Satisfaction of AO to incorrectness of claim an essential prerequisite for invoking section 14A

Satisfaction of AO as to incorrectness of claim of the assessee is an essential prerequisite for invoking the provisions of section 14A – ITAT

ABCAUS Case Law Citation:
ABCAUS 2622 (2018) (11) HC

Important Case Laws Cited/relied upon:
ACIT Vs. M/s Avon Cycles Ltd.
CIT Vs. Abhishek Industries Ltd. (2005) 56 Taxmann.com 391 (P&H)
M/s Anshul Goyal Land & Housing Ltd. Vs. DCIT
CIT Vs. Her Cycles Ltd. (2010) 189 Taxman 50 (P&H)
CIT vs. Deepak Mittal (2013) 38 Taxmann.com 83 (P&H)

The instant appeal had been filed by the assessee against the order of the Commissioner of Income Tax (Appeals) related to disallowance of expenses under the provisions of section 14A of the the Income Tax Act, 1961 (Act) holding the same to have been incurred in relation to earning of exempt income.

The appellant assessee was a partner in a firm and had derived income from :

(a) share of profit from the partnership firm

(b) interest on capital from the partnership firm

The profit earned by the assessee from the partnership firm was claimed as exempt under the provisions of section 10(2A) of the Act.

Against the interest earned, the assessee had claimed deduction on account of interest paid on unsecured loans taken, as per the provisions of section 36(1)(iii) of the Act on the premises that the interest income from the partnership firm was taxable as business income within the meaning of section of section 28(v) of the Act.

The Assessing Officer (AO) while framing the assessment invoked the provisions of section 14A of the Act r.w.r.8D of the Income Tax Rules, 1962 and disallowed the interest expenses holding the same to have been incurred for the purpose of earning the exempt income of share of profit from the partnership firm.

The matter was carried in appeal before the CIT(A) who upheld the order of the AO.

Aggrieved by the order of the CIT(A), the assessee was in appeal before the ITAT.

It was contended by the assessee that while making disallowance u/s 14A the AO was required to record satisfaction as to why he was not satisfied with the claim of the assessee that no expenditure had been incurred in relation to the exempt income earned.

It was submitted that under sub-section (2) of section 14A of the Act the AO was required to examine the accounts of the assessee and only when he was not satisfied with the correctness of the claim in respect of the expenditure in respect of the exempt income, he could have resorted to the prescribed method for determining the amount of expenditure disallowable u/s 14A of the Act, which was rule 8D of the Income Tax Rules.

The assessee placed reliance on various decisions of the Hon’ble High Courts and the Tribunals in support of his contention.

The Tribunal observed that the proposition of law laid down by courts in various decisions relied upon by the assessee, was that the satisfaction of the AO vis-a-vis the incorrectness of the claim of the assessee is an essential prerequisite for invoking the provisions of section 14A.

The Tribunal opined that the issue needed to be looked into and adjudicated upon before deciding the same on merits as admittedly this aspect /issue had been raised for the first time before it and had thus remained unexamined and unadjudicated by the CIT(A).

The Tribunal restored the appeal denovo to the CIT(A) to first adjudicate the issue of existence of satisfaction of the AO vis-a-vis the incorrectness of the claim of the assessee and thereafter decide the appeal in accordance with law.

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