[aaykarbhavan] No S. 14A Rule 8D Disallowance Without Showing How Assessee's Claim Is Wrong: Cal High Court

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The following important judgement is available for download at itatonline.org.

CIT vs. REI Agro Ltd (Calcutta High Court)

S. 14A / Rule 8D disallowance cannot be made without showing how assessee’s claim/ computation is wrong

In AY 2009-10 the assessee earned dividend income of Rs.1.65 lakhs which was claimed exempt u/s 10(34) of the Act. The assessee claimed that no disallowance u/s 14A could be made because no expenditure had been incurred to earn the said dividend. It was claimed that no new investment was made during the year. It was also claimed that no loans were taken for making the investments for earning the dividend income. The AO was not convinced with the reply of the assessee and computed the disallowance at Rs. 32.43 lakhs u/s 14A by making calculation under Rule 8D. This was deleted by the CIT(A). The department filed an appeal before the Tribunal which was dismissed. The Tribunal relied on J. K. Investors (Bombay) Ltd (ITAT Mum) and noted that the AO had not examined the accounts of the assessee and had not recorded satisfaction about the correctness of the claim of the assessee before invoking Rule 8D. It held that while rejecting the claim of the assessee with regard to expenditure or no expenditure, as the case may be, in relation to exempted income, the AO had to indicate cogent reasons for the same and was not entitled to disregard the assessee’s claim and straightaway embark upon computing disallowance under Rule 8D. On appeal by the department to the High Court HELD dismissing the appeal:

The AO disallowed the expenditure u/s 14A without first recording that he was not satisfied with the correctness of the claim as regards the claim that “no expenditure” was made by the assessee. The disallowance u/s 14A of the Income-tax Act, 1961 is plainly contrary to the provisions of the statute. The CIT allowed the appeal of the assessee and the Tribunal did not interfere. Challenging the order of the tribunal, the present appeal has been filed. We and are of the opinion that no point of law has been raised. Therefore, this appeal is dismissed

Note: See also the ITAT’s order in REI Agro for AY 2008-09 where it was held that (i) No s. 14A disallowance can be made if satisfaction is not recorded with reference to A/cs (ii) under Rule 8D(2)(ii) loans for specific business purposes cannot be included & (iii) under Rule 8D(2)(ii) & (iii) investments which have not yielded income cannot be included

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Regards,

 

Editor,

 

itatonline.org

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