· During the course of assessment proceedings, assessee was asked to explain as to why expenditure attributable to earning exempt income should not be disallowed.
· Assessee submitted before the AO that it has not done any investment during the year other than the investment in capital account of the joint venture, and income earned by assessee during the year is interest income from the joint venture, which has been offered to tax. Thus, it was submitted that assessee has not earned any exempt income during the year to suffer disallowance u/s 14A. Further, assessee submitted that since it has voluntarily made a disallowance of Rs.1,08,00,000/- u/s 14A, no further disallowance out of the interest expenditure should be made.
· The AO rejected the claim of assessee and made the impugned addition u/s 14A by adopting Rule 8D.
· The CIT(A), after considering the submissions of assessee, though, agreed that the AO has not recorded any satisfaction on the correctness or otherwise of assessee's claim of expenditure attributable to earning of exempt income, however, at the same time, he expressed the view that such lapse or omission on the part of the AO was a procedural lapse, and could be corrected by the first appellate authority, since, his powers are co-terminus with that of the AO.
· The Tribunal observed that section 14A(2) of the Act, which has been introduced to the statute w.e.f. 1st April 2007 by Finance Act, 2006, mandates recording of satisfaction by the AO on the correctness of assessee's claim having regard to its accounts. The Tribunal further observed the fact that Rule 8D(1) also postulates similar recording of satisfaction by the AO.
· The Tribunal was, therefore, of the view that when the statutory provisions mandate a particular act to be done by a particular Authority in a particular manner, it has to be done by that authority in that manner only or not at all. The satisfaction to be recorded by the AO u/s 14A(2) cannot be substituted by the satisfaction recorded by the first appellate authority, even, accepting the fact that his power is co-terminus with that of the AO.
· Thus, the Tribunal concluded that the AO could not have made any further disallowance u/s 14A read with Rule 8D.
For further reading, refer the attachment.
Further Reading