Mechanical Application of Rule 8D Invalid: ITAT Upholds CIT(A) Decision on Section 14A Disallowance for Bajaj Resources Pvt. Ltd. [Read Order]

The Income Tax Appellate Tribunal (ITAT), Agra Bench, has upheld the order of the Commissioner of Income Tax (Appeals) deleting the disallowance made under Section 14A of the Income Tax Act for Assessment Year 2017-18 against Bajaj Resources Pvt Ltd. The Tribunal held that the Assessing Officer (AO) erred by mechanically applying Rule 8D without recording the mandatory objective satisfaction regarding the incurring of expenditure.

The Revenue had challenged the deletion of a disallowance amounting to Rs. 4.72 Crores. The disallowance was originally made by the AO after the assessee, M/s. Bajaj Resources Pvt. Ltd., earned significant exempt dividend income but did not report any disallowance under Section 14A in the return. The AO computed the disallowance using the mechanism provided in Rule 8D(2).

The Coram of M. Balaganesh (Accountant Member) and Anubhav Sharma (Judicial Member) observed that while the Revenue was correct in arguing that the precedent of South Indian Bank (regarding own funds) did not apply to the facts of the case, the CIT(A) was right in deleting the addition on a different ground. The Bench noted that the CIT(A) had correctly deleted the disallowance because the AO failed to discharge the statutory mandate under Section 14A(2).

The Tribunal observed:

“It is a fact that the Learned AO had not recorded his objective satisfaction as to why the claim made by the assessee that no expenses were incurred for earning exempt income is incorrect... The Hon’ble Supreme Court in the case of *Maxopp Investments* had categorically held that the recording of dissatisfaction with cogent reasons is mandatory on the part of the Learned AO before resorting to computation mechanism provided in Rule 8D(2) of the Rules.”

Relying on the Supreme Court’s decision in Maxopp Investments Ltd., the Bench reiterated that a disallowance under Rule 8D cannot be computed merely because exempt income exists; there must be a recorded objective satisfaction that the assessee's claim of nil expenditure is incorrect.

In view of this failure by the AO to record the necessary satisfaction, the ITAT held that the relief granted by the CIT(A) was justified. The Revenue’s appeal was partly allowed, with the challenge to the deletion of the disallowance being dismissed.

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