THE issue is - Whether invocation of Section 14A is automatic and comes into operation, without any exception, as soon as the dividend income is claimed as an exemption. NO is the verdict.
Facts of the case
The assessee is engaged in the business of providing legal support and other support services to law firms. During assessment, the AO observed that assessee had a dividend income. The counsel of the assessee had submitted that no expenses were incurred for earning such dividend income. However, the AO held that the invocation of Section 14A was automatic and comes into operation, without any exception, as soon as the dividend income was claimed as an exemption. Thus, disallowed the same under Section 14A read with Rule 8D. The CIT(A) allowed the appeal of the assessee on the ground that the AO had failed to examine that assessee had sufficient funds and no borrowing was resorted to (no interest expenditure was incurred) and investments generating tax exempt income were done by using administrative machinery of PMS, who did not charge any fees. The Tribunal had confirmed the same.
On appeal, the HC held that,
++ the Court finds that the AO has indeed 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. Also, in CIT v. Taikisha Engineering India Ltd. 2014-TIOL-2239-HC-DEL-IT, in similar circumstances, the Court disapproved of an AO invoking Section 14A read with Rule 8D (2) of the Rules without recording his satisfaction and noted that the recording of satisfaction as to why "the voluntary disallowance made by the assessee was unreasonable and unsatisfactory" is a mandatory requirement of the law.