2026 (1) TMI 992 - HC - Income Tax

Disallowance under Section 14A r.w. Rule 8D: requirement of AO satisfaction for additions upheld, Revenue appeals dismissed.

Disallowance of expenditure relating to exempt income requires the assessing officer to record a satisfaction explaining why expenditure claimed by the ... Disallowance u/s 14A r.w.r. 8D - Mandation of recording satisfaction before addition - need to assign any reason as to why the disallowance was computed by him with respect to the interest expenses under Section 14A r/w. Rule 8D(2)(ii). HELD THAT:- In the present case, the ITO, when recording such satisfaction, has rejected the claim of the Assessee. However, the ITO has not recorded any dissatisfaction whilst disagreeing with the Assessee, with respect to the expenditure incurred by it, relating to the income, forming part of its total income, as required u/s 14A(2) before rejecting the claim of the Assessee. In the impugned order, the Tribunal has also followed the decision of Godrej and Boyce [2010 (8) TMI 77 - BOMBAY HIGH COURT] whilst confirming the order passed by the PCIT and dismissing the appeal filed by the Revenue. As decided in Bajaj Finance Ltd. [2019 (4) TMI 378 - BOMBAY HIGH COUR] a similar question of law was sought to be proposed by the Appellant – Revenue therein. However, whilst dismissing the said Appeals, this Court reiterated that under Section 14A(2), the satisfaction of the AO about the correctness of the expenditure offered for disallowance by the Assessee is a pre-condition, which was not done in that case and therefore, the said Appeals were dismissed. We are not persuaded to differ with this view, which is the correct one. Tribunal has neither committed any perversity nor applied incorrect principles to the given facts. The Tribunal and the PCIT are the final fact finding authorities which have held against the Revenue. Issues: Whether the Tribunal was justified in deleting the disallowance computed under Section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income-tax Rules, 1962 on the ground that the Assessing Officer had not recorded the requisite satisfaction about the incorrectness of the assessee's claim before applying Rule 8D.Analysis: Section 14A(2) permits determination of expenditure relating to exempt income by the Assessing Officer in accordance with the prescribed method, but such disallowance requires the Assessing Officer to record satisfaction that the assessee's claim is incorrect having regard to the assessee's accounts. Absent a recorded dissatisfaction and reasons showing why the assessee's computation is rejected, the mechanical application of Rule 8D without recording appropriate satisfaction is impermissible. Earlier authorities confirming this principle were applied; the assessing officer's computation was found to lack justification and to be mechanical, and the appellate authorities (Pr. Commissioner under Section 263 and the Tribunal) upheld the assessee's position after examining the accounts and the AO's working.Conclusion: Deletion of the disallowance under Section 14A read with Rule 8D is upheld; the Revenue's challenge fails and the appeal is dismissed in favour of the assessee.