2016 (10) TMI 345 - AT - Income Tax

Disallowance u/s 14A r.w.r 8D -- Held that - AO invoked provisions of Rule 8D of Income Tax Rules, 1962 for making and estimating disallowance. Therefore the basis of disallowance was not correct and bad in law as Rule 8D applies from asstt. year 2008- 09 onwards. Thus we inclined to hold that no material has been brought on record by the AO to show that the interest expenditure was incurred for the purpose of investment earning exempt income. At the same time, we also observed that the Ld. DR could not controvert this factual position that there is no expenditure on interest and there is some interest income shown by the assesse in both the years. As we have already noted that Rule 8D of Income Tax Rules is not applicable for asstt. year 2006-07 and 2007-08 which was wrongly applied by the AO for estimating this amount. The AO has not controverted the ratio adopted by assessee in making suo moto disallowance i.e ratio of dividend income to total income. Therefore, we decline to accept basis adopted by the AO for making disallowances. Per contra, at the same time we are in full agreement with the conclusion of the Ld. CIT(A) wherein he restricted the disallowance u/s 14A of the Act to the ratio of the dividend income to total income of the assessee during the relevant financial period. Hence we are unable to see any valid reason to interfere with the conclusion of the first appellate authority on this issue and thus we uphold the same. It is also relevant to mention here that the facts and circumstances of asstt. year 2006-07 and 2007-08 and quite similar therefore, our conclusion based on the facts and asstt. year 2006-07 would apply mutatis mutandis to asstt. year 2007-08 also. - Decided against revenue

Summary

Issues:
1. Disallowance under section 14A of the Income Tax Act.
2. Applicability of Rule 8D of the Income Tax Rules 1962.
3. Validity of the disallowance made by the Assessing Officer.
4. Assessment for the asstt. year 2006-07 and 2007-08.

1. Disallowance under section 14A of the Income Tax Act:
The appeal was filed by the revenue against the order of the Commissioner of Income-Tax (Appeals) regarding the disallowance of ?89,30,000 made by the Assessing Officer under section 14A of the Income Tax Act. The Revenue contended that the disallowance was wrongly restricted to ?1,46,397 by the Ld. CIT(A). The Counsel for the assessee argued that the assessee made a suo moto disallowance based on the ratio of dividend income to total income, which was logical for a public sector government undertaking company. The Tribunal observed that the AO invoked Rule 8D of the Income Tax Rules, which was not applicable for the assessment year in question. The Tribunal upheld the CIT(A)'s decision to restrict the disallowance to the ratio of dividend income to total income, as there was no evidence to show that the interest expenditure was incurred for the purpose of earning exempt income.

2. Applicability of Rule 8D of the Income Tax Rules 1962:
The Tribunal noted that Rule 8D applies from assessment year 2008-09 onwards and was incorrectly applied by the AO for the years 2006-07 and 2007-08. The CIT(A) correctly restricted the disallowance based on the ratio of dividend income to total income, considering the absence of any material to support that the interest expenditure was for earning exempt income. The Tribunal found that the AO's disallowance based on Rule 8D was not sustainable due to its inapplicability for the relevant assessment years.

3. Validity of the disallowance made by the Assessing Officer:
The Tribunal concluded that the AO failed to provide evidence that the interest expenditure was incurred for the purpose of investment earning exempt income. It was noted that the AO's disallowance of ?89,30,000 was not sustainable as it was based on a formula that was not widely acceptable. The Tribunal declined to accept the AO's basis for disallowances and upheld the CIT(A)'s decision to restrict the disallowance to ?1,46,397 based on the ratio of dividend income to total income.

4. Assessment for the asstt. year 2006-07 and 2007-08:
The Tribunal found that the facts and circumstances for both assessment years were similar, and the conclusion reached for 2006-07 applied to 2007-08 as well. Consequently, the Tribunal dismissed the revenue's appeals for both assessment years, upholding the CIT(A)'s decision to restrict the disallowance based on the ratio of dividend income to total income.

In summary, the appellate tribunal upheld the decision of the Commissioner of Income-Tax (Appeals) to restrict the disallowance under section 14A of the Income Tax Act based on the ratio of dividend income to total income for the assessment years 2006-07 and 2007-08. The tribunal found that the Assessing Officer wrongly applied Rule 8D of the Income Tax Rules, which was not applicable for those years. The tribunal concluded that the disallowance made by the Assessing Officer was not sustainable and dismissed the revenue's appeals for both assessment years.