Disallowance u/s 14A Unsustainable Without Recording of Proper Satisfaction: ITAT sets aside Addition of ₹48L against Zee Entertainment [Read Order]

The Income Tax Appellate Tribunal (ITAT)Mumbai Bench has held that the disallowance under Section 14A of the Income TaxAct cannot be made without proper satisfaction. The court has provided relief by deleting the addition of ₹48.97 lakhs.

The assessee Zee Entertainment Enterprises Ltd had received dividend income of ₹56.81 lakhs in the Assessment Year 2019-20. Out of this amount, ₹49.12 lakhs was claimed as exempt under Section 10(34). The assessee had suo motu disallowed ₹15,000 under Section 14A of the Income Tax Act 1961, being 1% of the average monthly investments.

However, the Assessing Officer had invoked Rule 8D and had recomputed the disallowance under Section 14A at ₹1.32 crore. The Assessing Officer had stated that the high expenditure was incurred by the assessee to earn the exempt income.

After adjusting the amount of ₹15,000 that was already disallowed by the assessee, an addition of ₹1.32 crore was made. The Commissioner of Income Tax (Appeals) [CIT(A)] had restricted the disallowance to the extent of exempt income and hence,the addition of ₹48.97 lakhs was sustained.

The assessee claimed that the AO had not expressed any dissatisfaction with the correctness of the suo motu disallowance before applying Rule 8D which is a mandatory precondition under law.In addition, the assessee claimed that investments not generating any exempted income should not be taken into account for the purpose of disallowance. relying on the earlier rulings of the Tribunal.

The Revenue department,on the other hand, supported the view of the AO and CIT(A) and claimed that the disallowance had been justified in view of the investments.

The Tribunal comprising Anikesh Banerjee [Judicial Member] and Arun Khodpia [Accountant Member] noted that the AO had made a mechanical application of Rule 8D without any objective dissatisfaction with regard to the computation made by the assessee.

The Bench, following judicial decisions, including the Bombay High Court decision in PCIT v. Tata Capital Ltd., noted that the AO’s failure vitiates the disallowance. The Bench further noted that the CIT(A) , though granting partial relief, went wrong in not deleting the balance addition without addressing this basic defect.

Accordingly, the Bench set aside the appellate order and deleted the sustained addition of ₹48.97 lakhs.

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