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2022 (11) TMI 656 - AT - Income TaxAddition made u/s 41(1) - Cessation of Liability u/s 41(1) - HELD THAT:- It is a fact on record that assessee has written off the said liability and offered it to tax in AY 2017-18 considering which we are inclined to accept the submission made by the Ld. Counsel and direct the ld. AO to delete the addition so made. Further it is settled position of law that unilateral right off in the manner which the AO has done cannot be sustained u/s 41(1) of the Act. In respect of second and third issue taken together, we note that it is an uncontroverted fact that assessee has never claimed these expenses in its return of income while reporting the total income. Thus, when no claim has been made by the assessee for the allowance of these expenses that the disallowance so made by the Ld. AO is not warranted and it is directed that the same be deleted. Disallowance u/s 14A read with Rule 8D(2)(iii) - We note that the assessee had capital, reserve and surplus far exceeding investment made in securities yielding exempt income. We also note that Ld. AO has straightway applied Rule 8D(2)(iii) for the purpose of making a disallowance without complying with the requirements of Section 14A to record a satisfaction having regard to the books of account of the assessee. AO has not brought on record the proximate relationship between the expenditure and the tax exempt income. We note that application of Section 14A read with Rule 8D(2) is not automatic and it is mandatory on the part of Ld. AO to record an objective satisfaction before resorting to computation of disallowance under rule 8D(2). Accordingly, we direct the Ld. AO to delete the disallowance made by applying Rule 8D(2)(iii). Appeal of the assessee is allowed.
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