A two-judge bench of the Gujarat High Court has held that the mere existence of mixed fund would not automatically attract disallowance under section 14A of the Income Tax Act, 1961.
During the relevant year, the assessee made disallowance under section 14A on a suo motu basis and filed its return. The Assessing Officer even then made the disallowance u/s 14A r/w 8D, holding that the disallowance u/s 14A can be made on expenditure incurred for earning exempt income even when there was no claim of exempt income. The CIT(A) and later the ITAT set aside the addition.
The division bench comprising Justice J B Pardiwala and Justice A C Rao noted that the issue is already covered by the decision of this Court in Principal Commissioner of Income Tax, Vadodara-1 Vs. Gujarat State Fertilizer and Chemicals Ltd, where it was held, the mere existence of mixed funds will not lead to automatic disallowance under Rule 8D by the AO without recording the requisite satisfaction requisite u/s 14A. Following such ruling, the Revenue appeal is dismissed.
“The language of Section 14A of the Act is plain and clear. Before invoking Rule 8D, the Assessing Officer is obliged to indicate that having regard to the accounts of the assessee, he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to the income which does not form part of the total income under the Act. To put it in other words, the condition precedent of recording the requisite satisfaction which is a safeguard provided in Section 14A should not be overlooked before going to Rule 8. In such circumstances we are not impressed by the submission canvassed on behalf of the Revenue that once there are mixed funds, Rule 8 would be attracted automatically,” the bench said.
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