Section 14A Disallowance Requires AO Satisfaction Before Applying Rule 8D: ITAT Hyderabad

Prasad Film Laboratories Private Limited Vs ACIT (ITAT Hyderabad)

Summary: Prasad Film Laboratories Private Limited, engaged in post-film production activities, filed its return for AY 2016-17 declaring a loss of Rs.2,95,28,869/-. The Assessing Officer completed assessment under Section 143(3) at a loss of Rs.2,85,37,337/- after making a disallowance of Rs.9,91,532/- under Section 14A read with Rule 8D(2)(iii), computed at 1% of the average value of investments. The assessee contended that no indirect expenditure had been incurred for earning exempt income and that the amended Rule 8D effective from 02.06.2016 could not apply to AY 2016-17. The CIT(A) nevertheless confirmed the disallowance.

ITAT Hyderabad held that recording satisfaction by the Assessing Officer regarding the incorrectness of the assessee’s claim was a condition precedent to invoking Section 14A read with Rule 8D. Despite the assessee’s specific assertion that no indirect expenditure had been incurred to earn exempt income, the Assessing Officer had recorded no satisfaction explaining why that assertion was incorrect. The Tribunal further held that the amended Rule 8D effective from 02.06.2016 operated prospectively and applied from AY 2017-18 onwards.

For computing the average value of investments under the applicable unamended Rule 8D, only investments which actually yielded exempt income were to be considered. The CIT(A)’s order was therefore set aside and the matter remitted to the Assessing Officer to first record the requisite satisfaction and thereafter, if warranted, recompute the Section 14A disallowance under the unamended Rule 8D. The assessee’s appeal was allowed for statistical purposes.