2014 (12) TMI 27 - AT - Income Tax

Tribunal rules in favor of taxpayer, emphasizing need for Assessing Officer to record dissatisfaction before disallowing expenses.

The Tribunal allowed the appeal filed by the assessee, directing the Assessing Officer to delete the disallowance of expenses related to exempt dividend ... Expenditure towards exempted dividend income disallowed u/s 14A r.w. section 8D – Held that:- The assessee had declared dividend income from mutual funds which it claimed as exempt - no borrowed fund has been utilised towards investment in the mutual funds, the income of which has been claimed as exempt - the AO disallowed an amount of ₹ 3,03,823/- being expenditure incurred for earning the dividend income u/s. 14A r.w. Rule 8D which has been upheld by the CIT(A) - the AO has not recorded any satisfaction with reference to accounts of assessee nor rejected the claim that no expenditure was incurred – following the decision in Raj Shipping Agencies Ltd. Versus Additional Commissioner of Income-tax [2013 (12) TMI 995 - ITAT MUMBAI] - The AO has to examine the accounts of the assessee first - If he is not satisfied with the correctness of the claim, then only he can invoke rule 8D - No such examination was made or satisfaction was recorded by the Assessing Officer - The AO has not considered the claim of the assessee at all and he has straightway embarked upon computing disallowance under rule 8D - The disallowance u/s 14A required finding of incurring of expenditure. Assessee has offered most of the income under the tonnage tax scheme - the disallowance need not be made on entire expenditure made as the assessee's income from shipping related activity was assessed under section 115VA on presumptive basis – When the income of the assessee from the business of operating ships is computed as per the special provisions contained in Chapter XII-G, only the expenses incurred by the assessee for earning income of the said business are deemed to be allowed and nothing else - The income of the assessee from the business of operating ships having been computed in accordance with the provisions of Chapter XII-G, only the expenses incurred for the said business are deemed to have been allowed and no addition to such income can be made by way of disallowance u/s 14A on account of any expenditure incurred in relation to earning of exempt dividend income – thus, the order of the CIT(A) is set aside and the AO is directed to delete the addition – Decided in favour of assessee. Issues Involved:1. Disallowance of expenses related to exempt dividend income under Section 14A read with Rule 8D of the Income Tax Rules.Analysis of the Judgment:1. Disallowance of Expenses Related to Exempt Dividend Income:The only effective ground raised by the assessee was that the CIT(A) erred in sustaining the disallowance of expenses of Rs. 3,03,823/- as related to exempt dividend income of Rs. 21,90,651/- under Section 14A read with Rule 8D of the Income Tax Rules. The assessee argued that no expenditure was incurred for earning the dividend income, and hence the disallowance made by the Assessing Officer (A.O.) was not justified.Facts of the case reveal that the assessee, a company engaged in manufacturing, trading, and servicing of machines, received dividend income of Rs. 21,90,651/- which was claimed as exempt. The A.O. noted that the assessee had not made any disallowance under Section 14A. Upon questioning, the assessee explained that no expenditure was incurred for earning the dividend. However, the A.O. disallowed Rs. 3,03,823/- under Section 14A read with Rule 8D due to the absence of supporting evidence.Before the CIT(A), the assessee provided detailed explanations, stating that the entire investment in mutual funds was made from its own funds and not from borrowed funds. The dividend income was credited directly to the bank account via ECS, and no separate expenses were incurred for earning it. Despite these explanations, the CIT(A) upheld the disallowance, distinguishing various decisions cited by the assessee.On appeal, the assessee's counsel argued that no direct or indirect expenses were incurred for earning the dividend income, and the entire investment was made from own capital and reserves. The counsel referenced the Tribunal's decision in Raj Shipping Agencies Ltd. Vs. Addl.CIT, where under similar circumstances, the disallowance was deleted due to the A.O.'s failure to record any dissatisfaction with the assessee's accounts or claims.The Tribunal considered the rival arguments, perused the orders of the A.O. and CIT(A), and reviewed the cited decision. It found that the A.O. had not recorded any satisfaction with the assessee's accounts or claims regarding no expenditure incurred. The Tribunal noted that the facts of the instant case were identical to those in Raj Shipping Agencies Ltd., where the disallowance was deleted due to the A.O.'s failure to record dissatisfaction with the assessee's claims.The Tribunal emphasized that the A.O. must record dissatisfaction with the correctness of the assessee's claim before invoking Rule 8D. It cited various judgments, including those from the Bombay High Court and Delhi High Court, which stressed the necessity of the A.O. recording dissatisfaction before determining disallowance under Section 14A read with Rule 8D. The Tribunal also referenced the Punjab & Haryana High Court's ruling in CIT vs. Hero Cycles Ltd., which held that disallowance under Section 14A is not sustainable if no expenditure is incurred for earning exempt income.In light of these precedents and the absence of any contrary material from the Departmental Representative, the Tribunal set aside the CIT(A)'s order and directed the A.O. to delete the addition. The appeal filed by the assessee was allowed.Pronounced in the Open Court on 11-02-2014.