2016 (12) TMI 753 - AT - Income Tax

Tribunal directs fresh examination on disallowance under section 14A

The Tribunal set aside the lower authorities' findings and directed a fresh examination by the AO to determine if the disallowance under section 14A r.w. ... Disallowance under section 14A r.w. Rule 8D - Held that:- The mandate of Rule 8D will follow as per the method prescribed for making disallowance under section 14A of the Act. In the case on hand, we find that the AO has gone directly to the second stage of invoking Rule 8D to make the disallowance under section 14A r.w. Rule 8D, only on the factually incorrect and uncorroborated assumption that the assessee agreed to disallowance thereunder; without considering or addressing the submission made by the assessee vide letter dated 05.11.2012 that no expenditure was incurred and rendering a finding on the correctness or otherwise of the assessee's claim that no expenditure was incurred by her to earn the exempt income which does not form part of total income. We therefore set aside the finding of the authorities below on this issue and restore the matter to file of the AO for fresh examination and adjudication of the issue of whether or not disallowance under section 14A r.w. Rule 8D is called for at all, after taking into consideration of our above observations and after affording the assessee adequate opportunity of being heard and examining the assessee's claims in this regard. We hold and direct accordingly. - Decided in favour of assessee for statistical purposes. Issues:Challenge to disallowance under section 14A r.w. Rule 8D for A.Y. 2010-11.Detailed Analysis:Issue 1: Disallowance under section 14A r.w. Rule 8DThe assessee contested the disallowance under section 14A r.w. Rule 8D, arguing that no expenditure was incurred for earning exempt dividend income. The AO made the disallowance without addressing the assessee's detailed explanation that investments were managed by a bank not charging fees. The disallowance included interest on a car loan, which the assessee claimed had no connection to exempt income. The AO's lack of clarity and failure to consider the assessee's submissions indicated a lack of application of mind. The CIT(A) mechanically confirmed the disallowance without addressing the judicial pronouncements cited by the assessee.Issue 1 Cont'd:The Tribunal observed that the AO did not follow the procedure mandated by section 14A, which requires a satisfaction regarding the correctness of the claim of no expenditure incurred for exempt income. The AO's failure to address the detailed submissions of the assessee and the incorrect assumption of the disallowance led to a non-speaking order. The Tribunal highlighted the necessity for the AO to examine and verify the correctness of the assessee's claim before invoking Rule 8D for disallowance under section 14A.Issue 1 Conclusion:The Tribunal set aside the findings of the lower authorities and directed a fresh examination by the AO to determine if the disallowance under section 14A r.w. Rule 8D is warranted. The matter was restored to the AO for proper adjudication after considering the observations made. The assessee's grounds were treated as allowed for statistical purposes, and the appeal for A.Y. 2010-11 was allowed accordingly.This detailed analysis of the judgment provides a comprehensive overview of the issues involved, the arguments presented by the parties, and the Tribunal's decision based on the legal principles and procedural requirements under section 14A r.w. Rule 8D of the Income Tax Act, 1961.