Disallowance u/s 14A applicable only if AO finds assessee incurred Expenses with Credible Evidence: ITAT rules in favour of Maruti Suzuki

In a significant case, the Delhi bench of the Income Tax Appellate Tribunal (ITAT) has held that disallowance under section 14A of the Income Tax Act, 1961 is applicable only if the Assessing Officer (AO) finds assessee incurred expenses with credible evidence.

Maruti Suzuki India Ltd, the assessee challenged the disallowance made by AO by invoking the provision of section 14A of the Act r.w.Rule 8D of the Income Tax Rules, 1962 (“the Rules”) amounting to Rs.32,57,05,335/-.

The assessee had earned dividend income of Rs.156,03,20,325/- which was claimed as exempt from tax u/s 10(34) & 10(35) of the Act.  In the income tax return, the assessee had suo-moto offered for disallowance a sum of Rs.1,69,36,938/-.  He contended that the sum was computed on a rational and scientific basis. 

The amount which was disallowed suo-moto was not incurred by the assessee company for earning exempt income because the investments were made from non-interest-bearing funds and other expenses were not required to be made as the investments were made largely in mutual funds and government securities. He contended that the AO had mechanically applied Rule 8D of the Rules without recording the requisite satisfaction having regard to the accounts of the assessee.

Under section 14A of the Act, only the expenditure incurred having relation to earning exempt income is not allowable as a deduction under the provision of the Act.  The provisions of section 14A of the Act are applicable only if the AO in the first place finds that the assessee has incurred expenses, which have proximate nexus with earning exempt dividend income and not otherwise. The action of the assessing officer should not be based merely on surmises. The surmises cannot be allowed to replace credible evidence.

A Coram comprising of Shri Shamim Yahya, Accountant Member & Shri Kul Bharat, Judicial Member observed that the AO has not recorded any satisfaction as mandated under section 14A of the Income Tax Act and Secondly, without prejudice to aforesaid, no part of the expenditure incurred by the assessee could be regarded as attributable to earning of income. 

The Tribunal further restored the issue to the file of AO for a limited purpose to verify the claim of the assessee regarding administrative expenses incurred for maintaining such a huge investment.  Theappeal of the assessee was partly allowed for statistical purposes.

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