2022 (10) TMI 75 - AT - Income Tax

Tribunal rules in favor of assessee for assessment years 2011-12 and 2012-13, disallowance under Section 14A(2) deemed incorrect

The Tribunal allowed the assessee's appeals for the assessment years 2011-12 and 2012-13. It held that the Assessing Officer did not properly satisfy the ... Addition u/s 14A - assessee company offered suo motu disallowance under the provisions of section 14A - HELD THAT:- The provisions of sub-section (2) of section 14A provides that resort to disallowance u/s 14A can be made only if the AO is not satisfied with the correctness of the claim of assessee in respect of expenditure incurred to earn the exempt income. Therefore, it is incumbent upon the AO to record satisfaction as to the correctness or otherwise of the assessee company that only an expenditure was incurred to earn the exempt income. Necessity of recording satisfaction - It is a settled position of law that the satisfaction recorded by the AO should be based on the objective material and cannot be subjective. From mere reading it is clear that the AO has not recorded satisfaction regarding the correctness of suo motu disallowance offered by the assessee u/s 14A and mere rejection of the explanation of the assessee per se, cannot be said to be a satisfaction as envisaged u/s 14A(2). The ratio laid down by the Hon’ble Delhi High Court in the case of PCIT vs. Moonstar Securities Trading and Finance Co. (P) Ltd [2018 (8) TMI 1151 - DELHI HIGH COURT] and PCIT vs. Keshav Power Ltd. [2018 (11) TMI 645 - DELHI HIGH COURT] as well as the Hon’ble Bombay High Court in the case of Pr.CIT vs. Reliance Capital Asset Management Ltd [2017 (10) TMI 177 - BOMBAY HIGH COURT] is squarely applicable. Therefore, we hold that the disallowance of Rs.1,20,60,460/- as made by the AO as confirmed by the CIT(A) is incorrect in law, as the AO had failed to record the satisfaction as envisaged u/s 14A(2). Thus, the grounds of appeal no.1 and 4 stand allowed. Deduction u/s 10B - decision of CIT(A) in holding that the assessee company is not entitled to deduction u/s 10B for want of Board’s approval as envisaged under Explanation to sub-section (2) of section 10B - HELD THAT:- This issue was decided by this Tribunal in assessee’s own case for assessment year 2010-11 [2022 (10) TMI 1 - ITAT PUNE] in favour of assessee company. The ld. CIT-DR had not made out case before us to take different view. Respectfully, following the decision of the Tribunal in assessee’s own case (supra), we hold that the assessee company is entitled for deduction u/s 10B of the Act. Issues Involved:1. Disallowance under Section 14A of the Income Tax Act, 1961.2. Deduction under Section 10B of the Income Tax Act.Detailed Analysis:Issue 1: Disallowance under Section 14A of the Income Tax Act, 1961Assessment Year 2011-12:The assessee challenged the disallowance of Rs. 1,35,93,675 made by the Assessing Officer (AO) under Section 14A of the Income Tax Act, which was confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The AO had made this disallowance based on the investments made by the assessee in mutual funds, which yielded exempt income. The assessee had initially offered a suo motu disallowance of Rs. 15,33,215 under Section 14A, arguing that no separate charges were required for these investments. However, the AO applied Rule 8D of the Income Tax Rules, 1962, to compute the disallowance, resulting in a higher amount.The CIT(A) upheld the AO's decision, stating that the assessee's ad-hoc disallowance was not substantiated. The CIT(A) also noted that the assessee's own disallowance indicated that some expenditure was indeed incurred to earn the exempt income.The Tribunal, however, found that the AO did not record the required satisfaction under Section 14A(2) regarding the correctness of the assessee's claim. Citing precedents from the Hon'ble Supreme Court and various High Courts, the Tribunal held that the AO's mere observation that substantial investments were made did not amount to the satisfaction required by law. Consequently, the Tribunal deemed the disallowance of Rs. 1,20,60,460 as incorrect and allowed the assessee's appeal on this ground.Assessment Year 2012-13:For the subsequent year, the assessee faced a similar disallowance issue, where the AO disallowed Rs. 65,08,219 under Section 14A, confirmed by the CIT(A). The Tribunal applied its previous decision from the assessment year 2011-12, ruling in favor of the assessee and allowing the appeal.Issue 2: Deduction under Section 10B of the Income Tax ActAssessment Year 2011-12:The assessee also contested the denial of deduction under Section 10B by the CIT(A) for want of Board's approval. The CIT(A) had allowed an alternate claim under Section 10A but denied the primary claim under Section 10B. The Tribunal referenced its earlier decision for the assessment year 2010-11, which had ruled in favor of the assessee, granting the deduction under Section 10B. As no new arguments were presented by the CIT-DR, the Tribunal followed its previous ruling and allowed the deduction under Section 10B for the assessment year 2011-12.Assessment Year 2012-13:The Tribunal did not specifically address the Section 10B issue for the assessment year 2012-13, as the primary focus was on the disallowance under Section 14A. However, the consistent application of the previous year's ruling implies that the Tribunal's favorable stance on Section 10B would apply similarly.Conclusion:Both appeals for the assessment years 2011-12 and 2012-13 were allowed in favor of the assessee. The Tribunal ruled that the AO did not properly record satisfaction under Section 14A(2) for the disallowances and upheld the assessee's entitlement to deductions under Section 10B.