Supreme Court Upholds Deletion of S. 14A Disallowance due to AO's Failure to Record Proper Satisfaction [Read Order]

In a recent ruling, the Supreme Court of India upheld the deletion of a disallowance made under Section 14A of the Income Tax Act after finding no reason to interfere with the view taken by the Income Tax Appellate Tribunal and affirmed by the Delhi High Court.

The matter arose from assessment proceedings concerning DLF Home Developers Ltd. for Assessment Year 2011-12. During the assessment, the Assessing Officer disallowed Rs. 80,66,72,112 under Section 14A read with Rule 8D of the Income Tax Rules.

The Assessing Officer took the position that certain expenditure was incurred in relation to exempt income and applied Rule 8D to compute the disallowance.

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DLF Home Developers Ltd. challenged the disallowance before the Income Tax Appellate Tribunal. The Tribunal examined the assessment order and the material on record and held that the disallowance was not justified.

It explained that before applying Rule 8D, the Assessing Officer must first examine the assessee’s accounts and record proper satisfaction that the claim made by the assessee regarding expenditure relating to exempt income is incorrect.

The Tribunal pointed out that the Assessing Officer had applied Rule 8D without recording the required satisfaction based on the accounts of the assessee. On this basis, the Tribunal set aside the disallowance of ₹80.66 crore made under Section 14A.

Aggrieved by the decision of the Tribunal, the Revenue filed an appeal before the Delhi High Court under Section 260A of the Income Tax Act. The High Court examined the Tribunal’s reasoning and observed that the Assessing Officer had failed to comply with the mandatory requirement of recording proper satisfaction before invoking Rule 8D.

The High Court held that the Tribunal’s view was correct and upheld the deletion of the disallowance.

The Revenue later approached the Supreme Court by filing a Special Leave Petition challenging the High Court judgment dated 6 November 2023. The petition was filed with a delay of 710 days and an application for condonation of delay was also submitted.

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The Bench comprising the Chief Justice of India, Justice R. Mahadevan, and Justice Joymalya Bagchi heard the parties. The Court observed that the findings recorded by the Tribunal and affirmed by the High Court did not call for interference under Article 136 of the Constitution of India.

In view of the above, the Supreme Court dismissed the Special Leave Petition. All pending applications were also disposed of.

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