The Pune Bench of the Income Tax Appellate Tribunal (ITAT) deleted proceedings against Serum Institute of India by upholding the order of CIT(A) which deletes the disallowance as the AO failed to record the satisfaction envisaged under section 14A(2) of the Income Tax Act,1961.
During the course of assessment proceedings, the Assessing Officer found that the respondent-assessee earned exempt income of Rs.49,66,91,432/-. However, the respondent-assessee disallowed only a sum of Rs.1,35,00,000/- u/s 14A of the Act. It was contended before the Assessing Officer that there is no direct expenditure incurred to earn the exempt income.
The Assessing Officer had proceeded to make a disallowance u/s 14A invoking Rule 8D of the Income Tax Rule, 1962 (‘the Rules’) by observing that the assessee had failed to prepare separate books of account for the expenditure to earn the exempt income or non-exempt income.
On appeal, the CIT(A)held that when the respondent-assessee offered a suo moto disallowance of Rs.1,35,00,000/-, the Assessing Officer cannot make recourse to the provisions of Rule 8D to compute the disallowance under section 14A of the income tax Act without recording a satisfaction as to how the contention of the assessee that no expenditure was incurred to earn the exempt income is incorrect.
The provisions of sub-section (2) of section 14A provide that a resort to disallowance u/s 14A can be made only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred to earn the exempt income.
It was incumbent upon the Assessing Officer to record satisfaction.A Coram of Shri Inturi Rama Rao, AM and Shri S S Viswanethra Ravi, JM observed that as per law the satisfaction recorded by the AO should be based on the objective material and cannot be subjective.
The Tribunal held that the disallowance of Rs.7,81,83,703/- as made by the AO was deleted by the CIT(A) is correct, as the AO had failed to record the satisfaction as envisaged u/s 14A(2) of the act. The appeal for the Revenue got dismissed.
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