2020 (10) TMI 797 - HC - Income Tax

Tax Case Appeal Remitted for Fresh Orders on Section 14A

Shri Arumugam Olaganathan Versus Commissioner of Income Tax 1 Chennai.

The court remitted the Tax Case Appeal back to the Assessing Authority for fresh orders on the limited issue under Section 14A of the Income Tax Act. The ... Disallowance u/s 14A - Whether Tribunal could have concluded that the appellant had incurred expenditure in relation to income not includable in the total income warranting application of the Section 14A read with Rule 8D? - HELD THAT:- Since both the learned counsel are agreeing that the matter should go back to the Assessing Authority for deciding the case again on the aspect of Section 14-A of this Court in M/s.Marg [2020 (10) TMI 102 - MADRAS HIGH COURT] the appeal is accordingly disposed of, by answering the questions of law in favour of the Assessee and against the Revenue and the matter is remitted back to the Assessing Authority for passing fresh orders on the limited issue u/s 14-A by complying with the directions of this Court in the aforesaid judgment with regard to the satisfaction, for invoking Section 14A read with Rule 8D also, in accordance with law. Issues Involved:1. Disallowance under Section 14A of the Income Tax Act.2. Expenditure incurred in relation to income not includable in total income.3. Satisfaction requirement for disallowance under Section 14A.4. Disallowance exceeding the income not includable in the total income.5. Tribunal's conclusion based on available materials.6. Consistency with the coordinate bench's order for the earlier year.Issue-wise Detailed Analysis:1. Disallowance under Section 14A of the Income Tax Act:The Assessee challenged the Income Tax Appellate Tribunal's decision upholding the disallowance made under Section 14A. The court referred to a recent Division Bench judgment in M/S. MARG LIMITED VS. COMMISSIONER OF INCOME TAX, which clarified that without recording satisfaction by the Assessing Authority, disallowance under Rule 8D cannot be made. The Tribunal's decision to uphold the disallowance under Rule 8D beyond the exempted income was deemed impermissible in law.2. Expenditure Incurred in Relation to Income Not Includable in Total Income:The court emphasized that the Assessing Authority must mandatorily record satisfaction regarding the proportionate disallowance of expenditure under Section 14A. The expenditure incurred to earn any income should always be below the extent of income itself and bear a reasonable proportion thereto.3. Satisfaction Requirement for Disallowance under Section 14A:The court reiterated that the Assessing Authority must record specific reasons for rejecting the apportionment of expenditure made by the Assessee. Only after such satisfaction can the computation method under Rule 8D be invoked. The court found that the Assessing Authority in the present case did not record such reasons, making the disallowance invalid.4. Disallowance Exceeding the Income Not Includable in the Total Income:The court held that the disallowance under Section 14A cannot exceed the amount of exempted income. The Tribunal's approach of allowing disallowance beyond the exempted income was criticized. The disallowance should be proportionate and reasonable, aligned with the actual exempted income.5. Tribunal's Conclusion Based on Available Materials:The court found inconsistencies in the Tribunal's approach, noting that in many cases, the Tribunal upheld disallowance only to the extent of 2% of the Dividend income. The Tribunal's inconsistent approach in the present case was not sustained.6. Consistency with the Coordinate Bench's Order for the Earlier Year:The court observed that the Tribunal did not follow the coordinate bench's order in the Assessee's case for the earlier year. The Assessee's counsel argued that the Assessing Authority's reasons for invoking Section 14A were illogical, as they included disallowance of Directors' remuneration, which was not applicable to a Proprietorship concern.Conclusion:The court, agreeing with both counsels, remitted the matter back to the Assessing Authority for fresh orders on the limited issue under Section 14A. The Assessing Authority was directed to comply with the directions of the Division Bench judgment in M/s. Marg, ensuring proper satisfaction for invoking Section 14A read with Rule 8D.Disposition:The Tax Case Appeal was disposed of, with no costs, and the matter was remitted back to the Assessing Authority for fresh consideration.