Tribunal failed to issue specific directions to AO as to what has to be done after the assessee files the working sheet: Madras HC

tribunal - AO - assessee - Madras High Court - Taxscan

The Madras High Court while quashing the order of the tribunal held that though the tribunal directed the assessee to work out the expenditure component towards administrative and managerial aspect so that the same shall be disallowed in the computation of income, but has not issued any specific directions to the Assessing Officer(AO) as to what has to be done after the assessee files the working sheet.

The respondent/assessee, M/s.Tamilnadu Industrial Development Corporation Limited is a state-owned undertaking which had filed its return of the income for the assessment years under consideration.

The assessee had received income by way of dividend for the assessment year 2011-12 which the assessee claimed it as exemption from tax. The Assessing Officer made a disallowance under Section 14A, by applying Rule 8D of the Income Tax Rules, 1962, and completed the assessment.

The tribunal held that the Assessing Officer has failed to comply with the statutory requirement, he cannot proceed to make the disallowance under. The tribunal noted that the assessee themselves had voluntarily offered Rs.2,64,14,439/- as disallowance and accordingly, the disallowance made by the Assessing Officer was reduced to the said extent.

The issue raised was whether the tribunal was right in coming to the conclusion that the Assessing Officer has not recorded his mandatory satisfaction as required under Section 14A(2) of the Act.

The court considered the principles underlying Section 14A and the procedure therein, which has been succinctly explained by the High Court of Bombay.

Firstly, the mandate of Section 14A is to prevent claims for deduction of expenditure in relation to income which does not form part of the total income of the assessee.

Secondly, Section 14A(1) is enacted to ensure that only expenses incurred in respect of earning taxable income are allowed.

Thirdly, the principle of apportionment of expenses is widened by Section 14A to include even the apportionment of expenditure between taxable and nontaxable income of an indivisible business.

Fourthly, the basic principle of taxation is to tax a net income. This principle applies even for the purposes of Section 14A and expenses towards non-taxable income must be excluded.

Lastly, once a proximate cause for disallowance is established – which is the relationship of the expenditure with income which does not form part of total income – a disallowance has to be effected.

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