The Bombay High Court recently observed that the dissatisfaction should be recorded by the Assessing Officer (AO) regarding the correctness of the claim of assessee relating to the expenditure under Section 14A(2) of the Income Tax Act, 1961.
The Assessee/Respondent has filed for Assessment Year (“AY”) 2008-09 its Return of Income (“ROI”) on 30th September 2008 declaring NIL income (Loss of Rs.6,76,80,285/-). The assessee was called upon to show cause as to why expenditure should not be disallowed under Section 14A of the Act read with Rule 8D of the Income Tax Rules (IT Rules). Assessee’s reply, was not accepted by the AO. The AO recomputed the disallowance by applying Rule 8D of the IT Rules at Rs.18,46,00,000/- and an assessment order under Section 143(3) of the Income Tax Act came to be passed.
On appeal the CIT(A) deleted the disallowance made by the AO holding that the AO has not recorded his findings about the correctness of the claim of Assessee in respect of such expenditure in relation to exempt income. Being unhappy with the CIT(A), Revenue preferred an appeal before the ITAT and the ITAT dismissed the appeal.
A Division Bench of Justices Dr Neela Gokhale and KR Shriram observed that “We agree with the finding of the CIT(A) and the ITAT that though the AO has stated that Assessee’s explanation is not acceptable, he has not given reasons why it was not acceptable to him. Subsection (2) of Section 14A and Rule 8D provides that if the Assessing Officer is not satisfied with the correctness of the claim in respect of expenditure made by Assessee in relation to income which does not form part of the total income under the Act, he shall determine the amount of expenditure in relation to such income in accordance with the provisions prescribed.”
“The most fundamental requirement, therefore, is the Assessing Officer should record his dissatisfaction with the correctness of the claim of Assessee in respect of the expenditure and to arrive at such dissatisfaction, he should give cogent reasons” the Court noted.
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