2016 (2) TMI 514 - AT - Income Tax

Appellate Tribunal directs deletion of additional disallowance under Income Tax Act, emphasizing procedural requirements

The Appellate Tribunal ruled in favor of the appellant, directing the Assessing Officer to delete the additional disallowance under section 14A of the ... Disallowance u/s 14A - Held that:- We find that the assessee had voluntarily disallowed a sum of ₹ 4,67,484/- u/s 14A of the Act with some basis. We find that the assesee does not have any debt funds and hence no interest is debited. The fact is that no investments were made during the previous year relevant to Asst Year 2009-10 out of the money borrowed from outside the company. Thus there is no element of interest cost involved in connection with investment made during the year. The Learned AO without controverting the said workings and without recording his satisfaction with cogent reasons as to why the said figure is incorrect, directly embarked on invoking Rule 8D(2) of the Rules. In our opinion, this action of the Learned AO is not in accordance with law. We hold that the satisfaction need to be recorded in terms of Rule 8D(1) by the Learned AO and not by the Learned CIT-A We also find lot of force in the alternative arguments of the Learned AR that only investments yielding exempt income should be considered for the purpose of disallowance u/s 14A read with Rule 8D of the Rules. - Decided in favour of assessee Issues:1. Disallowance under section 14A of the Income Tax Act, 1961.Analysis:The appeal in question concerns the disallowance under section 14A of the Income Tax Act, 1961, amounting to Rs. 12,24,192. The primary issue to be decided is whether this disallowance was justified in the given circumstances. The assessee had voluntarily disallowed a sum of Rs. 4,67,484 under section 14A, but the Assessing Officer (AO) proceeded to make a higher disallowance without providing detailed workings or justifications. The AO's order lacked specifics on the disallowance calculation and investments held by the assessee. The Commissioner of Income Tax (Appeals) upheld the AO's decision, leading to the appeal before the Appellate Tribunal.The appellant raised several grounds challenging the disallowance, arguing that the AO did not provide valid reasons for disregarding the initial estimate made by the assessee. The appellant contended that the disallowance should have been restricted to the amount voluntarily offered. The appellant also highlighted previous orders in their favor regarding the percentage of tax-free income considered as reasonable expenses for disallowance under section 14A.During the proceedings, the appellant's representative presented the basis for the voluntary disallowance, which included considering a portion of certain individuals' salaries as expenses attributable to earning exempt income. The AO's failure to record satisfaction as required by Rule 8D(1) before invoking Rule 8D(2) was a key argument raised by the appellant.The Appellate Tribunal found merit in the appellant's contentions. It noted that the AO had not provided valid reasons for disregarding the initial disallowance figure and directly applying Rule 8D(2). The Tribunal emphasized the importance of the AO recording satisfaction as per Rule 8D(1) and cited relevant judicial precedents supporting this position. Additionally, the Tribunal agreed with the appellant's argument that only investments yielding exempt income should be considered for disallowance under section 14A.Based on the facts and legal principles presented, the Appellate Tribunal directed the AO to delete the additional disallowance and accept the initial voluntary disallowance of Rs. 4,67,484. The Tribunal allowed the appellant's grounds and ultimately allowed the appeal, ruling in favor of the assessee.In conclusion, the judgment highlights the significance of proper justification and adherence to procedural requirements by tax authorities when making disallowances under section 14A of the Income Tax Act, 1961. It underscores the need for detailed workings and valid reasons before increasing disallowance amounts beyond what the assessee has voluntarily offered.