Assessing Officer's Failure to Record Dissatisfaction with Disallowance Computation Vitiates Order

The Tribunal held that the Assessing Officer's failure to record dissatisfaction with the assessee's computation of disallowance under Section 14A vitiated the order. Consequently, the disallowance made by the AO was not upheld. The appeal of the assessee was allowed, and the grounds raised were accepted.

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Issues Involved:
1. Disallowance under Section 14A of the Income-tax Act read with Rule 8D(2)(iii) of the Income Tax Rules.
2. Methodology for computing disallowance under Section 14A.
3. Assessing Officer's satisfaction regarding the correctness of the assessee's claim.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income-tax Act read with Rule 8D(2)(iii) of the Income Tax Rules:
The assessee contested the disallowance of Rs. 39,40,500/- under Section 14A read with Rule 8D(2)(iii). The Assessing Officer (AO) computed the disallowance as per Rule 8D, which resulted in a higher disallowance than claimed by the assessee. The AO restricted the disallowance to Rs. 27,52,808/- after considering the assessee's suo moto disallowance of Rs. 19,72,280/-. The CIT(A) upheld the AO's order but deleted the double disallowance of STT paid of Rs. 7,78,804/-.

2. Methodology for computing disallowance under Section 14A:
The assessee argued that the CIT(A) did not follow the methodology adopted in preceding assessment years, which had been accepted by the Department. The assessee maintained a separate treasury department and applied a percentage of 28% to the total expenses incurred to compute the disallowance under Rule 8D. The Tribunal noted that the assessee's detailed working showed an amount of Rs. 19.72 lakhs attributable to the exempt income.

3. Assessing Officer's satisfaction regarding the correctness of the assessee's claim:
The primary contention was that the AO did not record any satisfaction regarding the incorrectness of the assessee's disallowance computation before applying Rule 8D. The Tribunal emphasized that as per the Hon'ble Supreme Court in the case of Godrej & Boyce Mfg. Co. Ltd. and the Hon'ble Delhi High Court in Maxopp Investment Ltd., the AO must first determine the correctness of the assessee's claim by examining the accounts. Only if the AO is not satisfied, can he apply Rule 8D. The Tribunal found that the AO did not record such dissatisfaction, thus invalidating the disallowance made under Section 14A read with Rule 8D.

Conclusion:
The Tribunal held that the AO's failure to record dissatisfaction with the assessee's computation of disallowance under Section 14A vitiated the order. Consequently, the disallowance made by the AO was not upheld. The appeal of the assessee was allowed, and the grounds raised were accepted.

Order Pronouncement:
The appeal of the assessee was allowed, and the order was pronounced in the open court on 10th June, 2015.

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