2019 (11) TMI 105 - HC - Income Tax

Disallowance under section 14A and Rule 8D: AO must record non-satisfaction from accounts before applying Rule 8D.

Non-satisfaction with a claimed disallowance under section 14A must be determined by reference to the assessee's accounts; the Assessing Officer is ... Non-satisfaction on the disallowance claimed u/s 14A - HELD THAT:- Non-satisfaction with the disallowance offered by the assessee has to be arrived at on the basis of the accounts submitted by the assessee. In this case, AO had not carried out the aforesaid exercise but rejected the disallowance claimed by the assessee only on the ground that it was not in accordance with Rule 8D of the Rules. The application of Rule 8D of the Rules would only arise once the Assessing Officer is not satisfied on an objective criteria in the context of its accounts, that suo motu disallowance claimed by the assessee is not proper. In fact, the Supreme Court in the case of Maxopp Investment Ltd. v. Commissioner of Income Tax [2018 (3) TMI 805 - SUPREME COURT] while upholding the view of the Delhi High Court has held that the Assessing Officer needs to record his non-satisfaction having regard to the sou motu disallowances claimed by the assessee in the context of its accounts. It is only thereafter, the occasion to apply rule 8D of the Rules for apportionment of expenses can arise. In the present facts, the Tribunal has correctly come to the conclusion that non-satisfaction as recorded by the AO for rejecting the sou motu disallowances claimed by the assessee is not done as required under section 14A(2) of the Act. On facts, the view taken by the Tribunal is a possible view and calls for no interference. No substantial question of law. Issues:Challenge to Tribunal's order under section 260-A of the Income Tax Act, 1961 regarding disallowance under section 14A for assessment year 2008-09.Analysis:1. The Respondent, a recognized stock exchange, earned exempt dividend income but faced disallowance under section 14A of the Act. The Assessing Officer rejected the Respondent's claim and applied Rule 8D to compute a higher disallowance.2. The Respondent's appeal to the CIT(A) was dismissed, leading to an appeal to the Tribunal. The Tribunal allowed the appeal, stating that the Assessing Officer did not express non-satisfaction with the disallowance claimed by the Respondent, hence Rule 8D was not applicable.3. The Revenue appealed the Tribunal's decision, arguing that the Assessing Officer did express non-satisfaction with the Respondent's disallowance claim. The Revenue contended that Rule 8D should be invoked based on this non-satisfaction, not solely on the basis of the method used by the Respondent.4. The High Court noted that the Assessing Officer must first record non-satisfaction with the disallowance claimed by the assessee before invoking Rule 8D. The Court emphasized the need for clear and objective satisfaction without immediate reference to Rule 8D.5. Referring to the judgment in Godrej & Boyce Mfg. Co. Ltd. case, the Court reiterated that the Assessing Officer's satisfaction must be based on the accounts of the assessee. The application of Rule 8D arises only when the Assessing Officer is objectively unsatisfied with the disallowance claimed by the assessee.6. Citing the Supreme Court's decision in Maxopp Investment Ltd. case, the Court affirmed that the Assessing Officer must record non-satisfaction with the assessee's disallowance claims before applying Rule 8D for expense apportionment.7. Ultimately, the Court upheld the Tribunal's decision, stating that the Assessing Officer did not meet the requirements of section 14A(2) in expressing non-satisfaction with the disallowance claimed by the assessee. The Court found the Tribunal's view reasonable and declined to interfere.8. Concluding that no substantial question of law arose from the issues presented, the Court dismissed the appeal, affirming the Tribunal's decision.