Relief to Karnataka State Beverages Corporation Limited: ITAT Deletes Section 14A Disallowance for Failure of AO to Record Satisfaction [Read Order]

In a major relief to Karnataka State Beverages Corporation Limited, the Bangalore Bench of the Income Tax Appellate Tribunal (ITAT) deleted disallowance under Section 14A of the Income Tax Act, 1961, as there was failure by the Assessing Officer (AO) to record satisfaction which is a mandatory requirement.

The appeal arose from the disallowance of ₹16,66,890 made by the Assessing Officer under Section 14A read with Rule 8D of the Income Tax Act. The assessee, Karnataka State Beverages Corporation Limited, had earned dividend income of ₹3,05,17,000, which was claimed as exempt under the Act. In the assessment proceedings, the Assessing Officer noted the assessee’s finance and interest expenditure and called upon it to explain why disallowance under Section 14A should not be made.

The assessee contended that the investments in mutual funds were made out of its own funds and internal accruals, and not from borrowed funds. It was submitted that its capital and reserves as on 31.03.2011 amounted to ₹71,19,75,000, which was substantially higher than the investment of ₹15,67,56,000 in SBI Premier Fund, thereby giving rise to a presumption that investments were made from interest-free funds. On this basis, it was argued that no disallowance of interest expenditure was warranted.

The Assessing Officer rejected the contention and invoked Rule 8D, computing disallowance at ₹19,20,039, comprising proportionate interest expenditure of ₹2,53,149 and 0.5% of average investment at ₹16,66,800. On appeal, the CIT(A) restricted the disallowance to ₹16,66,890, sustaining only the component calculated at 0.5% of the average exempt investments.

Also Read: ITAT deletes Penalty as no Satisfaction Recorded by theAO u/s 271D of Income Tax Act

Before the Tribunal, the assessee contended that the Assessing Officer had failed to record proper satisfaction regarding the correctness of the assessee’s claim, which is a mandatory precondition for invoking Rule 8D. It was further reiterated that sufficient interest-free funds were available, and therefore no disallowance of interest could be made. The Revenue, on the other hand, submitted that due satisfaction had been recorded in the assessment order and that the invocation of Section 14A read with Rule 8D was justified.

A Division Bench of Prashant Maharishi, Vice President And Soundararajan K., Judicial Member observed that “In this case when the Assessee says that it has own interest free funds available which are invested in earning tax-free dividend on mutual fund, no disallowance is required to be made. Subsequent to this explanation, the Assessing Officer did not record any satisfaction admittedly. Thus in absence of satisfaction, the disallowance made by the Assessing Officer and confirmed by the CIT(A) deserves to be deleted.”

The Bench relied on the judgment of the Supreme Court in Maxopp investment Ltd v. Commissioner of Income Tax, wherein it was held that before applying the theory of apportionment the Assessing Officer needs to record satisfaction that having regard to the kind of the Assessee, suo moto disallowance under Section 14A was not correct. Thus it will have to record satisfaction to this effect. Further while recording such satisfaction, the nature of loan taken by the Assessee for purchasing the shares of making the investment in shares is required to be examined.

In view of the above facts, it is held that in the absence of any satisfaction recorded by the Assessing Officer regarding the correctness of the assessee’s claim that no expenditure was incurred in relation to exempt income, as required under Section 14A(2) of the Income Tax Act, the invocation of Rule 8D is not justified. Accordingly, the disallowance of ₹16,66,890 made by the Assessing Officer and confirmed by the CIT(A) is not sustainable in law.

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