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 is incorrect before applying Rule 8D(2) computation mechanism. Since AO failed to do so, only assessee's suo moto disallowance was sustained. Tribunal also directed that Rule 8D(2) mechanism cannot be applied for book profit computation under section 115JB, following Special Bench precedent in Vireet Investments case. Additionally, painting expenditure was allowed as revenue expenditure based on assessee's own case precedent.

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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.

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