2021 (10) TMI 1096 - AT - Income Tax

Tribunal overturns disallowance under Section 14A, emphasizes need for clear reasoning

The Tribunal allowed the appeal, vacating the disallowance of Rs. 12,79,310/- made by the Assessing Officer under Section 14A read with Rule 8D. It was ... Disallowance u/s 14A - Sufficiency of own funds - validity of the jurisdiction assumed by the A.O as regards the satisfaction recorded by him - simpliciter rejection by the AO - as submitted by the assessee that as it had sufficient non-interest bearing funds available with it throughout the year which were far much higher than the investments made in the exempt income yielding securities, therefore, no part of the interest expenditure claimed as deduction was liable to be disallowed - HELD THAT:- A.O on the basis of his general observations had dislodged the claim of the assessee that no expenditure was incurred for earning of the exempt dividend income and had worked out the disallowance u/s 14A r.w. Rule 8D. As per observation made in case GODREJ & BOYCE MANUFACTURING COMPANY LIMITED VERSUS DY. COMMISSIONER OF INCOME-TAX & ANR. [2017 (5) TMI 403 - SUPREME COURT] we are of the considered view, that the issue that an A.O before taking recourse to the provisions of Sec. 14A(2) and (3) r.w Rule 8D of the Income Tax Rules 1963, is statutorily obligated to give a clear finding with reference to the assessee”s accounts as to how the expenditure claimed by the assessee in respect of its non-exempt income were related to the exempt income; is no more res-integra pursuant to the aforesaid judgments of the Hon”ble Apex Court. The failure on the part of the A.O to strictly comply with the aforesaid statutory obligation that was cast upon him, can safely be gathered from the fact that there is no clear finding by him with reference to the assessee”s accounts, as to how to the other expenditure claimed by the assessee in respect of its non-exempt income were related to the exempt income - a simpliciter rejection by the A.O of the aforesaid claim of the assessee which is only backed by his general observations, surmises and conjectures can by no means justify the validity of the jurisdiction assumed by him for computing the disallowance u/s 14A r.w. Rule 8D(2)(iii) in the hands of the assessee. We, thus, not finding favor with the view taken by the CIT(A) who had upheld the validity of the jurisdiction assumed by the A.O for computing the disallowance u/s 14A r.w Rule 8D(2)(iii) set-aside the same - Decided in favour of assessee. Issues Involved:1. Disallowance under Section 14A of the Income Tax Act, 1961.2. Validity of the jurisdiction assumed by the Assessing Officer (A.O) for disallowance under Section 14A read with Rule 8D.Issue-wise Detailed Analysis:1. Disallowance under Section 14A of the Income Tax Act, 1961:The assessee company, engaged in manufacturing plastic molded articles, filed its return for A.Y 2016-17 declaring an income of Rs. 165,97,42,800/-. During assessment, the A.O noted that the assessee received exempt dividend income of Rs. 98,10,000/- but did not offer any disallowance under Section 14A of the Act. The assessee contended that it had sufficient non-interest-bearing funds and incurred no expenditure for earning the exempt income. The A.O rejected this, arguing that earning dividend income requires incurring some expenditure, including management and administrative expenses. Consequently, the A.O disallowed Rs. 12,79,310/- under Section 14A read with Rule 8D. The CIT(A) upheld this disallowance, finding the A.O's computation fair and reasonable.2. Validity of the jurisdiction assumed by the A.O for disallowance under Section 14A read with Rule 8D:The core issue was whether the A.O validly assumed jurisdiction and computed disallowance under Section 14A read with Rule 8D. The assessee argued that the A.O did not record any dissatisfaction with the assessee's claim of no expenditure incurred for earning the exempt income before applying Rule 8D. The A.O's general observations, without specific reference to the assessee's accounts, were insufficient to justify the disallowance. The Tribunal referred to the Supreme Court rulings in Godrej & Boyce Manufacturing Company Ltd. Vs. DCIT and Maxopp Investment Ltd. Vs. CIT, which mandate that the A.O must record clear reasons for rejecting the assessee's claim before applying Rule 8D. The Bombay High Court in CIT Vs. Sociedade De Fomento Industrial Pvt. Ltd. emphasized that the A.O must establish a proximate relationship between the expenditure and the exempt income, which was not done in this case.The Tribunal found that the A.O's disallowance was based on general observations and lacked a specific finding related to the assessee's accounts. Therefore, the jurisdiction assumed by the A.O was invalid. Consequently, the Tribunal set aside the CIT(A)'s order and vacated the disallowance of Rs. 12,79,310/- under Section 14A read with Rule 8D.Conclusion:The appeal was allowed, and the disallowance of Rs. 12,79,310/- made by the A.O under Section 14A read with Rule 8D was vacated. The Tribunal emphasized the necessity for the A.O to record clear reasons and establish a proximate relationship between the expenditure and the exempt income before making any disallowance under Section 14A. The general grounds of appeal were dismissed as not pressed.