2018 (11) TMI 645 - HC - Income Tax

Tribunal reinforces Assessing Officer's requirement to satisfy before applying Rule 8D for exempt income

The Tribunal upheld the decision of the Commission of Income Tax (Appeals) in a case involving the interpretation of Section 14A of the Income Tax Act, ... Disallowance u/s 14A r.w.r 8D - AO has not recorded his satisfaction regarding the correctness of the self disallowance made by the assessee - Held that:- Rule 8D is not mandatory and would come into play only when the Assessing Officer comes to the conclusion and records his satisfaction that he was not satisfied with the correctness of the disallowance made by the assessee, having regard to the accounts placed before him. This is a necessary and mandatory precondition for the Assessing Officer to invoke and apply Rule 8D of the Rules. Thus, Rule 8D cannot be applied unless this satisfaction is recorded by the AO. In the present case the AO has not recorded his satisfaction regarding the correctness of the self disallowance made by the assessee under Section 14A, as is mandatory in terms of sub section (2) of Section 14A to invoke and take recourse to Rule 8D of the Rules. Thus, the Assessing Officer, did not act as per and in terms of the statute. - Decided against revenue. Issues:1. Interpretation of Section 14A of the Income Tax Act, 1961.2. Applicability of Rule 8D of the Income Tax Rules, 1962.3. Disallowance of expenses related to exempt income.4. Assessment of disallowance by the Assessing Officer.5. Decision of the Commission of Income Tax (Appeals).6. Ruling of the Tribunal on the matter.7. Requirement of satisfaction by the Assessing Officer for invoking Rule 8D.8. Comparison with the judgment in Godrej & Boyce Manufacturing Company Ltd. case.Interpretation of Section 14A of the Income Tax Act, 1961:The case involved the interpretation of Section 14A of the Income Tax Act, 1961, which regulates expenditure related to exempt income. The section disallows deduction for expenditure incurred on income that does not form part of the total income under the Act.Applicability of Rule 8D of the Income Tax Rules, 1962:The Assessing Officer contended that Rule 8D of the Income Tax Rules, 1962, was mandatory for computing disallowance related to exempt income. The rule was applied to increase the disallowance amount based on specific provisions outlined in Section 14A of the Act.Disallowance of expenses related to exempt income:The Assessing Officer increased the disallowance amount significantly, citing the necessity for visibility in expenditure incurred for earning exempt income. The disallowance was made in accordance with Rule 8D, as the assessee failed to provide documentary evidence to support the claim that no interest or other expenditure was incurred for earning exempted dividend income.Assessment of disallowance by the Assessing Officer:The Assessing Officer assessed the income of the assessee at a higher amount by applying Rule 8D for disallowance under Section 14A. The disallowance was based on the total dividend income earned by the assessee during the year.Decision of the Commission of Income Tax (Appeals):The Commission of Income Tax (Appeals) deleted the enhanced disallowance, stating that the assessee had already made a reasonable disallowance under Section 14A, which exceeded the exempt income earned. Therefore, no further disallowance was deemed necessary.Ruling of the Tribunal on the matter:The Tribunal upheld the decision of the Commission of Income Tax (Appeals), indicating that the appeal by the Revenue lacked merit due to the absence of necessary satisfaction by the Assessing Officer for invoking Rule 8D.Requirement of satisfaction by the Assessing Officer for invoking Rule 8D:The court emphasized that Rule 8D cannot be applied unless the Assessing Officer records satisfaction regarding the correctness of the disallowance made by the assessee. The judgment referred to the necessity of a satisfaction requirement as highlighted in the Supreme Court's ruling in the Godrej & Boyce Manufacturing Company Ltd. case.Comparison with the judgment in Godrej & Boyce Manufacturing Company Ltd. case:The court compared the present case with the Godrej & Boyce Manufacturing Company Ltd. case, emphasizing the importance of the Assessing Officer's satisfaction before invoking Rule 8D. It was noted that the Assessing Officer's failure to record necessary satisfaction rendered the application of Rule 8D invalid in this instance.In conclusion, the judgment focused on the proper application of Section 14A and Rule 8D in determining the disallowance of expenses related to exempt income. The court highlighted the mandatory requirement for the Assessing Officer to be satisfied before invoking Rule 8D, as outlined in the relevant legal provisions and supported by previous judicial decisions.