Absence of Recorded Satisfaction Invalidates Disallowance u/s 14A: ITAT rules in Favour of SICPA India [Read Order]
In the absence of such recorded satisfaction, the disallowance under Section 14A was unsustainable in law, said the bench.
The Delhi Bench of the Income Tax Appellate Tribunal ( ITAT ) has ruled in favour of SICPA India Private Limited, holding that a disallowance under Section 14A of the Income Tax Act, 1961 cannot be sustained in the absence of a recorded satisfaction by the Assessing Officer regarding the correctness of the assessee’s claim.
In this case, SICPA India Pvt. Ltd., engaged in the manufacture and distribution of security inks, filed its return of income for AY 2020-21 declaring an income of ₹6.74 crore. During assessment, the Assessing Officer made two additions, one relating to Dividend Distribution Tax and Educational Cess, and another disallowance of ₹25.56 lakh under Section 14A.
The latter was made on the ground that the assessee had earned exempt income and, therefore, expenses relatable to such income were to be disallowed. The total income was accordingly assessed at ₹7.71 crore.
On appeal, the assessee argued that no expenditure had been incurred to earn exempt income and that the Assessing Officer had mechanically applied Rule 8D(2)(iii) without recording the required satisfaction as to the incorrectness of the assessee’s claim.
It was further submitted that the assessee’s own cases for earlier assessment years, 2008-09, 2009-10, 2016-17 to 2018-19, had been decided in its favour by various coordinate benches of the ITAT.
The Tribunal, after examining the facts and records, found that the Assessing Officer had failed to demonstrate any dissatisfaction with the assessee’s claim based on examination of its accounts. The disallowance was made merely on the assumption that exempt income necessarily entails expenditure, which the Tribunal held to be legally insufficient.
The ITAT stated that recording of satisfaction is a statutory responsibility under Section 14A(2), quoting its own previous orders from SICPA's earlier assessment years and following to the guidelines established by the Supreme Court in Godrej & Boyce Manufacturing Co. Ltd. v. DCIT (394 ITR 449).
The Tribunal noted that in all comparable cases, similar disallowances were deleted for want of recorded satisfaction and for lack of nexus between the expenditure and the earning of exempt income.
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It noted that broad, general, or presumptive observations cannot replace the necessary satisfaction required prior to applying Rule 8D, referencing cases like Eicher Motors Ltd. v. CIT and HT Media Ltd. v. PCIT.
Accordingly, the Bench comprising Yogesh Kumar U.S. (Judicial Member) and Manish Agarwal (Accountant Member) held that in the absence of such recorded satisfaction, the disallowance under Section 14A was unsustainable in law.
The Tribunal directed deletion of the disallowance of ₹25.56 lakh. It further held that initiation of penalty proceedings under Section 270A was premature and that interest under Section 234C, if any, was to be recomputed based on the returned income.
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