AO Fails to Examine Correctness of Asian Paints' Earning Exempt Income Expenditure Claim: ITAT deletes Disallowance u/s 14 A r.w Rule 8D [Read Order]

The Mumbai bench of the Income Tax Appellate Tribunal ( ITAT ) deleted the disallowance under Section 14A of Income Tax Act, 1961 read with Rule 8D of the Income Tax Rule, 1962 as the Assessing Officer failed to examine correctness of Asian Paints' claim regarding earning exempt Income expenditure.

The Asian Paints Ltd earned dividend income from domestic companies/mutual funds of Rs.40.57 crore, which was claimed as exempt under Section 10 of the Income Tax Act. The assessee suo-moto made a disallowance of Rs.24, 45,540 as an expense incurred for earning the aforesaid exempt income. The AO vide order passed under Section 143(3) read with Section 144C (3) of the Income Tax Act did not agree with the correctness of the claim of the expenditure made by the assessee and by applying the provisions of Rule 8D of the Income Tax Rules, 1962 computed the disallowance of Rs.1, 51, 24,084 under Section 14A of the Income Tax Act after considering the suo-moto disallowance of Rs.24, 45,540 made by the assessee.

Mr. Madhur Agrawal submitted that recording of satisfaction is a prerequisite for invoking the provisions of Section 14A of the Income Tax Act, however, in the present case the AO did not record any satisfaction regarding the rejection of assessee’s plea. Further submitted that in preceding years disallowance made under Section 14A of the Income Tax Act has been deleted in the absence of any satisfaction being recorded by the AO.

The bench noted that in the present case, the assessee earned a dividend income of Rs.40.57 crore, which has been claimed as exempt under Section 10 of the Income Tax Act. Further, there is no dispute regarding the fact that the assessee while computing its taxable income suo-moto disallowed an amount of Rs.24, 45,540 as an expenditure incurred for earning the aforesaid exempt income

Further, no incremental expenditure has been incurred on staff and other administrative activities for earning the exempt income. It is evident from the record that the AO disagreed with the correctness of the claim of expenditure made by the assessee and held that adequate interest and administrative expenses have not been disallowed for earning the exempt income.

It was also noted that the AO merely proceeded to compute the disallowance under Section 14A read with Rule 8D without examining the correctness of the claim of the assessee regarding expenditure incurred for earning the exempt income. It is evident from the  record that the assessee's own funds, i.e. share capital and reserves & surplus,  are Rs.2487.78 crore, while investment in tax-free securities is only limited to  Rs.165.07 crore and therefore it can be presumed that the assessee had  sufficient own funds for making the aforesaid investment in tax-free securities.

The Tribunal, consisting of Prashanth Maharishi (Accountant Member) and Sandeep Singh Karhail (Judicial Member), ruled that the Assessing Officer failed to adequately justify disallowances under Section 14A. Due to the absence of proper satisfaction recorded by the AO regarding the correctness of the assessee's claim on expenditure related to exempt income. Thus, ITAT found no grounds to uphold the disallowance under Section 14A read with Rule 8D. Consequently, the disallowance was ordered to be deleted, resulting in the allowance of the ground raised in the assessee's appeal.

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