ITAT Deletes Rs. 4.35 Cr Disallowance Under Section 14A for Lack of AO’s Dissatisfaction

The assessee, which provides technical consulting services for infrastructure projects, reported Rs. 7.43 Cr under normal provisions and Rs. 8.61 Cr under Section 115JB in its income return for the fiscal year 2017-18. The case was selected for analysis. The AO determined a disallowance under Section 14A of Rs. 12.39 Cr using Rule 8D; however, the total P&L expenditure of Rs. 7.68 Cr was permitted. After subtracting the assessee’s suo motu disallowance of Rs. 26.06 lakh, the AO made a net disallowance of Rs. 7.42 Cr under Section 14A.

CIT (A) Ruled: According to Section 115JB, CIT(A) removed the same disallowance from book profit and restricted it to the exempt dividend income of Rs. 4.35 Cr. The assessee filed an appeal with the ITAT in response to the Rs. 4.35 Cr disallowance that was sustained.

Main issue before the court: Whether the disallowance under Section 14A can be upheld when the Assessing Officer fails to record reasons for rejecting the taxpayer’s own computation and directly applies Rule 8D.

Tribunal’s Ruling: The ITAT allowed the appeal, holding that the AO did not record any dissatisfaction with the assessee’s computation of disallowance under Section 14A, which is a mandatory precondition under law. The Tribunal relied on its own earlier order in the assessee’s case for AY 2014–15 and the High Court’s ruling in Jaypee Ventures Pvt. Ltd., the amalgamated entity of the assessee, where the same issue was decided in favor of the assessee. The Tribunal also considered Supreme Court‘s rulings in Maxopp Investment and Godrej & Boyce to affirm that Rule 8D is not to be automatically invoked.

The Tribunal found no justification for the disallowance because the investments were long-standing, no new investments were made during the year, and the only exempt income was Rs. 4.35 crore from a group company. Thus, the Rs. 4.35 crore addition was removed.

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