ITAT sets aside Adjustment to Book Profit by Adopting Disallowance Determined u/s 14A of Income Tax Act [Read Order]

The Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) set aside the adjustment to book profit by adopting disallowance determined under Section 14A of the Income TaxAct, 1961.

The assessee, a company engaged in the business of development, maintenance, administration, and operation of a jetty, filed its appeal challenging the disallowance made under Section 14A of the Income-tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962.

During the assessment proceedings, the Assessing Officer, not being satisfied with the explanation furnished by the assessee, computed disallowance under Rule 8D of the Income Tax Rules. After adjusting the amount already disallowed by the assessee, a further disallowance was added to the total income. The Assessing Officer also considered the said disallowance while computing book profit under Section 115JB of the Income Tax Act.

The Commissioner of Income Tax (Appeals) upheld the action of the Assessing Officer, holding that due examination of the assessee’s working had been carried out and dissatisfaction with the correctness thereof was duly recorded before invoking Rule 8D of the Income Tax Rules.

Before the Tribunal, the assessee contended that the Assessing Officer had mechanically invoked Rule 8D of the Income Tax Rules without recording objective dissatisfaction as mandated under Section 14A(2) of the Income Tax Act. It was further submitted that disallowance under Section 14A read with Rule 8D of the Income Tax Rules could not be added while computing book profits under Section 115JB of the Income Tax Act.

The Revenue, on the other hand, relied upon the orders of the lower authorities and submitted that a show-cause notice under Section 142(1) had been issued, requiring the assessee to explain the applicability of disallowance under Section 14A read with Rule 8D of the Income Tax Rules.

The Tribunal observed, relying on the judgment of Bombay High Court in Principal Commissioner of Income Tax vs. Tata Capital Ltd., that the Assessing Officer is required to record clear and cogent reasons demonstrating dissatisfaction with the correctness of the assessee’s claim before invoking Rule 8D. It was further observed that such satisfaction must be based on an objective examination of accounts.

The Bench comprising Pawan Singh, Judicial Member and Makarand Vasant Mahadeokar, Accountant Member noted that “The Assessing Officer neither rejected the basis adopted by the assessee nor demonstrated from the accounts that the claim was incorrect. The assessment order merely proceeds on the assumption that once exempt income exists, disallowance must necessarily be recomputed under Rule 8D. Such an approach is contrary to the law laid down by the Bombay High Court.”

Accordingly, the Tribunal held that the invocation of Rule 8D in the absence of valid satisfaction under Section 14A(2) of the Income Tax Act was not justified. Consequently, the disallowance sustained by the Commissioner of Income Tax(Appeals) was deleted.