2017 (1) TMI 1143 - AT - Income Tax

Tribunal overturns tax decision, rules on Section 14A disallowance.

The Tribunal allowed the appeal of the Private Limited Company, reversing the lower authorities' decisions. It held that the Assessing Officer's ... Addition u/s 14A r.w.s. Rule 8D(2)(iii) - Held that:- AO has not examined the accounts of the assessee and there is no satisfaction recorded by the AO about the correctness of the claim of the assessee and without the same he invoked Rule 8D of Income Tax Rules. While rejecting the claim of the assessee with regard to expenditure or no expenditure, as the case may be, in relation to exempted income, the AO has to indicate cogent reasons for the same. From the facts of the present case it is noticed that the AO has not considered the claim of the assessee and straight away embarked upon computing disallowance under Rule 8D of the Rules on presuming the average value of investment at ½% of the total value. In view of the above and respectfully following the coordinate bench decision in the case of J. K. Investors (Bombay) Ltd., (2013 (5) TMI 580 - ITAT MUMBAI), we reverse the order of lower authorities. Thus, the appeal filed by the assessee is allowed. Issues Involved:1. Applicability of Section 14A of the Income Tax Act, 1961, and Rule 8D of the Income Tax Rules, 1962.2. Satisfaction of the Assessing Officer (AO) regarding the correctness of the claim made by the assessee.3. Calculation and disallowance of expenses related to exempt income.Detailed Analysis:1. Applicability of Section 14A and Rule 8D:The assessee, a Private Limited Company registered as a Non-Banking Finance Company, earned exempted dividend income of Rs. 55,17,162/- for the year under consideration. The AO invoked Section 14A read with Rule 8D(2)(iii) and disallowed Rs. 7,92,538/- as expenses related to the earning of exempt income. The assessee argued that only administrative expenses amounting to Rs. 1,98,732/- were incurred, which were unrelated to the dividend income. The CIT(A) partly upheld the AO's decision but directed the AO to recompute the disallowance by considering only the investments that yielded dividend income, as per the decision in REI Agro Ltd. vs. DCIT.2. Satisfaction of the Assessing Officer:The core issue was whether the AO recorded satisfaction regarding the correctness of the assessee's claim before invoking Rule 8D. The Tribunal noted that the AO did not consider the assessee's books of accounts and mechanically applied Section 14A and Rule 8D, which is not permissible. The Tribunal emphasized that the AO must first examine the accounts and record dissatisfaction with the assessee's claim before applying Rule 8D. This principle was supported by various judgments, including those of the Hon'ble Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. vs. DCIT and the Hon'ble Delhi High Court in Maxopp Investment Ltd. vs. CIT.3. Calculation and Disallowance of Expenses:The Tribunal observed that the total expenses claimed by the assessee were much lower than the disallowed amount, indicating that the AO did not give due regard to the assessee's accounts. The Tribunal cited multiple cases where it was held that disallowance under Section 14A requires a finding of actual expenditure incurred in relation to exempt income. The Tribunal concluded that no disallowance under Section 14A is warranted if the assessee has not incurred any expenditure for earning exempt income. The AO's failure to examine the accounts and record satisfaction invalidated the disallowance.Conclusion:The Tribunal allowed the assessee's appeal, reversing the lower authorities' orders. The AO's mechanical application of Rule 8D without examining the assessee's accounts and recording dissatisfaction was deemed improper. The Tribunal directed that no disallowance under Section 14A is justified when the assessee has not incurred any expenditure for earning exempt income. The order was pronounced in the open court on 18/01/2017.