2009 (2) TMI 737 - AT - Income Tax

Summary

Issues Involved:
1. Ad hoc disallowance of administrative expenditure u/s 14A of the Income-tax Act.
2. Applicability of CBDT instructions regarding the monetary limit for filing appeals.

Summary:

1. Ad hoc Disallowance of Administrative Expenditure u/s 14A:

The Revenue challenged the Commissioner of Income-tax (Appeals) decision to limit the disallowance of administrative expenditure to 25% for the purpose of disallowance u/s 14A in respect of tax-free income u/s 10(23G) and 10(33). The Assessing Officer had apportioned Rs. 4.35 lakhs towards exempt income and made a disallowance under section 14A. The Commissioner of Income-tax (Appeals) reduced this disallowance to Rs. 1.09 lakhs. The Tribunal noted that the assessee had earned exempt income exceeding Rs. 3 crores and had not offered any disallowance under section 14A. The Tribunal referred to the Special Bench decision in ITO v. Daga Capital Management Pvt. Ltd. [2008] 312 ITR (AT) 1 (Mum), which held that disallowance under section 14A is applicable even when shares are held as investments. The Tribunal concluded that the disallowance under section 14A should be computed as per the Special Bench decision and restored the matter to the Assessing Officer for fresh computation, ensuring it does not exceed the original disallowance of Rs. 4,26,946.

2. Applicability of CBDT Instructions Regarding Monetary Limit for Filing Appeals:

The assessee contended that the Departmental appeal should be dismissed as the tax effect was only Rs. 1,25,748, below the specified limit for filing appeals. The Tribunal examined the relevant CBDT instructions and noted that the appeal was filed on August 9, 2004, when the applicable instruction (Instruction No. 1979 dated March 27, 2000) allowed appeals where the tax effect exceeded Rs. 1 lakh. The Tribunal referred to the judgments of the Bombay High Court in CIT v. Pithwa Engg. Works [2005] 276 ITR 519 (Bom) and CIT v. Chhajer Packaging and Plastics P. Ltd. [2008] 300 ITR 180 (Bom), concluding that the instruction prevailing at the time of filing the appeal is relevant. Since the tax effect in this case was higher than Rs. 1 lakh, the appeal was maintainable and required adjudication on merits.

Conclusion:

The Tribunal allowed the appeal for statistical purposes, setting aside the impugned order and directing the Assessing Officer to recompute the disallowance u/s 14A as per the Special Bench decision in ITO v. Daga Capital Management Pvt. Ltd., ensuring it does not exceed the original disallowance amount.

The order pronounced on this 4th day of February, 2009.