INCOME TAX ACT, 1961

Section 14A(2)

Disallowance under section 14A - Expenditure against exempt income - Invocation of rule 8D - Non-recording of satisfaction in terms of section 14A(2)

Assessee earned tax-free dividend income on investment in shares/mutual funds. Assessee placed details of availability of own funds before AO and accordingly, pleaded that no disallowance of interest could be made under section 14A. Assessee further pleaded that since all the investments were held by it as stock-in-trade and Entire income derived from such investments was offered to tax under the head 'Business income' and not as 'capital gains', no expenditure per se was incurred by it towards administrative expenses for the purpose of earning dividend income which was exempt. However, AO invoked rule 8D(2) and worked out disallowance.Held: AO ought to have recorded objective satisfaction having regard to accounts of assessee by verifying each and every item of expenditure incurred by assessee and then come to conscious conclusion as to whether those expenses were indeed incurred for the purpose of earning exempt income or taxable income. However, AO directly proceeded to get into the computation mechanism provided in rule 8D(2) for the purpose of making disallowance under section 14A which was in contravention of mandate laid down under section 14A(2)/14A(3) and, therefore, disallowance could not be sustained.

Followed:Maxopp Investments (2018) 402 ITR 640 (SC) : 2018 TaxPub(DT) 1403 (SC).

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2012-13

INCOME TAX ACT, 1961

Section 115JB

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