Section 14A — Rule 8D can be invoked only after AO records his satisfaction on how the assessee’s calculation is incorrect. Onus is on the AO to show that expenditure has been incurred for earning taxfree income. Disallowance u/s.14A cannot be made on the basis of presumptions.

Section 14A — Rule 8D can be invoked only after AO records his satisfaction on how the assessee’s calculation is incorrect. Onus is on the AO to show that expenditure has been incurred for earning tax-free income. Disallowance u/s.14A cannot be made on the basis of presumptions.

The AO disallowed a sum of Rs.31.01,542 u/s.14A of the Act by invoking Rule 8D. However, he did not record satisfaction as to how the assessee’s calculation was not correct. Aggrieved, the assessee preferred an appeal to the CIT(A). The CIT(A) upheld the applicability of Rule 8D but he reduced the amount of disallowance to Rs.19,43,022 by reducing the amount of disallowance on account of interest but as regards disallowance of administrative expenses he upheld the action of the AO. He also upheld the applicability of Rule 8D. Aggrieved, the Revenue preferred an appeal to the Tribunal and the assessee filed cross-objections.

Held:

The Tribunal noted that the assessee has suo motu made a disallowance u/s.14A. The Tribunal also noted that the AO has invoked Rule 8D without recording satisfaction as to how the assessee’s calculation is incorrect. Upon considering the ratio of various decisions of the Tribunal and the decision of the Punjab & Haryana High Court in the case of CIT v. Hero Cycles, (323 ITR 518), the Tribunal held that for invoking Rule 8D the AO must record satisfaction as to how the claim of the assessee is incorrect. If that is not done, provisions of Rule 8D cannot be invoked. An ad hoc disallowance cannot be made under Rule 8D. The onus is on the AO to establish that expenditure has been incurred for earning exempt income. Disallowance u/s.14A cannot be made on the basis of presumption that the assessee must have incurred expenditure to earn tax-free income.

Since the AO had not recorded satisfaction regarding the assessee’s calculation being incorrect and since such satisfaction is a pre-requisite for invoking Rule 8D, the CIT(A) erred in partially approving the action of the AO. The Tribunal dismissed this ground of the appeal filed by the Department. Cases referred:

1. CIT v. Hero Cycles, (323 ITR 518) (P&H)

2. ACIT v. Eicher Ltd., (101 TTJ 369) (Del.)

3. Maruti Udyog v. DCIT, (92 ITD 119) (Del.)

4. Wimco Seedlings Ltd. v. DCIT, (107 ITD 267) (Del.) (TM)

5. Punjab National Bank v. DCIT, (103 TTJ 908) (Del.)

6. Vidyut Investment Ltd. (10 SOT 284) (Del.) 7. D. J. Mehta v. ITO, (290 ITR 238) (Mum.) (AT)