In a recent ruling, the Cochin Bench of the Income Tax Appellate Tribunal ( ITAT ) directed the Assessing Officer ( AO ) to delete the addition due to disallowance which was made without recording satisfaction regarding the assessee’s books of account.
The assessee in this case is Condis India Healthcare Pvt. Ltd., Trivandrum, Kerala. During the assessment proceedings for the financial years 2013-14 to 2015-16, the AO noted that the company had declared dividend income of Rs. 2.88 crore as tax-exempt under Section 10(34) of the Income Tax Act,1961.
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But, the company did not make any disallowance under Section 14A of the Income Tax statute, which relates to expenses incurred in relation to income that does not form part of the total taxable income. Invoking the provisions of Section 14A, read with Rule 8D, the AO disallowed Rs. 60.65 lakh towards administrative expenses and added this amount to the company’s taxable income.
The company approached the Commissioner of Income Tax (Appeals) [ CIT(A) ] for relief. The assessee contended before CIT(A) that the AO had made the disallowance without recording satisfaction based on the company’s books of account and that the company’s administrative expenses amounted to Rs. 65.47 lakh, of which 90% had been disallowed.
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However, the CIT(A) upheld the AO’s decision and held that the disallowance had been correctly calculated under Rule 8D, which mandates a 0.5% disallowance of the average value of investments, regardless of the source of funds. Aggrieved by the above order, the company appealed before the ITAT.
The ITAT observed that while Section 14A of the Income Tax Act allows for the disallowance of expenses related to tax-exempt income, the AO had acted mechanically, without considering the company’s overall income from consultancy services and other expenses.
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As a result, the ITAT directed the AO to delete the disallowance for all three assessment years.
The ITAT bench comparing Soundararajan K (Judicial Member) and Waseem Ahmed (Accountant Member) allowed the appeal filed by the assessee.
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