2015 (4) TMI 477 - AT - Income Tax

Tribunal rules expenses disallowance under Income-tax Act Section 14A invalid. Proper satisfaction by Assessing Officer required.

M/s HPP Energy (India) Pvt. Ltd. Versus ACIT, Circle 12(1), New Delhi

The Tribunal held that the disallowance of expenses under Section 14A of the Income-tax Act, 1961 could not be sustained as neither the Assessing Officer ... Disallowance of expenses made u/s 14A - held that:- Provisions of Rule 8D are applicable for this assessment year for making any disallowance under Section 14A of the Act. However, the provisions of Section 14A are triggered when the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of expenditure claimed to have been incurred in relation to income, which does not form part of the total income under the Act. Section 14A(2) categorically provides that the Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, 'if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act'. No satisfaction was recorded to satisfy the mandate of sub-sections (2) and (3) of Section 14A. The position continued to remain same before the learned CIT(A) as well, who also simply upheld the view taken by the Assessing Officer without making good the deficiency left by the Assessing Officer. The position which, therefore, emerges is that neither the Assessing Officer nor the learned CIT(A) recorded the requisite satisfaction as required under Section 14A. In the absence of such satisfaction, there can be no disallowance as per Section 14A. In these peculiar facts when there is a deficiency in recording satisfaction, much less a proper satisfaction, in terms of sub-section (3) read with sub-section (2) of section 14A, we hold, that no disallowance could have been made or sustained on this score. As such, we order for deletion of addition of ₹ 3.78 lac made under Section 14A of the Act. - Decided in favour of assessee. Issues:Confirmation of disallowance of expenses made under Section 14A of the Income-tax Act, 1961.Analysis:Issue 1: Disallowance of expenses under Section 14AThe case involved the confirmation of disallowance of expenses made under Section 14A of the Income-tax Act, 1961. The Assessing Officer had called for details of exempt income and corresponding disallowance under Section 14A. The Assessing Officer calculated a disallowance based on Rule 8D due to the assessee's explanation being deemed unacceptable. The CIT(A) upheld this disallowance. However, the Tribunal noted that for disallowance under Section 14A, the Assessing Officer must be unsatisfied with the correctness of the assessee's claim regarding expenses related to exempt income. The Tribunal emphasized that satisfaction by the Assessing Officer is a prerequisite for invoking Section 14A. The Tribunal referred to legal precedents stating that if the Assessing Officer fails to record satisfaction, the CIT(A) can rectify this deficiency. In this case, neither the Assessing Officer nor the CIT(A) recorded the necessary satisfaction as per Section 14A. Therefore, the Tribunal held that the disallowance could not be sustained due to the absence of satisfaction, leading to the deletion of the addition made under Section 14A.The judgment highlighted the importance of the Assessing Officer's satisfaction in invoking Section 14A for disallowance of expenses related to exempt income. It clarified that without the requisite satisfaction, no disallowance could be made. The Tribunal emphasized the need for proper recording of satisfaction as per the provisions of Section 14A to uphold any disallowance. The decision underscored the significance of following legal procedures and requirements for making and confirming disallowances under tax laws.