ITAT accepts assessee's suo-moto disallowance under section 14A read with Rule 8D over AO's rejection

The ITAT Delhi ruled in favor of the assessee regarding disallowance under section 14A read with Rule 8D. The assessee had made suo-moto disallowance based on detailed scientific working certified by a Chartered Accountant. The ITAT held that the Assessing Officer failed to record objective satisfaction for rejecting the assessee's suo-moto disallowance. Following its own precedent from AY 2015-16, the tribunal directed the AO to accept the suo-moto disallowance and clarified that only investments not yielding exempt income should be considered for section 14A disallowance.

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Issues:
1. Disallowance under section 14A of the Income Tax Act, 1961 along with Rule 8D computation.
2. Proper satisfaction of the Assessing Officer in not accepting suo moto disallowance made by the assessee.

Issue 1: Disallowance under section 14A of the Income Tax Act, 1961 along with Rule 8D computation:

The appeal was against the order of the ld. CIT (Appeals) for the Assessment Year 2016-17, specifically challenging the disallowance under section 14A of the Act amounting to Rs. 54,98,682. The appellant had initially suo-moto disallowed an amount under section 14A based on a detailed scientific working certified by an independent Chartered Accountant. However, the AO invoked Rule 8D of the Income Tax Rules, 1962, and made an additional disallowance. The AO was not satisfied with the disallowance calculated by the assessee, stating that the apportionment of costs was not correctly done, and indirect costs such as rent were not considered. The AO computed the total disallowance under section 14A using the procedure prescribed under Rule 8D, resulting in a further disallowance. The Ld. CIT(A) confirmed the AO's action, leading to the appeal before the tribunal.

Issue 2: Proper satisfaction of the Assessing Officer in not accepting suo moto disallowance made by the assessee:

The tribunal analyzed whether the Assessing Officer had recorded proper satisfaction in not accepting the suo moto disallowance made by the assessee. Referring to a previous decision in the assessee's own case for AY 2015-16, the tribunal observed that the AO did not record any objective satisfaction as to why the allocation of indirect expenses made by the assessee was not sufficient to cover the expenses attributable to earning exempt income. Citing a decision by the Hon'ble Supreme Court, the tribunal emphasized that the AO needs to record satisfaction before applying the theory of apportionment, especially when the assessee has already apportioned in the return. As the AO had not recorded any objective satisfaction in not accepting the suo moto disallowance, the tribunal directed the AO to accept the disallowance made by the assessee. Additionally, the tribunal referred to a Special Bench decision for disallowance under section 14A r.w.r. 8D, stating that only investments not yielding exempt income should be considered for computation.

In conclusion, the tribunal allowed the appeal of the assessee, holding that the additional disallowance made by the Revenue was not sustainable. The tribunal decided in favor of the assessee, directing the AO to accept the suo moto disallowance and considering only investments not yielding exempt income for computation under Rule 8D. The order was pronounced on 9th January 2023.

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