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Poona Health Services Private Limited Versus Asst. Commissioner of Income Tax, Circle 4, Pune

2017 (6) TMI 345 - ITAT PUNE

Disallowance of expenses u/s 14A - necessity of recording of satisfaction - Held that:- AO while proceeding with disallowing the expenses has not recorded any satisfaction as required u/s 14A(2) of the Act. As per Sec.14A(2), for invocation of Rule 8D, the AO has to record satisfaction about the correctness of the claim of the assessee, in respect of the expenditure incurred in relation to the income which does not form part of total income. In the present case, we find that no satisfaction has .....

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ssessee is emanating out of the order of Commissioner of Income Tax (A) - II, Pune, dt.28.05.2014 for the assessment year 2009-10. 2. The relevant facts as culled out from the material on record are as under :- 2.1 Assessee is a company stated to be running a Diagnostic Centre. Assessee electronically filed its return of income for A.Y. 2009-10 on 29.10.2009 declaring total income at ₹ 15,12,596/-. Subsequently, assessee filed revised return of income on 27.09.2010 declaring nil taxable in .....

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incurred any expenditure to earn the exempt income and in the absence of any proper satisfaction recorded by the learned AO no disallowance u/s 14A r.w.r 8D could be made in the hands of the assessee. Assessee also filed additional ground, which reads as under : The assessee submits that without prejudice to its contention that no disallowance u/s 14A r.w.r. 8D is warranted, in the event, any disallowance is to be made, the investments made in national Housing Bank of ₹ 20,00,000/- and in .....

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had derived exempt income. The assessee was asked to give the working of disallowance u/s 14A of the Act and the assessee worked out the disallowance at ₹ 1,46,964/-. AO thus made a disallowance of ₹ 1,46,964/-. Aggrieved by the order of AO, assessee carried the matter before Ld.CIT(A), who upheld the order of AO by holding as under : 3.4 I have considered the submission made by the appellant and perused material on record. The appellant has contested the disallowance made u/s 14A of .....

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h the correctness of the claim of the assessee and finding no expenditure having been incurred in relation to exempt income sought the explanation of the assessee who furnished the working of the disallowance u/s 14A r.w. Rule 8D(2)(iii) of an amount of ₹ 1,46,964/-. The aforesaid working has been arrived at by taking the average of such investment yielding exempt income being 0.5% of the average of Rs (3,15,24,178 + 2,72,61,518) being ₹ 2,93,92,848/-. The Assessing Officer concurred .....

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aim of the assessee having regard to its accounts. The said principle has also been upheld by ITAT Madras in the case of Siva Industries Holding Ltd Vs ACIT in its order dated 20-05-2011, ITA No 2148/Mds/2010 and also by the Delhi Tribunal in DCIT Vs Jindal Photo Ltd lTA No 814/De1/2011 dated 23-09-2011. The fact on record clearly indicate the appellant to be in receipt of exempt income in the form of dividend from the investments made of Rs. 2.72 crores during the year under consideration. Thus .....

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e appellant has undisputedly earned exempt income hence the sec 14A is applicable where it provides that no deduction by the assessee in respect of expenditure incurred by the assessee in relation to exempted income will be allowed. There are expenses incurred for earning the exempt income as well as earning of other incomes. 3.4.1. The section 14A does not take care of only direct expenses but indirect expenses are also to be allocated to the exempted income. In the case of ACIT Vs Champion Com .....

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t. The satisfaction in any case as to the non-disallowance of expenses against exempt income is in any case discerning from the observation of the Assessing Officer. Thus the issue in appeal lies in a very narrow compass of undisputed material facts and in principle the disallowance u/s 14A r.w. Rule 8D gets attracted and the same has been rightly worked out by the assessee and also concurred by the Assessing Officer while working out the disallowance. So far as the contention of the appellant i .....

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incumbent on the Assessing Officer to, on an examination of the assessee's claim to either accept the same or state his reasons for his dissatisfaction therewith against with reference to the accounts. Apart from being the requirement of law it is only in such case that the validity of the dissatisfaction of the Assessing Officer, on an appeal by the assessee could be examined and reviewed by an appellate authority. The Assessing Officer in any case has considered the disallowance as is appa .....

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becomes relevant wherein the assessee earned exempt dividend income. When the Assessing Officer found to be in order and accordingly considered this amount of disallowance. In this regard the decision of the Chennai ITAT in the case of DCIT Vs. Vintros & Co (2013) 141 ITD 626 becomes relevant wherein the assessee earned exempt dividend income. When the Assessing Officer invoked sec.14A, assessee itself worked out disallowance u/r 8D which was added to the total income. The tribunal held tha .....

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uring the year assessee had earned tax free dividend of ₹ 7,37,340/- from investments in mutual funds. He submitted that the dividend were received under re-investments scheme of mutual funds and were therefore automatically re-invested in the same funds and accordingly assessee had not incurred any expenditure for earning the dividend. Ld.A.R. further pointed out the copy of the audited Balance-Sheet and stated that assessee was having sufficient interest free funds in the form of Share C .....

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s.20 lacs) and Rural Electrification Company Limited (Rs.30 lacs) aggregating to ₹ 50 lacs should have been excluded because the interest earned from these bonds are not tax free but are taxable. His third argument was that while making a disallowance u/s 14A r.w.r. 8D, AO has not recorded any satisfaction as required u/s 14A(2) of the Act and in such a situation, the disallowance u/s 14A of the Act cannot be proceeded with and for the aforesaid proposition, he relied on the decision of Pu .....

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nses u/s 14A of the Act. It is seen that the disallowance of ₹ 1,46,964/- has been worked out u/s 14A r.w.r. 8D(2), being 0.5% of average investments and no disallowance of account of interest has been worked out. We find that AO while proceeding with disallowing the expenses has not recorded any satisfaction as required u/s 14A(2) of the Act. As per Sec.14A(2), for invocation of Rule 8D, the AO has to record satisfaction about the correctness of the claim of the assessee, in respect of th .....

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igh Court has held that AO must record satisfaction that claim regarding expenditure is not satisfactory. The relevant observations by Hon ble High Court are reproduced hereunder : 11.Section 14A specifies the circumstances in which the Assessing Officer is entitled to determine the amount of expenditure incurred in relation to exempt income in accordance with such method as may be prescribed. The method prescribed is in rule 8D of the Income-tax Rules, 1962 which was introduced with effect from .....

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he correctness of the assessee's claim in respect of such expenditure in relation to exempt income. The word "if" indicates that to invoke the method prescribed namely rule 8D, the Assessing Officer must not be satisfied with the correctness of the assessee's said claim. 12. Sub-section (3) provides that the provisions of sub-section (2) shall apply in relation to a case where the assessee claims that no expenditure has been incurred by him in relation to exempt income. The ope .....

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l income under this Act. Thus under sub-section (2) and (3) of section 14A, an Assessing Officer can resort to rule 8D only if he is not satisfied with the correctness of the assessee s claim in respect of the expenditure in relation to the income which does not form part of the total income under the Act or if he is not satisfied with the correctness of the assessee s claim that no expenditure has been incurred by him in relation to such income. The Hon ble High Court further observed as under .....

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he assessee's claim that no expenditure had been incurred by him in relation to the income which does not form part of the total income under the Act. 20. The matter stands concluded by a judgment of this court dated January 27, 2015 in CIT Vs. Abhishek Industries Ltd. I T A. No. 320 of 2013- reported in [2016] 380 I1R 652 (P&H), where the Division Bench held (page 657) :- Section 14A of the Act requires the Assessing Officer to record satisfaction that interest bearing funds have been u .....

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