INCOME TAX ACT, 1961

Section 14A(2)

Disallowance under section 14A - Expenditure against exempt income - Invocation of rule 8D - Assessee pleading non-recording of satisfaction by AO before applying rule 8D(2)(iii)

Assessee earned tax exempt dividend income of Rs. 15.82 Crores including dividend income and offered suo-moto disallowance under section 14A. AO invoked rule 8D and worked out expense disallowance under rule 8D(2)(iii) @ 0.5% of average investments held by the assessee. Assessee contended that AO did not arrive at requisite satisfaction in terms of section 14A(2) that the computation of disallowance by assessee was incorrect, before proceeding to apply rule 8D and therefore, additional disallowance was not justified. Held: It was evident from discussion made by AO in assessment order that assessee did not furnish basis of allocation of expenses suo moto disallowed by him. Also, part of salary and expenses attributed towards earning of dividend income bore no co-relation with earning of dividend income or man-hours allowed to activities resulting into earning of dividend. Thus it could not be said that AO had not recorded requisite satisfaction. However, AO was directed to examine sufficiency or correctness of suo moto disallowance made by assessee having regard to assessee's accounts and explanations and proceed further after recording speaking reasons for non-satisfaction before proceeding to apply rule 8D(2)(iii). Further, investments which had not yielded any exempt income during the year under consideration had to be excluded, if disallowance was computed in terms of rule 8D(2)(iii).

Relied:Asstt. CIT Vireet Invesgment (P) Lgd. 92017) 82 Taxmann.com 415 (Del) : 2017 TaxPub(DT) 1760 (Del- Trib)