2019 (1) TMI 1213 - HC - Income Tax

Tribunal rules AO must express dissatisfaction before applying Rule 8D for disallowance

The Tribunal allowed the respondent's appeal challenging the disallowance under Section 14A of the Income Tax Act. It held that the Assessing Officer must ... Disallowance u/s 14A as per Rule 8D - Held that:- Tribunal is on the basis of clear mandate of Section 14(2) of the Act which provides that the Assessing Officer will determine the amount of expenditure to be disallowed to earn exempt income as provided in Rule 8D of the Rules, as if he is not satisfied with suo motu disallowance made by the respondent. In fact this interpretation of Section 14A(2) of the Act by the Tribunal has now been taken in the case of Godrej & Boyce Manufacturing Co Ltd Vs. Dy. CIT & Anr [2017 (5) TMI 403 - SUPREME COURT OF INDIA] it is not possible to generate the requisite satisfaction with regard to the correctness of the claim of the assessee. It may only thereafter that the provisions of section 14A(2) and (3) read with rule 8D of the Rules or a best judgment determination, as earlier prevailing, would become applicable. No substantial question of law Issues:Challenge to order of Income Tax Appellate Tribunal under Section 260 A of Income Tax Act for Assessment Year 2009-10. Question of law regarding disallowance under Section 14A of Income Tax Act and Rule 8D of Income Tax Rules.Analysis:The respondent, engaged in trading, investment, and financing, received exempt income of Rs. 44 crores and made a suo motu disallowance of Rs. 1.65 crores for expenditure incurred to earn exempt income. The Assessing Officer rejected this disallowance and, under Section 143(3) of the Act, disallowed an aggregate amount of Rs. 3.55 crores under Rule 8D of the Rules. The Commissioner of Income Tax (Appeals) upheld this decision.The Tribunal, in its order, emphasized that if an assessee makes a suo motu disallowance of expenditure for earning exempt income, the Assessing Officer must examine and express dissatisfaction with the claim before applying Rule 8D of the Rules. Since the Assessing Officer did not express any dissatisfaction with the respondent's claim, the Tribunal found the application of Rule 8D inappropriate and allowed the respondent's appeal.The Tribunal's decision was based on Section 14(2) of the Act, which mandates the Assessing Officer to determine the amount of disallowance if unsatisfied with the assessee's claim, as per Rule 8D of the Rules. This interpretation aligns with the Supreme Court's ruling in Godrej & Boyce Manufacturing Co Ltd Vs. Dy. CIT & Anr [2017] 394 ITR 449 (SC), stating that satisfaction of the Assessing Officer is crucial before applying Rule 8D or making a best judgment determination.Given the Supreme Court's decision and the clear mandate of the Act, the Tribunal concluded that the question raised did not present a substantial question of law and dismissed the Tax Appeal. The Tribunal's decision was based on the requirement of the Assessing Officer's satisfaction before applying Rule 8D, as outlined in Section 14A(2) and (3) of the Act.Therefore, the Tribunal upheld the respondent's appeal, emphasizing the necessity for the Assessing Officer to express dissatisfaction with the assessee's claim before resorting to Rule 8D for disallowance under Section 14A of the Income Tax Act.