2022 (6) TMI 931 - AT - Income Tax

Assessing Officer's Disallowance Reversed: Importance of Proper Procedure in Sec. 14A Cases

The Assessing Officer disallowed Rs.11,59,010 under Sec. 14A read with Rule 8D(2)(iii) due to lack of expenditure allocation for exempt dividend income. ... Disallowance u/s 14A r.w.r. 8D - whether or not it is obligatory for the Assessing Officer to record his satisfaction as to why the claim of the assessee in respect of expenses incurred for earning of exempt income? - HELD THAT:- In case the A.O, or, the CIT(A) in exercise of his powers which are coterminous with that of an A.O, sought to disallow the claim of the assessee that no expenses could be attributed to earning of the exempt dividend income by him, then, there was an innate obligation cast upon them to have recorded the requisite satisfaction that having regard to the accounts of the assessee, as placed before them, it was not possible to generate the requisite satisfaction with regards to the correctness of the aforesaid claim of the assessee. At this stage, we may herein observe, that the Hon'ble High Court of Bombay in the case of CIT v. Sociedade De Fomento Industrial Pvt. Ltd. [2020 (11) TMI 277 - BOMBAY HIGH COURT] referring to the facts involved in the case before it, had observed, that though the Assessing Officer had discussed the provisions of section 14A(1) of the Act, but had not justified how the expenditure which the assessee had incurred during the relevant year related to the income not forming part of its total income and, had straightaway applied rule 8D, then, in the absence of proximate relationship between the expenditure and the exempt income the disallowance made by him was rightly vacated by the Tribunal. Accordingly we are of the considered view, that as there is a clear lapse on the part of the lower authorities in validly assuming jurisdiction for dislodging the assessee’s claim that no disallowance u/s.14A of the Act was called for in its hands, therefore, the disallowance worked out by the Assessing Officer u/s 14A r.w Rule 8D(2)(iii), which thereafter, had been sustained by the CIT(Appeals) is liable to be vacated. We, thus, set-aside the order of the CIT(A) and vacate the disallowance made by the A.O u/s 14A r.w Rule 8D(2)(iii). Issues involved:1. Disallowance made under Sec. 14A read with Rule 8D(2)(iii) of Rs.11,59,010.2. Whether the Assessing Officer validly assumed jurisdiction to determine the disallowance.3. Nexus between exempt dividend income and expenditure incurred.4. Obligation of the Assessing Officer to record satisfaction regarding the correctness of the claim of the assessee.5. Application of legal precedents regarding the obligation to record dissatisfaction.Detailed Analysis:1. The controversy in the appeal revolves around the disallowance of Rs.11,59,010 made by the Assessing Officer under Sec. 14A read with Rule 8D(2)(iii). The Assessing Officer observed that the assessee did not offer any part of expenditure on a suo-motto basis despite receiving exempt dividend income. The disallowance was based on the view that administrative expenditure was attributable to exempt income yielding investments. The CIT(Appeals) upheld this disallowance, leading to the appeal.2. The main issue is whether the Assessing Officer validly assumed jurisdiction to determine the disallowance. The assessee argued that the Assessing Officer did not record satisfaction regarding the claim that no expenditure was attributable to earning exempt income. The CIT(Appeals) rejected this contention, stating that the Assessing Officer had properly determined the disallowance after recording satisfaction. However, the ITAT disagreed, citing legal precedents requiring the Assessing Officer to record dissatisfaction before invoking Sec. 14A(2) and (3) with Rule 8D.3. Another aspect is the nexus between the exempt dividend income and the expenditure incurred. The assessee claimed no nexus existed as no separate accounts were maintained for exempt income. The CIT(Appeals) upheld the disallowance, stating that the absence of separate accounts meant no burden was on the Assessing Officer to establish the nexus. The ITAT, however, found this reasoning flawed and vacated the disallowance due to the lack of proper jurisdiction.4. The judgment emphasized the obligation of the Assessing Officer to record satisfaction regarding the correctness of the assessee's claim before making disallowances under Sec. 14A. Legal precedents, including the Godrej & Boyce case, were cited to support this requirement. The failure to record dissatisfaction invalidated the disallowance in this case.5. The ITAT's decision was influenced by legal precedents emphasizing the importance of the Assessing Officer's satisfaction and the need to establish a nexus between income and expenditure. The judgment highlighted the necessity of proper procedures and adherence to legal principles in determining disallowances under Sec. 14A. Ultimately, the disallowance was vacated due to the Assessing Officer's failure to meet the required standards.This detailed analysis covers the key issues and legal principles considered in the judgment, providing a comprehensive understanding of the case.