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2024 (6) TMI 1451 - AT - Income TaxAddition u/s 14A - AO was not satisfied with suo moto offering of disallowance of expenditure w.r.t. earning exempt income - HELD THAT - AO cannot straight away resort to Rule 8D. Sub-Section 2 of Section 14A and Rule 8D (1) both require the ld. AO to first consider the books of accounts of the taxpayer before resorting to Rule 8D. AO must arrive at an objective satisfaction that the assessee s claim is incorrect. The satisfaction of the AO as to the incorrect claim made by the assessee in this regard is sine qua non for invoking the applicability of Rule 8D. Such satisfaction can be reached and recorded only when the claim of the assessee is verified. If the assessee proves before the ld. AO that it incurred a particular expenditure in respect of earning the exempt income and the AO gets satisfied then there is no requirement to still proceed with the computation of amount disallowable as per Rule 8D. We respectfully relied on the order of Bombay Stock Exchange Ltd.( 2019 (11) TMI 105 - BOMBAY HIGH COURT ). We reject the impugned appeal order. The addition amount is quashed. The appeal of the assessee is succeeded.
ISSUES PRESENTED and CONSIDERED
The core legal questions considered in this judgment are:
ISSUE-WISE DETAILED ANALYSIS 1. Disallowance under Section 14A Relevant legal framework and precedents: Section 14A of the Income-tax Act, 1961, deals with the disallowance of expenditure incurred in relation to income not includible in total income. Rule 8D provides the method for determining the amount of expenditure to be disallowed. The Supreme Court's decision in Maxopp Investments Ltd. v. CIT establishes that the AO must record satisfaction regarding the correctness of the assessee's claim before invoking Rule 8D. Court's interpretation and reasoning: The Tribunal found that the AO did not record the necessary satisfaction before applying Rule 8D, as required by the Supreme Court's ruling in Maxopp Investments. The AO's mechanical application of Rule 8D without examining the assessee's accounts was deemed inappropriate. Key evidence and findings: The assessee had initially disallowed Rs. 77,38,091 in its original return and later revised this to Rs. 1,69,01,920 in the revised return. The AO added back Rs. 77,17,358, claiming dissatisfaction with the assessee's disallowance. Application of law to facts: The Tribunal applied the principles from the Maxopp Investments case, emphasizing the necessity of the AO's satisfaction based on the assessee's accounts. The absence of such satisfaction rendered the AO's disallowance unsustainable. Treatment of competing arguments: The assessee argued that the AO's disallowance was mechanical and lacked the required satisfaction. The Department relied on the AO's order, but the Tribunal found the assessee's arguments more compelling. Conclusions: The Tribunal concluded that the AO's disallowance was unjustified due to the lack of recorded satisfaction, and thus, the addition of Rs. 77,17,358 was quashed. 2. Applicability of Finance Act 2022 Amendment Relevant legal framework and precedents: The Finance Act 2022 introduced clarifications to Section 14A. However, these amendments are not retrospective and apply prospectively. Court's interpretation and reasoning: The Tribunal noted that the amendments by the Finance Act 2022 were not applicable to the assessment year under consideration (2017-18), as the amendments were not retrospective. Key evidence and findings: The CIT(A) had relied on the 2022 amendments, but the Tribunal found this reliance misplaced for the relevant assessment year. Application of law to facts: The Tribunal applied the principle that amendments are prospective unless explicitly stated otherwise, thereby excluding the applicability of the 2022 amendments to the case at hand. Treatment of competing arguments: The assessee contested the applicability of the 2022 amendments, which the Tribunal upheld, agreeing with the assessee's position. Conclusions: The Tribunal concluded that the Finance Act 2022 amendments were not applicable to the assessment year 2017-18, reinforcing the decision to quash the disallowance. SIGNIFICANT HOLDINGS Preserve verbatim quotes of crucial legal reasoning: "The AO cannot straight away resort to Rule 8D. Sub-Section 2 of Section 14A and Rule 8D (1), both require the ld. AO to first consider the books of accounts of the taxpayer before resorting to Rule 8D. The ld. AO must arrive at an objective satisfaction that the assessee's claim is incorrect." Core principles established: The necessity for the AO to record satisfaction regarding the correctness of the assessee's disallowance under Section 14A before applying Rule 8D is reaffirmed. The Tribunal also established that amendments to tax laws are prospective unless explicitly stated otherwise. Final determinations on each issue: The Tribunal quashed the addition of Rs. 77,17,358 made by the AO under Section 14A, ruling in favor of the assessee. The appeal was allowed, and the disallowance was deemed unjustified due to the lack of recorded satisfaction by the AO.
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