INCOME TAX ACT, 1961

Section 14A Rule 8D

Disallowance under section 14A - Expenditure against exempt income - AO made disallowance over and above suo moto disallowance made by assessee - No requisite satisfaction by AO

Assessee-company made suo-moto disallowance under section 14A read with rule 8D. However AO, held that the working of the disallowance made by the assessee as per rule 8D(2)(iii) was less than 0.5% of average value of investment and accordingly, made addition to the assessee's income. Assessee submitted that the AO without going through the nature of expenditure debited and having regard to the accounts, mechanically applied rule 8D(2)(iii) @ 0.5%. It further, submitted that there was no satisfaction by the AO on the disallowance made by it and in a very mechanical manner he provided to make the disallowance. Held: It was found that assessee provided a very detailed working regarding suo-moto disallowance made under section 14A, then without pointing out any defect, the AO in a very general manner held that there was direct and proximate nexus between the expenditure and the exempt income. The satisfaction of the AO should not be mechanical but should prima facie indicate his application of mind on the accounts maintained by the assessee and the nature of expenditure debited vis-à-vis its co-relation with the earning of the exempt income. Further, it is a well settled proposition that satisfaction of the AO is mandatory before resorting to disallowance. In instant case, there was no requisite satisfaction by the AO and he mechanically applied rule 8D. Therefore, as the manner in which the disallowance under rule 8D(2)(iii) was made, was not called for and, accordingly, the disallowance made by the AO over and above the suo moto disallowance made by the assessee was deleted.

REFERRED : Godrej & Boyce Manufacturing Company Limited v. Dy. CIT & Anr. (2017) 81 taxmann.com 111 (SC)

FAVOUR : In assessee's favour

A.Y. :

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