2025 (7) TMI 1857 - AT - Income Tax

AO must record satisfaction before invoking Section 14A and Rule 8D disallowance, says ITAT

The ITAT Kolkata held that the AO failed to record any satisfaction regarding the incorrectness of the assessee's calculation for disallowance under ... Disallowance u/s 14A - mandation to record satisfaction - AO observed that during the year the assessee has earned dividend income and claimed the same as exempt - HELD THAT:- AO has not recorded any satisfaction as to how the calculation furnished by the assessee is wrong necessitating the calculation of disallowance u/s 14A read with Rule 8D of the Rules. Therefore, in absence of any satisfaction the provisions of section 14A can not be invoked and no disallowance can be made u/s 14A read with section 8D of the Rules. The case find support from the decision of TIL Ltd.[2023 (3) TMI 339 - ITAT KOLKATA], in which the Tribunal has followed the decision in case of REI Agro Ltd. [2014 (4) TMI 713 - CALCUTTA HIGH COURT] and ACB India Ltd. [2015 (4) TMI 224 - DELHI HIGH COURT]. Accordingly, we set aside the order of ld. CIT (A) and direct the ld. AO to delete the addition. As disallowance offered by assessee suo moto ₹1,96,311/- has to be made. Consequently, the appeal of the assessee is partly allowed. The Appellate Tribunal (ITAT Kolkata) heard the assessee's appeal against the National Faceless Appeal Centre, Delhi's order dated 21.01.2025 for AY 2016-17, upholding a disallowance under section 14A of Rs.53,53,375/- in the assessment framed u/s 143(3). The issue concerned the disallowance of expenses related to exempt dividend income of Rs.76,30,220/-, with investments totaling Rs.107.47 crore. The AO applied section 14A read with Rule 8D to compute the disallowance, rejecting the assessee's offered disallowance of Rs.1,96,311/-. The Tribunal held that the AO failed to record any satisfaction explaining why the assessee's calculation was incorrect, a prerequisite for invoking section 14A read with Rule 8D. Citing precedents including TIL Ltd. v. DCIT (ITA No. 558/KOL/2022), REI Agro Ltd. (Calcutta HC), and ACB India Ltd. v. ACIT (Delhi HC), the Tribunal ruled that 'in absence of any satisfaction the provisions of section 14A cannot be invoked and no disallowance can be made u/s 14A read with section 8D of the Rules.' Accordingly, the Tribunal set aside the CIT(A)'s order, directed deletion of the disallowance of Rs.53,53,375/-, but upheld the assessee's own offered disallowance of Rs.1,96,311/-. The appeal was therefore partly allowed.