2024 (6) TMI 1467 - AT - Income Tax

ITAT Mumbai deletes additions for non-reconciliation of receipts and improper Section 14A disallowance under Rule 8D

Ganesh Srinivasan Versus Asstt. Commissioner of Income Tax, Range-11 (2), Mumbai.

ITAT Mumbai ruled in favor of the assessee on two issues. First, regarding non-reconciliation of professional receipts with AIR information/Form 26AS, the ... Non-reconciliation of assessee’s professional receipts with AIR information/Form 26AS - HELD THAT:- The issue arising in the present appeal is recurring in nature and has been decided in favour of the assessee by the coordinate bench of the Tribunal in the preceding assessment year. As evident from the record that the CIT(A) though took note of the aforesaid decisions rendered in assessee’s own case, however decided not to follow the same without pointing out any change in facts vis-à-vis the year under consideration. Since in the year under consideration, the impugned addition is made only due to non-reconciliation of professional receipts as per the AIR information with reference to assessee’s books of accounts and bank statement, therefore, respectfully following the aforesaid decisions rendered in assessee’s own case, we direct the AO to delete the balance addition. Disallowance u/s 14A r/w Rule 8D - Mandation to record satisfaction - HELD THAT:- If the AO is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred in relation to income which does not form part of the total income, after having regard to the accounts of the assessee, the AO can determine the amount of such expenditure. Satisfaction as required to be recorded under the provisions of section 14A of the Act is not limited to merely disagreeing with the submission of the assessee and requires that the AO should also provide the basis for reaching such a conclusion, after having regard to the accounts of the assessee. Since, in the present case, no proper satisfaction has been recorded by the AO in terms of the provisions of section 14A(2) of the Act, having regard to the accounts of the assessee, about the correctness of the claim of the assessee in respect of expenditure incurred in relation to exempt income, respectfully following the aforesaid decision, we do not find any reason to uphold the disallowance made by the AO u/s 14A r/w Rule 8D of the Rules. Accordingly, the same is directed to be deleted. Decided in favour of assessee. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered by the Tribunal in the appeals for the assessment years 2008-09 and 2011-12 are:(a) Whether the addition made by the Assessing Officer (AO) on account of non-reconciliation of the assessee's professional receipts with the Annual Information Report (AIR) data/Form 26AS is justified, particularly when the assessee's declared income exceeds the receipts reflected in the AIR data and prior judicial decisions have held against such additions.(b) Whether the disallowance under section 14A of the Income Tax Act, 1961 ('the Act') read with Rule 8D of the Income Tax Rules, 1962 ('the Rules') in respect of expenditure related to exempt dividend income is sustainable, especially in the absence of recorded satisfaction by the AO regarding the correctness of the assessee's claim about such expenditure.2. ISSUE-WISE DETAILED ANALYSIS(a) Addition on account of non-reconciliation of professional receipts with AIR/Form 26ASRelevant legal framework and precedents: The issue arises from the AO's invocation of section 143(3) of the Act to add unexplained professional receipts which remained unreconciled with AIR data. The assessee challenged this addition relying on binding judicial precedents, including orders of the Tribunal and the High Court in the assessee's own case, which held that no such addition can be made merely on the ground of non-reconciliation with AIR/Form 26AS data.Court's interpretation and reasoning: The Tribunal noted that the assessee is a Senior Advocate whose fees are received by cheque and deposited in a single bank account, with no allegation of cash receipts. The Tribunal emphasized the practical difficulties faced by the assessee in providing a party-wise reconciliation of fees due to the nature of professional engagements-fees may be received from instructing advocates, chartered accountants, or directly from clients, sometimes with delays or adjustments. The Tribunal relied heavily on the coordinate bench's earlier decision for the assessment year 2006-07, wherein similar additions were deleted after detailed consideration of the facts and explanation by the assessee.Key evidence and findings: The assessee's declared professional income (Rs. 8,79,07,752) exceeded the AIR-reported receipts (Rs. 7,82,82,633). The assessee's explanation regarding mode and source of receipts was undisputed, and there was no evidence of cash receipts or undisclosed income. The Tribunal also noted that the