2017 (11) TMI 1929 - AT - Income Tax

Tribunal Rules AO's Disallowance Unsustainable Due to Lack of Satisfaction Recording u/s 14A, Partly Allows Appeals.

Finolex Cables Limited Versus The Deputy Commissioner of Income Tax, Central Circle – 1 (2), Pune

The Tribunal found that the Assessing Officer (AO) failed to record satisfaction regarding the correctness of the assessee's disallowance under Section ... Disallowance u/s. 14A r.w. Rule 8D - suo-moto disallowance by assessee - HELD THAT:- In the present case we observe that during the course of assessment, AO after considering the submissions of assessee proceeded on to working of disallowance u/s. 14A r.w. Rule 8D without commenting or recording satisfaction qua suo-moto disallowance made by assessee. The right course of action for the Assessing Officer is to first examine correctness of assessee’s claim of disallowance made u/s. 14A. If the Assessing Officer is not satisfied with the correctness of the claim made by assessee, the Assessing Officer after recording objective satisfaction should have invoked the provisions of Rule 8D. In the instant case the Assessing Officer has not deliberated in his order as to what was the disallowance made by assessee, and as to why the disallowance made by assessee is incorrect. AO directly proceeded on to compute disallowance under Rule 8D without even taking note of suo-moto disallowance made by the assessee. CIT (A) has erred in coming to conclusion that the Assessing Officer has recorded satisfaction regarding applying Rule 8D. A perusal of assessment order reveals that the Assessing Officer at the outset asked the assessee to furnish explanation as to why proportionate amount of interest expenditure should not be disallowed under Rule 8D r.w. section 14A of the Act, instead of first examining the suo-moto disallowance made by assessee and seeking explanation from the assessee the manner of computation of such disallowance. The Assessing Officer proceeded on the premise as if disallowance u/s. 14A r.w. Rule 8D is automatic irrespective of the genuineness of claim made by assessee. In the case of Pr. Commissioner of Income Tax Vs. Reliance Capital Asset Management Ltd. [2017 (10) TMI 177 - BOMBAY HIGH COURT] has held that where Assessing Officer has not commented upon the correctness or otherwise of the assessee’s working of expenditure, formula prescribed in Rule 8D(2)(iii) could not have been applied to work out disallowance u/s. 14A. Hon’ble Bombay High Court in the case of Commissioner of Income Tax Vs. Ultra Tech Cement Ltd. [2017 (2) TMI 1005 - BOMBAY HIGH COURT] held that the Assessing Officer is required to record objective satisfaction for making disallowance of expenditure u/s. 14A - AO has made disallowance u/s. 14 r.w. Rule 8D in violation of the provisions of sub-section (2) to section 14A. Hence, the disallowance made by Assessing Officer is not sustainable. - Decided in favour of assessee. Issues Involved:1. Applicability of Section 14A and Rule 8D of the Income Tax Act, 1961.2. Requirement of recording satisfaction by the Assessing Officer before disallowance under Section 14A.Detailed Analysis:Issue 1: Applicability of Section 14A and Rule 8D of the Income Tax Act, 1961The primary issue in all four appeals is the disallowance under Section 14A of the Income Tax Act, 1961, read with Rule 8D. The assessee argued that the provisions of Rule 8D are substantive and not procedural, thus should not apply to the disallowance of Rs. 2,55,400/- considered reasonable and appropriate by the assessee. The assessee had made strategic investments in shares of a sister company, which were not for trading or earning dividend income. The dividend income was incidental to the investment, and the assessee had sufficient interest-free funds for such investments.However, the Assessing Officer (AO) enhanced the disallowance under Section 14A read with Rule 8D without recording reasons for rejecting the assessee's suo-moto disallowance. The AO did not provide specific findings on why the disallowance made by the assessee was insufficient. The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that the assessee did not make any disallowance under Section 14A before the AO.Issue 2: Requirement of Recording Satisfaction by the Assessing OfficerThe Tribunal emphasized that under Section 14A(2), the AO must record satisfaction regarding the correctness of the assessee's claim of expenditure related to income not forming part of the total income. This recording of satisfaction is a pre-condition for invoking Rule 8D. The AO must first verify the assessee's claim and then, if unsatisfied, proceed with Rule 8D.In this case, the AO did not record any satisfaction or reasons for rejecting the assessee's claim. The AO directly computed the disallowance under Rule 8D without considering the assessee's suo-moto disallowance. The CIT(A) erroneously concluded that the AO had recorded satisfaction regarding the application of Rule 8D, relying on a distinguishable case.The Tribunal noted that the AO asked the assessee to explain why proportionate interest expenditure should not be disallowed under Rule 8D, instead of first examining the assessee's disallowance. The AO's approach assumed that disallowance under Section 14A read with Rule 8D was automatic, contrary to the requirement of recording objective satisfaction.The Tribunal referred to the Bombay High Court's decision in the case of Commissioner of Income Tax Vs. Ultra Tech Cement Ltd., which held that the AO must record objective satisfaction for making disallowance under Section 14A. The Tribunal also cited the Jurisdictional High Court's decision in Pr. Commissioner of Income Tax Vs. Reliance Capital Asset Management Ltd., which held that without commenting on the correctness of the assessee's working of expenditure, Rule 8D(2)(iii) could not be applied.Conclusion:The Tribunal concluded that the AO made the disallowance under Section 14A read with Rule 8D in violation of the provisions of Section 14A(2). The disallowance was not sustainable, and thus, the appeals for the assessment years 2008-09 to 2011-12 were partly allowed. Ground Nos. 2 and 3 raised by the assessee were allowed, while ground No. 1 was dismissed as not pressed.Order Pronounced:The order was pronounced on Tuesday, the 28th day of November, 2017.