AO cannot apply Rule 8D without recording any satisfaction as to how assessee’s calculation of s. 14A disallowance was incorrect

DCIT Vs. Jindal Photo Limited (ITAT Delhi)– As per section 14A(2) of the Act, if the AO, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred in relation to income which does not form part of the assessee ’s total income under the Act, the AO shall determine the amount incurred in relation to such income, in accordance with such method as may be prescribed, i.e., under Rule 8D of the I.T. Rules. However, in the present case, the assessment order does not evince any such satisfaction of the AO regarding the correctness of the claim of the assessee.

As such, Rule 8D of the Rules was not appropriately applied by the AO as correctly held by the CIT(A). It has not been shown by the AO that any expenditure had been incurred by the assessee for earning its dividend income. Merely, an ad hoc disallowance was made. The onus was on the AO to establish any such expenditure . This onus has not been discharged. In “CIT v. Hero Cycles” (P&H) 323 ITR 518, under similar circumstances, it was held that the disallowance u/s 14A of the Act requires a clear finding of incurring of expenditure and that no disallowance can be made on the basis of presumptions in “ACIT v. Eicher Ltd.” 101 TTJ (Del)369, that it was held that the burden is on the AO to establish nexus of expenses incurred with the earning of exempt income before making any disallowance u/s 14A of the Act. In “Maruti Udyog v. DCIT” 92 ITD 119(Del), it has been held that before making any disallowance u/s 14A of the Act, the onus to establish the nexus of the same with the exempt income, is on the revenue. In the year under consideration, it is seen that it is not incorrect when the assessee contends that no satisfaction has been recorded by the AO regarding the assessee’ s calculation being incorrect. Even so, Rule 8D of the Rules has been applied. This, in our opinion, is not correct. Such satisfaction of the AO is a pre-requisite to invoke the provisions of Rule 8D of the Rules. The ld. CIT(A), therefore, erred in partially approving the action of the AO.

INCOME TAX APPELLATE TRIBUNAL, DELHI

The Dy. Commissioner of Income Tax V. M/s. Jindal Photo Limited

ITA No. 814(Del)2011

Assessment year: 2008- 09

M/s. Jindal Photo Limited V. The Dy. Commissioner of Income Tax

C.O. No. 91(Del)2011

(In ITA No. 814(Del)2011)

Assessment year: 2008- 09

ORDER

PER A.D. JAIN, J.M.

This is Department’s appeal and the cross objections are by the assessee. The Department has taken the following grounds:-