2016 (7) TMI 905 - AT - Income Tax

Tribunal overturns disallowances for assessment years 2008-09 and 2009-10

Avis Tie Up Pvt. Ltd. Versus DCIT, Circle-11, Kolkata

The Tribunal allowed the assessee's appeal for the assessment years 2008-09 and 2009-10, overturning the disallowances made by the AO under Section 14A ... Disallowance under Rule 8D(iii) r.w.s. 14A - non recording of requisite satisfaction before making the disallowance - Held that:- AO has to record the satisfaction having regard to its books of account. In our view AO has not recorded the requisite satisfaction before making the disallowance u/s. 14A(2) of the Act. We also find that from the Memorandum Explaining the provision of Finance Bill, 2006 and CBDT in its Circular dated 28 of 2006 states that since the existing provision of Sec. 14A did not provide a method of calculating the expenditure incurred in relation to income which did not form part of the total income of assessee. There was a considerable dispute between the taxpayers and the Department for determining such expenditure as per section 14A of the Act. It was in this background, that sub-section (2) of Sec. 14A of the Act was inserted so as to provide an uniform method applicable in the situations where Assessing Officer is not satisfied with the correctness of the claim of assessee and such sub-section (3) of Sec. 14A of the Act clarify that the application of method would be attracted even under a situation where the assessee claimed that no expenditure at all was incurred in relation to earning of non-taxable income. In our considered view, it was necessary for the AO to arrive at applying the provision of the Act 14A of the Act to record the ‘satisfaction’ after having regard to its books of account. - Decided in favour of assessee Issues Involved:1. Disallowance under Rule 8D(2)(ii) and Rule 8D(2)(iii) read with Section 14A of the Income Tax Act, 1961.Issue-wise Detailed Analysis:1. Disallowance under Rule 8D(2)(ii) and Rule 8D(2)(iii) read with Section 14A of the Income Tax Act, 1961:Facts and Background:The assessee, a Private Limited Company holding a Non-Banking Financial Corporation (NBFC) license, filed its return of income for the assessment year 2008-09, declaring a total income of Rs. 2,62,49,220. The Assessing Officer (AO) disallowed Rs. 79,219 under Rule 8D(2)(ii) and Rs. 17,31,535 under Rule 8D(2)(iii) read with Section 14A of the Income Tax Act, 1961, as the assessee had earned tax-exempt income but had not disallowed any expenditure in relation to this exempt income in its books.Assessee's Argument:The assessee contended that no expenditure was incurred to earn the exempt income, and hence, no disallowance under Section 14A was warranted. It argued that the interest earned exceeded the interest paid, and the borrowings were used for making loans in the ordinary course of business. The assessee also provided a detailed allocation of expenses related to different business segments and claimed that only Rs. 3,63,114 could be subject to disallowance under Section 14A.CIT(A)'s Decision:The Commissioner of Income Tax (Appeals) upheld the AO's decision, stating that the AO was justified in making additions under Rule 8D(2)(ii) and 8D(2)(iii) read with Section 14A, as the assessee had not shown any expenditure for earning the exempt income.Tribunal's Decision:The Tribunal noted that the AO had not recorded the necessary satisfaction as required under Section 14A(2) before invoking Rule 8D. The Tribunal emphasized that the AO must record satisfaction with regard to the accounts of the assessee before making any disallowance under Section 14A. The Tribunal cited several judicial precedents supporting the need for recording such satisfaction, including the cases of Auchtel Products Ltd v. ACIT, ACIT vs. Sil Investment Ltd., and others.The Tribunal concluded that the AO had failed to record the requisite satisfaction and, therefore, the disallowance under Section 14A read with Rule 8D was not justified. Consequently, the Tribunal allowed the assessee's appeal for the assessment year 2008-09.For Assessment Year 2009-10:The facts for the assessment year 2009-10 were identical to those for the assessment year 2008-09, except for the amounts involved. Following its decision for the assessment year 2008-09, the Tribunal also allowed the assessee's appeal for the assessment year 2009-10.Conclusion:In summary, the Tribunal allowed both appeals of the assessee, reversing the disallowances made by the AO under Section 14A read with Rule 8D for both assessment years 2008-09 and 2009-10, due to the AO's failure to record the required satisfaction before making such disallowances.