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Income Tax Appellate Tribunal, DELHI BENCH ‘D’ NEW DELHI
PER CHANDRA MOHAN GARG, JUDICIAL MEMBER This appeal by the assessee has been directed against the order of the CIT(A)-XI, New Delhi dated 12.9.2013 passed in first appeal No. 76/2012-13 for asstt. year 2010-11.
The ground No. 4 and 5 of the assesse are of general in nature and other effective grounds for adjudication read as follows :-
1.The CIT(A) has erred on facts and circumstances of the case in confirming the addition made by the Assessing Officer (herein after referred to as “AO ) amounting to Rs. 3,37,282/- u/s 14A read with Rule 8D
2. The CIT(A) has erred on facts and circumstances of the case in confirming the addition made by the AO u/s 14A read with Rule 8D without appreciating the fact that the Ld. AO proceeded to apply Rule 8 without recording his dissatisfaction on the correctness of the disallowance made by the appellant itself.
3.The CIT(A) has erred on facts and circumstances of the case in confirming the addition made by the AO u/s 14A read with Rule 8D without appreciating the submission of the appellant that while considering the average investment for the purpose of clause (iii) of Rule 8D, the investment which has given rise to the income and which does not form part of the total income, is to be considered.”
We have heard arguments of both the sides and carefully perused the relevant materials placed on record before the Tribunal. The Ld. Counsel for the assessee placing reliance on the decision of Hon’ble Jurisdictional High Court of Delhi in the case of Maxopp Investment Ltd. vs. CIT dated 18.11.2011 passed in submitted that primary satisfaction has not been recorded by the AO as per provision of Section 14A of the Income Tax Act, 1961 ( for short the Act) challenging the suo moto disallowance made by the assesee and there is no satisfaction to dismiss the correctness of the expenditure claimed by the assessee. The co-counsel pointed out that the assessee has not claimed any exempt income and the assessee has suo moto disallowed Rs. 31,553/- u/s 14A of the Act, hence no further disallowance and addition can be made u/s 14A read with rule 8D of the IT Rules, 1962.
The Ld. DR replied that the CIT(A) recorded required satisfaction alleging the correctness of the claim of the assessee under coterminous powers given by the Act. He drawn our attention towards para 9 and 9.1 of the first appellate order and contended that the CIT(A) recorded required satisfaction while upholding the action of the AO.
The Ld. Counsel also placed rejoinder to the above contentions of the Ld. DR, and submitted that the recording of satisfaction has to be made by the AO and the CIT(A) cannot fill the gap by using coterminous powers and these powers cannot be extended to fill the perversity and illegality in the assessment order.
On a careful consideration of the above rival contentions at the outset, we note that undisputedly the assessee did not claim any exempt income during the period and the assessee also made suo moto disallowance of Rs. 31,553/-. However, the AO without alleging the correctness at the suo moto disallowance on expenditure claimed by the assessee made addition u/s 14A read with Rule 8D (2)(iii) of the Rules.
In our humble understanding subsection (2) of section 14A of the Act mandates the manner in which the AO has to determine the amount of expenditure incurred in relation to income which does not form part of total income. As per ratio laid down by Hon’ble High Court of Delhi in the case of Maxopp (supra) and as per mandate of subsection (2) section 14A of the Act, we would find that the AO is required to determine the amount of such expenditure only if the AO, having regard to the accounts of the assessee, is satisfied with the correctness of the claim of expenditure as well as about the correctness of the suo moto disallowance made by the assessee. This requirement is mandatory to be complied by the AO and the CIT(A) by using coterminous powers during first appellate proceeding can not fill the gap by recording required satisfaction which was not recorded by the AO in the assessment order.
In the present case the AO has dealt this issue in last page of the order and from this relevant operative part it is amply clear that the AO has not any satisfaction – alleging and dismissing the correctness of the claim of expenditure made by the assesee. However from para 9 and 9.1 of the first appellate order, we note that CIT(A) has noted that the AO has not recorded required dissatisfaction on the correctness of the assesee’s claim but he also further note that the argument of the appellant – assessee that AO has not recorded his dissatisfaction on the correctness of the appellants claim in respect of expenditure relatable to earning of tax-free dividend income becomes redundant. But we decline to accept this analogy adopted by the CIT(A) because as per provision of subsection (2) of Section 14A of the dissatisfaction about the correctness of the claim of expenditure has to be recorded by the AO and this omission by the AO cannot be filed by the CIT(A) during first appellate proceedings . The sub-section (2) of Section 14A reads as follows :-
“14A. Expenditure incurred in relation to income not includible in total income.—(1)For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act: Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001.’ 8. In view of above mandate of this provision it is amply clear that for making any disallowance u/s 14A of the Act the AO shall determine the amount of total expenditure incurred by the assessee which does not form part of total income under his Act in accordance with such method as may be prescribed i.e. under Rule 8D of the Income Tax Rule, 1962. At the same time second subsequent part of sub section (2) of Section 14A of the Act imposes precondition that before such determination of disallowance the AO has to record that he is not satisfied with the correctness of the claim of the assesee in respect of such expenditure in relation to income which does not form part of total income under the Act. But this mandatory requirement, if not fulfilled by the AO, cannot be done, to fill – omission of the AO before the CIT(A).
It is also pertinent to note that in the present case the assessee suo moto disallowed Rs. 31553/- and the AO has not recorded any finding to show that he is not satisfied with the correctness of the claim as well as suo moto disallowance, made by the assessee and thus the authorities below cannot validly make any disallowance and consequent addition u/s 14A of the Act.
It is also relevant to mention that in the present case the assessee has not claimed any exempt income and thus in view of ratio laid down by Hon’ble Jurisdictional High Court of Delhi in the case of Cheminvest Limited vs CIT – VI vide order dated 2.9.2015 no disallowance can be made. The relevant operative para 23 of this judgment reads as under :-
Asstt. Year: 2010-11 “23. In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression ‘does not form part of the total income’ in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.”
Finally, respectfully following the decision of Hon’ble Jurisdictional High Court of Delhi in the case of Cheminvest Ltd. (supra), we hold that no disallowance u/s 14A of the Act can be made where there is no exempt income. In view of above findings ground No. 1,2 & 3 of the assesee are allowed and consequently addition made by the AO and confirmed by the CIT(A) is demolished.
In the result, appeal of the assessee is allowed. Order pronounced in the open court on 6th June, 2016.