AO To Record Dissatisfaction With Correctness Of Claim Of Assessee In Respect Of Expenditure: Bombay High Court

The Bombay High Court has held that the Assessing Officer should record his dissatisfaction with the correctness of the claim of the assessee in respect of the expenditure, and to arrive at such dissatisfaction, he should give cogent reasons.

The Bench of Justice K. R. Shriram and Justice Neela Gokhale has observed that though the AO has stated that the assessee's explanation is not acceptable, he has not given reasons why it is not acceptable to him. Section 14A(2) and Rule 8D provide that if the Assessing Officer is not satisfied with the correctness of the claim in respect of expenditure made by the assessee in relation to income that does not form part of the total income under the Act, he shall determine the amount of expenditure in relation to such income in accordance with the provisions prescribed.

The assessee/respondent has filed for AY 2008–09 its Return of Income (ROI), declaring NIL income. During the course of assessment proceedings, when the case of the assessee was selected for scrutiny, the AO observed that the Schedule 14 forming part of the P&L A/c. for the year ended on March 31, 2008, the assessee had received a dividend of Rs. 214 lakhs from long-term investments, Rs. 985 lakhs from mutual funds, and Rs. 2065 lakhs under the head 'Capital Gains'. The AO also observed that the assessee had claimed the above dividends, aggregating to Rs. 11,984,44,042, as exempt under Section 10(34) of the Act, besides Rs. 12,15,13,871 out of the capital gains under Section 10(38) of the Act. The AO also observed from Schedule 16 forming part of the P&L A/c that the assessee has claimed expenditure of Rs. 94,00,00,000 on account of interest expenses.

Subsequently, the assessee was called upon to show cause as to why expenditure should not be disallowed under Section 14A of the Act read with Rule 8D of the Income Tax Rules. The assessee's reply was not accepted by the AO. The AO recomputed the disallowance by applying Rule 8D of the Income Tax Rules at Rs. 18,46,00,000, and an assessment order under Section 143(3) came to be passed.

The assessee filed an appeal before the Commissioner of Income Tax (Appeals), Bombay (CIT (A)). In an order dated December 9, 2011, the assessee's appeal was allowed by the CIT (A). The CIT(A) deleted the disallowance made by the AO, holding that the AO has not recorded his findings about the correctness of the claim of the assessee in respect of such expenditure in relation to exempt income. The CIT(A) had further observed that Rule 8D is not automatic, and the AO ought to have given reasons.

The department preferred an appeal before the ITAT. The ITAT dismissed the appeal.

The department contended that the AO had in fact recorded in the assessment order that the assessee's explanation was not acceptable.

The court held that the assessing officer did not record his satisfaction that the disallowance made by the assessee was incorrect.

Counsel For Appellant: Suresh Kumar

Counsel For Respondent: J.D.Mistri

Case Title: PCIT Versus M/s. Tata Capital Ltd.

Case No.: Income Tax Appeal No.1081 Of 2018

Click Here To Read The Order