The Ahmedabad Bench of the Income Tax Appellate Tribunal ( ITAT ) emphasized that the Assessing Officer (AO) must properly record satisfaction regarding the incorrectness of the taxpayer’s claim before invoking Income Tax Rule 8D.
LA Renon Healthcare Pvt. Ltd., the assesse-appellant filed its income tax return for the assessment year 2016-17, declaring a total income of ₹47,17,20,900. The income tax return was selected for scrutiny by the AO, who noted that the assessee had earned a dividend of ₹1,64,89,016 and claimed an interest expense of ₹1,45,82,263.
The AO issued a notice under Section 142(1) of the Income Tax Act, 1961 questioning why the provisions of Section 14A read with Rule 8D of the Income Tax Rules, 1962, should not be applied. The assessee responded by stating that its investments, both long-term non-current and current in debt mutual funds, were funded through its own capital. It explained that ₹68 crore received as share capital during the year was used for these investments, not borrowed funds.
Get a Copy of Income Tax Rules, Click here
Further, the assessee detailed that investments were managed through a separate account with HDFC Bank and claimed no direct or indirect costs were incurred for these investments. The assessee argued that no specific administrative efforts were required to earn dividend income and pointed out that services from India Infoline (IIFL) were utilized without any associated fees.
Despite this, the AO concluded that the assessee’s response was insufficient and lacked specific explanations, only providing general statements. Consequently, the AO applied Section 14A read with Rule 8D, disallowing ₹51,15,778, including ₹36,30,382 for interest and ₹14,85,395 for administrative expenses.
The assessee contested the AO’s order before the CIT(A), who ruled in favor of the assessee. The AO, dissatisfied, appealed the CIT(A)’s decision, leading the assessee to file a cross-objection.
During the tribunal hearing, department counsel Ashok Kumar Suthar argued that the absence of a fund flow statement indicated potential use of borrowed funds, justifying the disallowance.
In contrast, Vartik Chokshi, representing the assessee, contended that the AO had a preconceived intention to disallow expenses under Section 14A, as evidenced by the premature issuance of the show-cause notice.
Chokshi further argued that the assessee had provided bank statements demonstrating that investments were funded from share capital and highlighted the AO’s failure to record dissatisfaction before applying Rule 8D, citing various tribunal precedents.
Get a Copy of Income Tax Rules, Click here
The two-member bench, comprising Nautiyal (Judicial Member) and Makarand V. Mahadeokar (Accountant Member), reviewed the arguments. The tribunal observed that the AO appeared to have predetermined the disallowance, as indicated by the early show-cause notice issuance. The tribunal referenced the decision in Pidilite Industries Ltd., reinforcing that the AO must document specific dissatisfaction with the taxpayer’s claim before invoking Rule 8D.
The ITAT noted that a similar principle was upheld in two other cases, emphasizing that AO must express specific dissatisfaction with the assessee’s computation before invoking Rule 8D under section 14D.
Based on the evidence provided by the assessee and the lack of proper satisfaction recorded by the AO, the tribunal deleted the disallowance of Rs.36,30,382 on account of interest expenses. Thus, the revenue appeal was dismissed.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
