2018 (12) TMI 105 - AT - Income Tax

AO must express dissatisfaction with assessee's accounts before applying Rule 8D for disallowance under section 14A

The Tribunal held that the AO must express dissatisfaction with the assessee's accounts before applying Rule 8D for disallowance under section 14A of the ... Disallowance of expenses u/s 14A r.w.r. 8D(2)(iii) - non recording of satisfaction - Held that:- there is no satisfaction recorded by the AO despite the fact that the assessee has computed the expenses relatable to exempt income in a scientific manner and once there is no satisfaction recorded by the AO, no disallowance can be made. Hence, we confirm the order of CIT(A) deleting the disallowance. The appeal of Revenue is dismissed. Issues:- Disallowance of expenses under section 14A of the Income Tax Act read with Rule 8D(2)(iii) of the Income Tax Rules.Analysis:1. The appeal by the Revenue challenged the CIT(A)'s order deleting the disallowance of expenses made by the AO under section 14A of the Income Tax Act. The AO applied Rule 8D(2)(iii) of the Rules for administrative expenses, resulting in a disallowance of &8377; 81,66,640. The CIT(A) deleted this disallowance based on the assessee's own case for a future assessment year. The Revenue contended that Rule 8D should have been applied, and the AO had not recorded any dissatisfaction with the assessee's computation of disallowance.2. The Tribunal referred to a previous case where the assessee had requested a set aside due to lack of examination of suo moto disallowance. The Tribunal emphasized the requirement for the AO to express dissatisfaction with the assessee's accounts before applying Rule 8D. The Tribunal highlighted the mandatory nature of this examination, as per section 14A and Rule 8D. The Tribunal ordered the matter to be sent back to the AO for a fresh determination following the proper procedure.3. The assessee had voluntarily made a disallowance while computing income, based on a scientific computation of expenses related to exempt income. The AO did not reject this computation or record any satisfaction for disallowance under section 14A. The Tribunal cited a Supreme Court case emphasizing the need for the AO to record satisfaction before rejecting the assessee's apportionment of expenses. Since no satisfaction was recorded by the AO, the disallowance could not be upheld. The Tribunal confirmed the CIT(A)'s decision to delete the disallowance, dismissing the Revenue's appeal.