2012 (2) TMI 516 - AT - Income Tax

Disallowance being 10% of the dividend income under the provisions of Section 14A - satisfaction by AO - Held that - In case the Assessing Officer is satisfied with the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, the Assessing Officer is to ascertain the claim of the assessee in so far as the quantum of disallowance under Section 14A is concerned. In such eventuality, the Assessing Officer cannot embark upon a determination of the amount of expenditure for the purposes of Section 14A(1). In case, the Assessing Officer is not, on the basis of objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Having done so, the Assessing Officer will have to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the Act. He is required to do so on the basis of reasonable and acceptable method of apportionment. Therefore, we restore this issue to the file of Assessing Officer to redetermine the disallowance

Summary

Issues:
1. Disallowance of 10% of dividend income under Section 14A of the Act.
2. Applicability of Rule 8D for Assessment Year 2007-08.
3. Correctness of the disallowance amount.

Analysis:
1. The appeal filed by the assessee challenged the sustained disallowance of Rs. 12,71,622, which was 10% of the dividend income of Rs. 1,27,16,222 under Section 14A of the Act. The Assessing Officer calculated the disallowance using Rule 8D, resulting in a sum of Rs. 16,02,548. The assessee contended that Rule 8D could not be applied for Assessment Year 2007-08, citing Tribunal decisions and the Bombay High Court case of Godrej & Boyce Mfg. Pvt. Ltd. The CIT (A) acknowledged that Rule 8D could not be invoked for that year but upheld the disallowance at 10% of the dividend income, reducing it to Rs. 12,71,622 and granting relief of Rs. 3,30,926 to the assessee. The assessee remained dissatisfied and raised various grounds of appeal against the sustained addition.

2. During the hearing, the assessee argued that the CIT (A) erred in limiting the disallowance to 10% based on estimation. Referring to the jurisdictional High Court's decision in Max Opp Investment Ltd. vs. CIT, it was highlighted that for the pre-Rule 8D period, the Assessing Officer should verify the correctness of the assessee's expenditure claim related to income not forming part of the total income. The matter was suggested to be remanded to the Assessing Officer for reevaluation in line with the Delhi High Court's decision in Max Opp Investment Ltd. vs. CIT.

3. The Tribunal, after considering the submissions, noted the decision in Max Opp Investment Ltd. vs. CIT, emphasizing that even for the pre-Rule 8D period, the Assessing Officer must verify the correctness of the assessee's expenditure claim. If unsatisfied, a reasonable method of apportionment should be used to determine the disallowance under Section 14A. Therefore, the issue was remanded to the Assessing Officer for reassessment in accordance with the High Court's observations. Consequently, the appeal by the assessee was treated as allowed for statistical purposes.