CIT vs. I. P. Support Services India (P) Ltd (Delhi High Court)

The Assessee had dividend income of Rs.2,38,13,275. The Assessee was asked to furnish an explanation as to why the expenses relevant to the earning of dividend should not be disallowed under Section 14A of the Act. The Assessee’s representative submitted that as no expenses have been incurred for earning of dividend income, this was not a case for making any disallowance. The AO, inter alia, observed that “the invo-cation of Section 14A is automatic and comes into operation, without any exception, as soon as the dividend income is claimed as an exemp-tion. The AO proceeded to disallow the amount of Rs.33,35,986/- under Section 14A read with Rule 8D of Income Tax Rules, 1962 and added the said amount to the total income of the Assessee. The CIT (A) allowed the appeal filed by the Assessee after recording a finding that the AO had failed to examine the contention of the Assessee that it had sufficient funds of Rs.83.13 crores and “no borrowing, for whatever purposes, was resorted to (no interest expenditure was incurred) and investments gen-erating tax exempt income were done by using administrative machinery of PMS, who did not charge any fees.” It was further found by the CIT(A) that the AO had failed to record the AO’s satisfaction after examining the accounts which was requirement for invoking Section 14A of the Act. The ITAT dismissed the Revenue’s appeal. On appeal by the department to the High Court HELD dismissing the appeal:

(i) The AO has proceeded on the erroneous premise that the invocation of Section 14A is automatic and comes into operation as soon as the dividend income is claimed exempt. The Assessing Officer is required to determine the amount of such expenditure only if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under the said Act. In other words, the requirement of the Assessing Officer em-barking upon a determination of the amount of expenditure incurred in relation to exempt income would be triggered only if the Assessing Officer returns a finding that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Therefore, the condition precedent for the Assessing Officer entering upon a determination of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure (Maxopp Investment (P) Ltd. v. CIT (2012) 347 ITR 272 (Del) followed);

(ii) Also, the Court disapproves of the AO invoking Section 14A read with Rule 8D (2) of the Rules without recording his satisfaction. The recording of satisfaction as to why “the voluntary disallowance made by the assessee was unreasonable and unsatisfactory” is a mandatory re-quirement of the law (CIT v. Taikisha Engineering India Ltd. 370 ITR 338 (Del).