2022 (4) TMI 157 - AT - Income Tax

Tribunal Limits Disallowance to Exempt Income Investments

S.M. Auto Engineering Pvt. Ltd. Versus DCIT, Circle-2 (3) Pune

The Tribunal partly allowed the appeal, dismissing challenges on the need for recording satisfaction before invoking Rule 8D. The request to restrict ... Addition u/s. 14A r.w. Rule 8D(2)(iii) - Mandation of recording satisfaction - HELD THAT:- There was no occasion to AO to record satisfaction for not accepting the accounts before invocation of Rule 8D of the Rules. In our opinion, when the assessee itself submitted its working before the AO accepting in principle that the disallowance is required to be made under Rule 8D and accordingly the AO made disallowance under Rule 8D(2)(iii). We note that a contention was raised before the CIT(A) regarding having surplus fund making investments from its own funds and it was accepted by the CIT(A) resulted into deletion of disallowance under Rule 8D(2)(ii) - CIT(A) also held that the assessee failed to point out any error in respect of disallowance under Rule 8D(2)(iii) of the Rules, if that is so, a ground raising challenging the action of AO for non-recording of satisfaction concerning the accounts before us, is untenable. Therefore, we reject the arguments of ld. AR in respect of contentions raised in ground Nos. 1 to 4. Thus, ground Nos. 1 to 4 raised by the assessee are dismissed. Disallowance in respect of those investments which yielded exempt income - HELD THAT:- It is a settled principle to restrict the disallowance to the investment earned dividend income and this Tribunal has been following in directing the AO to compute the expenditure for the purpose of section 14A in respect of those investments yielded exempt income. Following the same we direct the AO to compute the disallowance taking into consideration those investments which yielded exempt income. The assessee is liberty to file evidences, if any, in this regard. Thus, the ground No. 5 raised by the assessee is allowed. Issues:Challenge to addition made under section 14A r.w. Rule 8D(2)(iii) without recording satisfaction.Request for direction to restrict disallowance to investments yielding exempt income.Analysis:1. The appeal was filed against the order passed by the Commissioner of Income Tax (Appeals) for the assessment year 2014-15, specifically challenging the addition made under section 14A r.w. Rule 8D(2)(iii) without recording satisfaction. The Assessing Officer (AO) disallowed an amount under Rule 8D(2)(iii) based on the working of disallowance submitted by the assessee. The CIT(A) deleted part of the disallowance under Rule 8D(2)(ii) but confirmed the disallowance under Rule 8D(2)(iii) as the assessee failed to point out any errors in the working of disallowance. The Tribunal rejected the argument that satisfaction of non-acceptance of accounts is a pre-condition before invoking Rule 8D, as the assessee had submitted the working of disallowance voluntarily, accepting the applicability of Rule 8D.2. The assessee also raised a ground seeking a direction to restrict the disallowance to investments yielding exempt income. The Tribunal acknowledged the principle of restricting disallowance to investments earning exempt income and directed the AO to compute the disallowance considering only those investments that yielded exempt income. The assessee was given the liberty to submit any additional evidence in this regard.3. In conclusion, the Tribunal partly allowed the appeal of the assessee, dismissing the challenges regarding the recording of satisfaction before invoking Rule 8D and allowing the request to restrict the disallowance to investments earning exempt income. The order was pronounced on 17th March, 2022.