2019 (5) TMI 1714 - AT - Income Tax

Appellate Tribunal eases tax burden in complex case involving disallowance under Section 14A

Ratanlal Gaggar Versus DCIT, Circle-22, Kolkata

The Appellate Tribunal partially allowed the appeal of the assessee in a case involving disallowance under section 14A of the Income Tax Act, 1961, and ... Disallowance u/s 14A read with Rule 8D(2)(iii) - assessee had suo moto made the disallowance - HELD THAT:- AO had not applied his mind to the facts of this case. When the assessee had disallowed ₹ 25,000/- suo moto, the Assessing Officer proceeds on a presumption that no disallowance was made by the assessee. What the Assessing Officer had to record, is his satisfaction that the suo moto disallowance made by the assessee is, in his opinion, not correct or justified on the particular set of facts. It is not the case of the assessee that section 14A is not applicable to his case as alleged by the Assessing Officer. Thus no proper satisfaction as required in law was recorded by the Assessing Officer prior to invoking Rule 8D of the I.T. Rules. Hence we delete the disallowance u/s 14A and allow this appeal of the assessee. Undisclosed interest income - assessee’s contention is that the amounts, in question, was held by him as a trustee, in an escrow account, consequent to the orders passed by the Hon’ble Supreme Court in the legal proceedings - HELD THAT:- . We agree with the submissions of the assessee. In such facts no income can be brought to tax in the hands of the assessee. Never the less this issue requires enquiry to verify as to whether the assessee is merely a custodian of the funds under the directions of Hon’ble Court or not. Thus for the limited purpose, we set aside the matter to the file of A.O for fresh adjudication in accordance with law. The assessee is directed to appear before the ld. Assessing Officer and cooperate in the matter by producing all evidences, as may be directed by the Assessing Officer, in support of his claim. This ground is allowed for statistical purposes. Issues:1. Disallowance under section 14A of the Income Tax Act, 19612. Addition of undisclosed interest incomeIssue 1: Disallowance under section 14A of the Income Tax Act, 1961:The appellant, an individual solicitor, appealed against the disallowances made by the Assessing Officer under section 14A of the Act. The Assessing Officer disallowed a specific amount as the appellant had not responded to the query regarding exempted income. The Commissioner (Appeals) upheld the disallowance citing the Assessing Officer's satisfaction and application of Rule 8D(2)(iii). However, the Appellate Tribunal noted that the Assessing Officer did not record proper satisfaction before invoking Rule 8D. Referring to a Supreme Court judgment, the Tribunal held that the Assessing Officer must record satisfaction before applying the theory of apportionment. As the Assessing Officer had not applied his mind to the case and the appellant had made a suo moto disallowance, the Tribunal deleted the disallowance under section 14A, thus allowing the appeal of the assessee.Issue 2: Addition of undisclosed interest income:The second issue involved the addition made by the Assessing Officer regarding undisclosed interest income earned by the appellant. The appellant claimed that the amounts were held in trust in an escrow account as per orders of the Supreme Court and were returned to clients with accrued interest. The Tribunal agreed with the appellant's contention that the income did not belong to him but to his clients. However, it directed further investigation by the Assessing Officer to verify if the appellant was indeed a custodian of the funds under court directions. The matter was set aside for fresh adjudication, and the appellant was instructed to cooperate by providing necessary evidence. Consequently, the Tribunal allowed this ground for statistical purposes, partially allowing the appeal of the assessee.In conclusion, the Appellate Tribunal, in its judgment dated May 10, 2019, addressed the issues of disallowance under section 14A and addition of undisclosed interest income, providing detailed analysis and legal reasoning for each issue, ultimately partially allowing the appeal of the assessee.