (11) TMI 267 - Delhi High Court ] - the requirement of the Assessing Officer embarking upon a determination of the amount of expenditure incurred in relation to exempt income in term of rule 8D of the Rules would be triggered only if the Assessing Officer records a finding that he was not satisfied with the correctness of the claim of the assessee in respect of such expenditure. The assessee made detailed submissions to the Assessing Officer that the determination of disallowance u/s 14A of the Act was based on the employee costs and other costs involved in carrying out this activity - assessee also explained that the shares which have yielded exempt income were acquired long back out of own funds and no borrowings were utilized - All the points raised by the assessee have not been addressed by the Assessing Officer and the same have been brushed aside by making a bland statement that the disallowance is 'not acceptable' - the Assessing Officer has not recorded any objective satisfaction in regard to the correctness of the claim of the assessee, which is mandatorily required in terms of section 14A(2) of the Act and therefore his action of invoking rule 8D of the Rules to compute the impugned disallowance is untenable – thus, the order set aside and the matter remitted back to the AO for fresh adjudication – Decided in favour of Assessee. Issues Involved:1. Justification of the enhanced disallowance under Section 14A of the Income-tax Act, 1961.2. Application of Rule 8D of the Income Tax Rules, 1962.3. Requirement of recording satisfaction by the Assessing Officer regarding the incorrectness of the assessee's claim.Detailed Analysis:1. Justification of the Enhanced Disallowance under Section 14A of the Income-tax Act, 1961:The primary issue in this appeal is whether the income-tax authorities were justified in enhancing the disallowance under Section 14A of the Act to Rs.1,05,46,918/- from the Rs.5,00,000/- disallowed by the assessee in its computation of total income. The assessee, a company engaged in the manufacture and sale of hot metal, pig iron, steel billets, and power generation, had declared a total income of Rs.58,17,36,890/- for the assessment year 2008-09, which included Rs.5,45,58,685/- as exempt dividend income under Section 10(38) of the Act. The assessee had disallowed Rs.5,00,000/- under Section 14A, stating it was the expenditure incurred in relation to the exempt income. However, the Assessing Officer calculated a disallowance of Rs.1,05,46,918/- using Rule 8D, leading to an additional disallowance of Rs.1,00,46,918/-.2. Application of Rule 8D of the Income Tax Rules, 1962:The Assessing Officer applied Rule 8D to compute the disallowance, which the assessee contested. The assessee argued that the pre-requisite for invoking Rule 8D was not satisfied, as the Assessing Officer did not record satisfaction about the incorrectness of the assessee's claim. The assessee justified the Rs.5,00,000/- disallowance by explaining that most investments yielding exempt income were made in preceding years and from profits of the current year. The assessee also referenced a previous assessment year where 5% of the exempt income was considered a fair estimate of expenditure, which would amount to Rs.27,27,934/- for the year under consideration.3. Requirement of Recording Satisfaction by the Assessing Officer:The CIT(A) upheld the Assessing Officer's disallowance, stating that the Assessing Officer had recorded satisfaction regarding the incorrectness of the assessee's claim and that Rule 8D was mandatory from the assessment year 2008-09. The assessee's counsel argued that the Assessing Officer failed to record any satisfaction about the incorrectness of the assessee's computation, a mandatory requirement as per the Hon'ble Bombay High Court in Godrej & Boyce Manufacturing Co. Ltd. vs. DCIT. The counsel pointed out that the Assessing Officer accepted there was no interest expenditure related to the exempt income, and no reasons were provided for rejecting the Rs.5,00,000/- disallowance. The Departmental Representative argued that the Assessing Officer's satisfaction was implied due to the lack of separate accounts for exempt income.Tribunal's Findings:The Tribunal emphasized that Section 14A(2) requires the Assessing Officer to record satisfaction about the incorrectness of the assessee's claim before invoking Rule 8D. The Tribunal found that the Assessing Officer did not provide reasons for rejecting the Rs.5,00,000/- disallowance and merely stated it was 'not acceptable.' The Tribunal noted that the assessee had provided detailed submissions, which were not addressed by the Assessing Officer. Therefore, the Tribunal concluded that the Assessing Officer did not record the mandatory satisfaction, making the invocation of Rule 8D untenable.Conclusion:The Tribunal held that the lower authorities were not justified in enhancing the disallowance under Section 14A to Rs.1,05,46,918/-. The Tribunal directed the Assessing Officer to retain the disallowance at Rs.5,00,000/- as returned by the assessee. The appeal of the assessee was allowed.