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Income Tax - Rule 8D(1)(b) comes into play only after AO records his non-satisfaction about assessee's claim: HC

By TIOL News Service

ALLAHABAD, OCT 12, 2017: THE issue is - Whether Rule 8D(1)(b) comes into play only after AO records his non-satisfaction about the assessee's claim. YES is the verdict.

Facts of the case

The Assessee-a registered State owned company, was engaged in promotion of electronics industry and imparting computer training in the State of U.P. The Assessee was also registered as non-banking finance company and its activity also included trading activity, computer hardware and other peripherals. The Assessee filed its return declaring a total income as 'NIL'. However, the income for calculation of tax u/s 115JB at Rs. 47,23,798/-, therefore, the Assessee revised its original return showing book profit through CASS. The Assessee claimed a dividend income stating that no expenditure was incurred. During the process of assessment, the Assessee's return was selected for scrutiny and thereby, notices u/s 143(2) and 142(1) were issued by the AO. Moreover, the AO applied Section 14A r/s Rule 8D(2)(iii) and thereby, disallowed the dividend income as claimed and subsequently made additions. Therefore, the Assessee's total income was computed at Rs. 59,32,539/-.

On Assessee's appeal, the CIT(A) confirmed applicability of Section 14A for disallowing expenditure but reduced the additions made by the AO. Again on Assessee's appeal, the Tribunal observed that the AO had failed to record its objective satisfaction with regard to the correctness of Assessee's claim and addition was mechanical without satisfying the conditions precedent for applying Section 14A(2). Therefore, the Tribunal had partly allowed Assessee's appeal and had set aside the assessment order as confirmed by CIT(A) in relation to additions made by disallowing exemption u/s 14A(2) r/w Rule 8D.

the High Court held that,

++ Section 14A after its insertion came to be considered at length in the case of Walfort Share and Stock Brokers Private Ltd., it held that insertion of Section 14A with respective effect reflects serious attempt on the part of Parliament not to allow deduction in respect of any expenditure incurred by Assessee in relation to income which does not form part of total income under Act, 1961 against taxable income;

++ in the case of Dhampur Sugar Mills, a Division Bench of this Court, presided by Dr. Justice D.Y. Chandrachud (Chief Justice), after referring to Section 14A(2) and Rule 8D of Rules, 1962 observed that to determine the amount of expenditure incurred in relation to such income which does not form part of total income under Act, 1961 by applying the method which is prescribed in Rule 8D, AO must not be satisfied with the correctness of claim of Assessee having regard to accounts of Assessee. Having said so, Court observed that for the purpose of looking into the fact whether order passed by AO has applied to the requirement or not, one has to go through the order itself since there cannot be any strait jacket formula requiring AO to use any particular language or form. If the order of AO indicate that he is not satisfied with the correctness of claim of Assessee or the claim of Assessee that no expenditure has been incurred, he has to proceed in the manner indicated in Rule 8D(2). Court then examined the order of AO passed in that case which contained various reasons and details of disclosure made by the Assessee and found that there was compliance of requirement of Section 14A(2) and order shows application of mind on the part of AO to the accounts of Assessee from the assessment order itself;

++ in our view, jurisdiction to apply Section 14A contemplates satisfaction of condition precedent therein, on the part of AO. If he has illegally exercised jurisdiction, same cannot be said to have been rectified by order passed by Appellate Authority inasmuch as order of Assessing Authority itself being illegal as statutory mandatory condition was not satisfied, such illegality could not have been cured by order passed by Appellate Authority. In the circumstances, we answer the questions against Revenue and in favour of Assessee. Appeal in question is accordingly dismissed.

(See 2017-TIOL-2150-HC-ALL-IT)