Non Satisfaction of AO to suo moto disallowance by assessee u/s 14A must be objective – SC dismisses Revenues SLP

Non Satisfaction of AO to suo moto disallowance by assessee u/s 14A has  to  be  an  objective satisfaction with notice and opportunity to assessee-Supreme Court dismisses Revenue’s SLP 

ABCAUS Case Law Citation:
ABCAUS 2404 (2018) 07 SC

The assessee was a limited company. In its Return of Income for the relevant Assessment Year it had on  its  own  disallowed some expenditure ­under section 14A of the Act i.e.  expenditure incurred  to  earn  exempt  income.

However, the Assessing Officer after holding that he was not satisfied with the correctness of the disallowance of expenditure made by the assessee,  applied  Rule 8D  and  determined a further dis­allowance.

Being aggrieved, the respondent assessee carried the issue  in appeal to the Commissioner  of  Income  Tax  (Appeals) [CIT(A)]. However, the CIT(A) upheld the order of the AO holding that he had recorded his non ­satisfaction with the dis­allowance made by the respondent assessee under  Section 14A of the Act. Thus CIT(A), held that the Assessing Officer had rightly applied Rule 8D to disallow the expenditure u/s 14A of the Act.

Being aggrieved, the assessee carried the issue in appeal to the Tribunal.

The Tribunal observed that the Assessing Officer in his order did not give  any  reasons  for  his non­ satisfaction  with the disallowance claimed by the assessee at its own. In view of the above the Tribunal restored  the  issue of dis­allowance to the AO for fresh determination.

Aggrieved by the order of the Tribunal, the Revenue took the matter to the High Court.

The Hon’ble High Court opined that as held by it, the non ­satisfaction of the Assessing Officer with regard to the dis­allowance of expenditure done by the assessee has to be an  objective satisfaction which contemplates  a  notice  to  the assessee, an opportunity to the assessee to place on record all the relevant acts including his accounts and  recording of  reasons by the Assessing Officer in the event that he comes to the conclusion that he is not satisfied with the claim  of the assessee.

Thus the High Court upheld the order of the Tribunal that Assessing Officer should show fallacies in the computation of disallowance done by the assessee.

Aggrieved by the order of the High Court the Revenue challenged it before the Hon’ble Supreme Court by way of filing SLP. However after hearing the counsel, the Hon’ble Supreme Court dismissed the SLP of the Revenue on merits.

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