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Income Tax Appellate Tribunal, DELHI BENCH: ‘D’ NEW DELHI
Before: SHRI G.D. AGRAWAL, HON’BLE & SHRI K.N. CHARY
ORDER PER SHRI K.N. CHARY, JUDICIAL MEMBER
This is an appeal by the assessee challenging the order dated 26.02.2014 in appeal no. 336/11-12 passed by the Ld. Commissioner of Income Tax (Appeals)-19, New Delhi (hereinafter for short called as the “Ld. CIT (A)”).
Brief facts of the case are that the assessee was engaged in the business of providing repairs & maintenance services of earth movers tyres, coveyor belts, trading in cold valcunising products, tyres and run flat system. During the scrutiny assessment proceedings the AO among others made an addition of Rs. 9,73,343/- by invoking the provisions u/s 14A read with Rule 8D of the Rules. In appeal Ld. CIT (A) confirmed the same by way of impugned order. Hence this appeal. Though several grounds are raised in the appeal, at the time of hearing Ld. AR submitted that except grounds no. 1 & 2 relating to the addition u/s 14A read with Rule 8D of the Rules, they are not pressing the other grounds.
2. As could be seen from the assessment order, during the scrutiny proceedings AO observed that the assessee derived dividends from sale and mutual funds to a tune of Rs. 1,02,28,175/- and while claiming the deduction of the entire amount being exempt u/s 10(34) and 10(35) of the Income Tax Act, 1961 (for short called as the “Act”), disallowance of expenses on account of this exempt income was made as follows:
i. Portfolio Management Services (PMS) - Rs. 2,10,294/- ii. Security Transaction Tax (STT) - Rs. 63,532/- Total - Rs. 2,73,826/- However, the AO issued notice as to why the disallowance be not made as per Rule 8D of the Rules, and not being satisfied with the explanation of the assessee AO proceeded to calculate the disallowance under Rule 8D and disallowed a sum of Rs. 9,73,343/-. Ld. CIT (A) held that since the AO has given an opportunity to the assessee as to why the disallowance be not made as per Rule 8D, and worked out the disallowance under Rule 8D, it is deemed that the dissatisfaction required u/s 14A(2) of the Act was duly recorded and according to him since there is no prescribed format for recording the dissatisfaction the order has to be read as a whole. Further according to the Ld.CIT (A) since the CIT (A) has all the powers of Assessing Officer he can record the dissatisfaction as to the correctness of the claim for disallowance made by the assessee and recorded his dissatisfaction.
Ld. AR based his arguments mainly on two points. Firstly, though there is no format for recording the satisfaction/dissatisfaction, the order of assessment shall read clearly the reasons for the AO not to accept the disallowance worked out by the assessee, which is conspicuously absent in this case. Second point is that when the statute required the satisfaction/dissatisfaction had to be recorded by a particular authority, all other authorities are precluded from doing so. In this matter statute confers the powers of the AO which the AO alone has to do but not CIT (A). Ld. DR strongly supported the orders of the authorities below for the reasons stated therein.
As could be seen from the assessment order, vide paragraph no. 3.1 AO directly jumped to issuance of notice as to why the disallowance be not made under Rule 8D, and finding the explanation of the assessee as not acceptable, Ld. AO proceeded to apply Rule 8D. However, the law is otherwise. First the AO has to record his reasons for not agreeing with the disallowance worked out by the assessee. Here in this matter that was not done. Straightway the AO issued a notice as to why Rule 8D shall not be applied.
In Eicher Motors Ltd Vs. CIT, decided on 15.09.2017 the Hon’ble Jurisdictional High Court held as follows:
“13. As regards the disallowance of expenditure for earning exempt income in terms of Section 14A of the Act, the settled legal position is that the AO had to record reasons for disagreeing with the submission of the assessee that it had incurred no expenditure for earning such exempt income. This is plain even from Rule 8D(1) which requires the AO to mandatorily record his satisfaction that the claim made by the assessee that no expenditure has been incurred is incorrect “having regard to the accounts of the assessee”. In this case, a perusal of the AO’s reasoning shows that the AO has merely conjectured that there is an inbuilt cost even in passive investment as also incidental expenditure like collection, telephone, follow up etc. The AO thus, concludes that the expenses are embedded as indirect expenses. This is not as per the requirements of Rule 8D. There is no satisfaction recorded based on the accounts of the assessee. The AO simply presumes that since the exempt income exists and is being claimed by the assessee, some portion of the expenses ought to be added back. This is not sufficient as per the law.”
Further, statute confers the powers on the AO to record satisfaction, which the AO alone has to do but not CIT (A). In view of this settled law in Eicher Motors Ltd Vs. CIT (supra), we find it difficult to sustain the addition made by the AO to a tune of Rs. 8,73,343/- by invoking Rule 8D of the Rules. We, therefore, direct the AO to delete the same.
In the result, the appeal is allowed.