2021 (7) TMI 1396 - AT - Income Tax

Tribunal dismisses Revenue's appeals, emphasizes AO's need to record dissatisfaction before invoking Rule 8D

M/s. Lok Prakashan Ltd. Versus D.C.I.T, Circle-1 (3), Ahmedabad AND D.C.I.T, Circle-1 (3), Ahmedabad Versus The Principal Officer, Lok Prakashan Ltd.

The tribunal allowed the assessee's appeals and dismissed the Revenue's appeals across all assessment years, emphasizing the AO's requirement to record ... Disallowance u/s 14A r.w.r. 8D - Suo moto disallowance by assessee - Necessity of recording satisfaction - CIT(A) deleted the addition made by the AO with respect to interest disallowance observing that the amount of interest income shown by the assessee exceeds the amount of interest expenses and therefore there cannot be any disallowance - whether the AO can resort to the provisions of section 14A read with rule 8D without rejecting the suo-moto disallowance made by the assessee? - HELD THAT:- We find that the provisions of section 14A of the Act requires that the AO has to record the satisfaction after having regard to the accounts of the assessee as well as correctness of the claim of the assessee in respect of the expenditure incurred in connection with the exempted income. Admittedly, there was the disallowance made by the assessee against the exempted income. But the AO has not pointed out any defect in the disallowance made by the assessee. Thus in our considered view such act of the AO is in violation of the provisions of section 14A read with rule 8D of Income Tax Rule. As such, the AO was under the obligation to record the dissatisfaction about the correctness of the claim of the assessee. We find support and guidance from case of DCIT v/s Pidilite Industries Ltd. [2019 (6) TMI 470 - ITAT MUMBAI] wherein it was held that the AO has to form an opinion as to why the disallowance offered by the assessee, having regards to its accounts, was not satisfactory or correct. The aforesaid satisfaction of the AO is sine-qua-non, before acquiring jurisdiction under section 14A r.w. rule 8D - we are not convinced with the order of the ld. CIT-A and thus, we direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed. Nature of expenses - business development expenditure - Revenue or capital expenditure - HELD THAT:- As decided in assessee own case[2016 (11) TMI 1730 - ITAT AHMEDABAD] business development expenditure to be Revenue in nature - accordingly, we dismiss the ground of appeal of the Revenue. Issues Involved:1. Disallowance of expenditure under Section 14A read with Rule 8D of Income Tax Rules.2. Disallowance of business development expenditure.Issue-wise Detailed Analysis:1. Disallowance of Expenditure under Section 14A read with Rule 8D:The primary issue revolves around the disallowance of Rs. 44,26,707/- by the AO, confirmed by the Ld. CIT(A) under Section 14A read with Rule 8D. The assessee, a limited company engaged in printing and publishing newspapers, earned dividend income and other tax-free income, claiming them as exempt under Section 10 of the Act. The assessee made a suo-moto disallowance of Rs. 11,98,579/- under Section 14A. However, the AO calculated the disallowance as Rs. 57,05,060/- under Rule 8D, leading to an additional disallowance of Rs. 45,06,481/-.The Ld. CIT(A) deleted the interest disallowance of Rs. 79,774/- citing the Gujarat High Court judgment in PCIT vs. Nirma Credit and Capital, but confirmed the administrative expenses disallowance based on ITAT's decision in the assessee's own case for AY 2009-10. Both the assessee and the Revenue appealed.The tribunal noted that the AO did not record dissatisfaction with the assessee's suo-moto disallowance, violating Section 14A read with Rule 8D. The tribunal referenced the Mumbai Tribunal's decision in DCIT vs. Pidilite Industries Ltd., emphasizing that the AO must specify dissatisfaction with the assessee's disallowance before invoking Rule 8D. Consequently, the tribunal directed the AO to delete the disallowance, allowing the assessee's appeal and dismissing the Revenue's appeal.2. Disallowance of Business Development Expenditure:The second issue concerns the disallowance of Rs. 4,91,30,449/- on business development expenditure. The assessee launched various schemes to retain its customer base, which was affected by a competitor. The AO disallowed this expenditure, treating it as capital expenditure, despite ITAT's previous decisions allowing such expenses as revenue expenditure.The Ld. CIT(A) deleted the disallowance, referencing ITAT's consistent decisions in the assessee's favor for earlier years. The tribunal upheld the Ld. CIT(A)'s decision, noting that similar issues were decided in favor of the assessee in previous years, including AY 2010-11, where such expenditures were deemed revenue in nature. The tribunal dismissed the Revenue's appeal.Subsequent Appeals:For subsequent assessment years (2012-13, 2013-14, 2014-15, and 2015-16), similar issues were raised regarding disallowance under Section 14A and business development expenditure. The tribunal consistently applied its findings from the AY 2011-12 case, allowing the assessee's appeals and dismissing the Revenue's appeals for these years.Conclusion:In conclusion, the tribunal allowed the assessee's appeals and dismissed the Revenue's appeals across all assessment years, consistently applying its findings on the disallowance under Section 14A and business development expenditure. The tribunal emphasized the necessity for the AO to record dissatisfaction with the assessee's disallowance under Section 14A before invoking Rule 8D and upheld the treatment of business development expenditure as revenue expenditure based on ITAT's previous decisions.