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of <h1>Dividend income expense claim u/s14A: Rule 8D disallowance deleted as AO skipped mandatory satisfaction u/s14A(2).</h1> Disallowance under s.14A r.w. Rule 8D was held unsustainable because the AO failed to record the mandatory satisfaction under s.14A(2) that the assessee's ... Disallowance u/s. 14A r.w. Rule 8D - Mandation of recording satisfaction - assessee submitted that it has earned exempt dividend income of Rs. 23,09,005 from its investment in mutual funds which is exempt u/s. 10(35) and also objected that no expenditure has been incurred by the asse and therefore it has not disallowed any sum u/s.14A - CIT(A) confirmed the disallowance rejecting all the contentions of the assessee - HELD THAT:- According to the provisions of section 14A of the Act, the assessee is not allowed deduction of any expenditure in relation to exempt income. According to the provisions of sub-section (2) of section 14A, the ld. AO is given a power to determine the amount of expenditure incurred in relation to exempt income according to the method prescribed. Such method is under Rule 8D of the I.T. Rules. AO has to examine that has the assessee put any expenditure in the Profit & Loss account which is incurred in relation to earning exempt income or the expenditure of such nature are more than what is claimed by the assessee. Then he must record such satisfaction in precise manner in the assessment order. After this process only, the ld. AO is empowered to compute the disallowance under Rule 8D. This is the mandate of the provision of the law. The Hon’ble Supreme Court also in the case of Maxopp Investment Ltd. [2018 (3) TMI 805 - SUPREME COURT] has categorically held that recording of the satisfaction is a sine qua non before making any disallowance. Further the claim of the assessee is that it has not incurred any expenditure has also not been refuted by the ld. AO. When the complete Income & Expenditure statement is available before him, he is duty bound to have pointed out some expenditure which has been incurred for earning of exempt income to negate the claim of the assessee. We do not find any such satisfaction recorded by the ld. AO about the correctness of the claim of assessee that it has not incurred any expenditure for earning of the exempt income, the disallowance made u/s. 14A of the Act cannot be sustained. Disallowance cannot be sustained. Decided in favour of assessee. AO has not recorded the satisfaction for invoking the applicability of section 14A r.w. Rule 8D - There is no error pointed out by the ld. AO that the books of account maintained by the assessee is not reliable, except making disallowance u/s. 14A to the returned income of the assessee of Rs. 70.29 crores as well as the book profit computed u/s. 115JB of the Act was accepted as it is. AO has not referred any item of expenditure from the books of account of the assessee which even remotely can be said to have incurred for earning of the exempt income. Thus, making a generalised statement without substance or evidence pointing out that the claim made by the assessee that it has not incurred any expenditure towards earning the exempt income, cannot be said to be satisfaction properly recorded in terms of section 14A of the Act. Issues: Whether, before invoking the mechanics of Rule 8D to determine disallowance under section 14A, the Assessing Officer recorded the requisite satisfaction having regard to the assessee's books and claim that no expenditure was incurred in relation to exempt income.Analysis: The legal framework comprises section 14A (prohibiting deduction of expenditure in relation to exempt income), subsection (2) (empowering the AO to determine such expenditure where he is not satisfied with the assessee's claim) and Rule 8D (prescribing the method of computation). Subsection (2) requires the AO, having regard to the accounts of the assessee, to be satisfied about the incorrectness of the assessee's claim before applying Rule 8D. Judicial precedent establishes that recording of such satisfaction is a sine qua non and that generalized observations without reference to specific entries or cogent reasons do not meet the statutory requirement. In the present matters, the AO issued show-cause and mechanically applied Rule 8D percentages without identifying or disputing specific items in the accounts or recording a clear, reasoned dissatisfaction with the assessee's claim that no or minimal expenditure was incurred to earn the exempt dividends. The appellate authorities restricted some disallowances to the quantum of exempt income but did not cure the absence of recorded satisfaction. Identical facts across the appeals show absence of a proper satisfaction note tied to examination of the books.Conclusion: The disallowances made under section 14A by applying Rule 8D are set aside for want of the mandatory satisfaction required by section 14A(2); the Assessing Officer is directed to delete the respective disallowances (subject to nominal amounts admitted in accounts where applicable). Appeals allowed in favour of the assessee.
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