2024 (9) TMI 475 - AT - Income Tax

Assessee's suo moto Section 14A disallowance sustained as AO failed recording objective satisfaction before applying Rule 8D(2)

ITAT Delhi held that where assessee made suo moto disallowance under section 14A, AO must record objective satisfaction with cogent reasons why such ... Disallowance made u/s 14A r.w.s. 8D(2)(iii) - suo moto disallowance made by the assessee - HELD THAT:- If suo moto disallowance of the expenditure has been made by the assessee and basis thereon has been explained by the assessee, then AO ought to have recorded an objective satisfaction with the cogent reasons as to why such disallowance made by the assessee is incorrect and thereafter resort to proceed with the computation mechanism provided in Rule 8D(2) of the Rules. This is mandate of law provided in section 14A(2) of the Act r.w. Rule 8D(1) of the Rules. Since the same is conspicuously absent in the instant case, we hold that the disallowance made by the learned AO under section 14A of the Act deserves to be deleted. Hence, we hold that only a sum being the suo moto disallowance made by the assessee in the return of income under section 14A should be sustained. Accordingly, Ground Nos.1 and 1.1 raised by the assessee are allowed. Disallowance of expenses u/s 14A r.w. Rule 8D of the Rules while computing the book profits under section 115JB - Special Bench of Delhi Tribunal in the case of Vireet Investments Pvt. Ltd. [2017 (6) TMI 1124 - ITAT DELHI] had categorically held that computation mechanism provided in Rule 8D(2) of the Rules cannot be imputed in the book profit computation under clause (f) of Explanation 1 to section 115JB(2) - direct expenses identified by the assessee in the sum as explained attributable to the earning of exempt income requires to be disallowed. Hence, we direct the learned AO to disallow addition u/s 14A while computing book profits under section 115JB. Nature of expenditure - disallowance of painting expenditure - revenue or capital expenditure - HELD THAT:- As relying in assessee’s own case for A.Y. 2008-09 [2024 (8) TMI 802 - ITAT DELHI] we hold that cost of paintings is to be considered as Revenue expenditure and accordingly ground no. 3 is allowed. Issues:1. Disallowance under section 14A read with section 8D(2)(iii) of the Income Tax Rules.2. Disallowance of expenses under section 14A r.w. Rule 8D of the Rules while computing book profits under section 115JB of the Act.3. Disallowance of painting expenditure as capital expenditure and non-granting of depreciation.Analysis:1. The appeals involved challenges to disallowances made under section 14A read with section 8D(2)(iii) of the Income Tax Rules. The assessee, engaged in real estate and investment activities, received exempt income in the form of dividends. The Assessing Officer (AO) disallowed expenses under Rule 8D(2) of the Rules, ignoring the assessee's suo moto disallowance. The ITAT held that the AO should have first assessed the assessee's disallowance before applying Rule 8D(2). The ITAT sustained only the assessee's suo moto disallowance of Rs. 36,54,208, deleting the rest of the disallowance.2. The next issue was the disallowance of expenses under section 14A r.w. Rule 8D of the Rules while computing book profits under section 115JB of the Act. The ITAT referred to a previous decision that the Rule 8D(2) mechanism cannot be applied to book profit computation. However, the ITAT directed the AO to disallow Rs. 36,54,208 of expenses identified by the assessee as related to exempt income while computing book profits.3. The final issue was the disallowance of painting expenditure as capital expenditure and the non-granting of depreciation. The ITAT relied on a previous decision regarding the nature of the paintings and held that the cost of paintings should be considered as revenue expenditure. Consequently, the ITAT allowed the cost of paintings as revenue expenditure and dismissed the disallowance of depreciation on paintings.In conclusion, the ITAT partly allowed the assessee's appeal for A.Y. 2011-12 and A.Y. 2012-13, while dismissing the Revenue's appeal for A.Y. 2012-13. The judgments were pronounced on 29.08.2024.