Revenue failed to produce any contrary material to rebut the assessee's submissions.Application of law to facts: The Tribunal applied the principle that an addition cannot be sustained merely on non-reconciliation where the declared income exceeds the AIR figures and no evidence of concealment exists. The Tribunal followed the binding precedent of the coordinate bench and the High Court, which had dismissed Revenue's appeals on similar grounds.Treatment of competing arguments: The Revenue's reliance on the AO and CIT(A) orders was rejected due to lack of any change in facts or law and absence of any material to contradict the assessee's explanation. The Tribunal observed that the CIT(A) failed to follow binding judicial precedents without providing any justification.Conclusion: The Tribunal directed deletion of the addition of Rs. 1,71,47,470 made on account of non-reconciliation of professional receipts with AIR data.(b) Disallowance under section 14A read with Rule 8D in respect of exempt dividend incomeRelevant legal framework and precedents: Section 14A of the Act disallows expenditure incurred in relation to income which does not form part of total income, such as exempt dividend income under section 10. Section 14A(2) mandates that the AO must record satisfaction based on the assessee's accounts before determining such disallowance. The Supreme Court in Godrej & Boyce Manufacturing Company Ltd. v. DCIT clarified that the AO's satisfaction is a prerequisite for applying the formula under Rule 8D or making a best judgment assessment.Court's interpretation and reasoning: The Tribunal found that the AO made an ad-hoc disallowance of Rs. 50,000 without recording any satisfaction regarding the correctness of the assessee's claim that no expenditure was incurred to earn exempt income. The assessee's submissions that investments were managed by his father without remuneration and dividends were directly credited without any related expenditure were undisputed.Key evidence and findings: The absence of any material contradicting the assessee's claim and the lack of a reasoned satisfaction recorded by the AO were critical. The Tribunal noted that the AO did not comply with the mandatory requirement of section 14A(2) to examine the accounts and record satisfaction before applying Rule 8D.Application of law to facts: Following the Supreme Court's ruling, the Tribunal held that mere disagreement by the AO without recording satisfaction is insufficient to sustain disallowance under section 14A. The AO's approach was contrary to law.Treatment of competing arguments: The Revenue's contention was dismissed due to failure to demonstrate any basis for dissatisfaction with the assessee's claim or any contrary material in the assessee's accounts.Conclusion: The Tribunal deleted the disallowance made under section 14A read with Rule 8D.(c) Application of findings to assessment year 2011-12Since the issues and facts for the assessment year 2011-12 were similar to those in 2008-09, the Tribunal applied the same reasoning and directions mutatis mutandis, deleting the additions and disallowances made by the AO and setting aside the CIT(A) orders.3. SIGNIFICANT HOLDINGS'We find sufficient force in the submissions made by the assessee that no addition is called for on this account. Accordingly, we set aside the order of the CIT(A) and direct the Assessing Officer to delete the addition.''The satisfaction as required to be recorded under the provisions of section 14A of the Act is not limited to merely disagreeing with the submission of the assessee and requires that the AO should also provide the basis for reaching such a conclusion, after having regard to the accounts of the assessee.''Since, in the present case, no proper satisfaction has been recorded by the AO in terms of the provisions of section 14A(2) of the Act, having regard to the accounts of the assessee, about the correctness of the claim of the assessee in respect of expenditure incurred in relation to exempt income, respectfully following the aforesaid decision, we do not find any reason to uphold the disallowance made by the AO under section 14A of the Act read with Rule 8D of the Rules.'Core principles established include:An addition on account of non-reconciliation with AIR/Form 26AS cannot be sustained where the assessee's declared income exceeds the AIR figures and no evidence of concealment or cash receipts exists.The AO must record a reasoned satisfaction based on the assessee's accounts before making disallowance under section 14A read with Rule 8D; mere disagreement is insufficient.Binding precedents and prior judicial decisions in the assessee's own case must be followed unless there is a material change in facts or law.Final determinations on each issue were in favour of the assessee, resulting in deletion of the additions and disallowances for both assessment years 2008-09 and 2011-12.