INCOME TAX ACT, 1961

Section 154

Rectification - Debatable issue - Disallowance made by AO under rule 8D -

Assessee-company had earned dividend income from mutual funds which was exempt income from tax under section 10(38) and computed administrative expenses amounting to Rs. 3,55,660 against the exempt dividend income which was disallowed under section 14A. AO passed the order under section 143(3) accepting the income declared by assessee and also accepted the disallowance made under section 14A. Subsequently, AO initiated rectification proceedings under section 154 proposing to rectify the alleged mistake. Assessee had claimed expenses towards interest on term loan as financial expenses. However, Assessee ought to have disallowed expenses under section 14A, read with rule 8D(2)(iii) of the Income Tax Rules 1962 (Rules) of Rs. 45,04,341. A notice under section 154, was issued to assessee accordingly disallowing Rs. 41,48,681 being the difference between Rs. 45,04,341 and Rs. 3,55,660 under section 14A and added the same to the total income of assessee. Held: It is only when no reasonable and proper parameters for making disallowance can be arrived at, that resort to rule 8D(2) can be had by AO. AO under section 14A had the discretion to substitute the computation of disallowance under section 14A as made by assessee on estimation. The satisfaction contemplated under section 14A (2) was not merely restricted to rejecting the claim made by assessee and the disallowance to be made under section 14A but also includes substituting the claim made by the Assessee on any other reasonable basis as AO deems it fit. In such circumstances the correctness of the AO's judgment could be reviewed but it could not be said that AO had no jurisdiction to do so and AO ought to resort only to the provision of rule 8D of the Rules. Hence, rule 8D is not automatic and can be resorted to by AO only as a measure of last resort. The issue before AO was debatable and therefore, resort to proceedings under section 154 of the Act was not appropriate.

REFERRED : Maxopp Investment Ltd. v. CIT, New Delhi and Pr. CIT-I v. D.B. Corp Ltd. (2018) 402 ITR 640 (SC) : 2018 TaxPub(DT) 1403 (SC) TS Balaram, ITO, Company Circle IV, Bombay v. Volkart Brothers & Ors. (1971) 82 ITR 50 (SC) : 1971 TaxPub(DT) 0355 (SC) Maxopp Investment Ltd., Cheminvest & Ors. v. CIT, CIT v. Escorts Finance Ltd. (2011) 203 Taxman 364 (Del) : 2011 TaxPub(DT) 2171 (Del-HC) Godrej and Boyce Mfg. Co. Ltd. v. Dy. CIT & Anr. (2010) 328 ITR 81 (Bom) : 2010 TaxPub(DT) 2182 (Bom-HC)

FAVOUR : In assessee's favour

A.Y. : 2014-15

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