2011 (2) TMI 1400 - AT - Income Tax

Disallowance u/s 14A on account of expenditure incurred to earn exempt dividend income, by applying the provision of Rule 8D - HELD THAT - On perusal of learned CIT(A) s order, it is found that the CIT(A) has confirmed the Assessing Officer s action by applying the decision of ITAT, Special Bench Mumbai in the case of INCOME-TAX OFFICER, WARD 6 (2) (2) , MUMBAI VERSUS DAGA CAPITAL MANAGEMENT (P.) LTD. 2008 (10) TMI 383 - ITAT MUMBAI and, has thus, applied the method provided under Rule 8D of the Income-tax Rules. At this stage, it is pertinent to note that the decision of Special Bench of Tribunal in the case of Daga Capital Management Pvt. Ltd. holding that Rule 8D is retrospective in nature, has been over-ruled by the Hon ble Bombay High Court in the case of GODREJ AND BOYCE MFG. CO. LTD. VERSUS DEPUTY COMMISSIONER OF INCOME-TAX AND ANOTHER 2010 (8) TMI 77 - BOMBAY HIGH COURT , where it has been held that Rule 8D would be applicable only on and from assessment year 2008-09 onwards and not prior to assessment year 2008-09 - the AO shall be at liberty to identify actual expenditure which had been incurred for the purpose of making and earning dividend income from the investment in shares and mutual funds as so observed by the Hon ble High Court in the case of Godrej Boyce vs. DCIT. Matter restored back to the file of the Assessing Officer for his fresh adjudication. MAT - Addition being expenditure incurred to earn exempt income while computing book profit under sec. 115JB of the Act - HELD THAT - Both the authorities have applied Rule 8D of the Income-tax Rules while computing the amount of expenditure disallowable u/s 14A of the Act. As already held above, the provisions of Rule 8D are not applicable to the present assessment year under consideration. Therefore, disallowance of expenditure by applying Rule 8D is not justified. No actual expenditure was debited in the profit loss account relating to the earning of exempt income. Therefore, the provision of section 14A cannot be imported into while computing the book profit u/s 115JB of the Act inasmuch as clause (f) of Explanation to sec. 115JB refers to the amount debited to the profit loss account which can be added back to the book profit while computing book profit u/s 115JB of the Act - the disallowance of expenses confirmed by the CIT(A), is deleted while computing book profit under sec. 115JB of the Act. Non-quantification of unabsorbed depreciation to be carried forward to subsequent years - HELD THAT - Issue being restored back to the file of the AO to quantify the unabsorbed depreciation of the current year to be carry forward to the next assessment year as per provisions of sec. 32(2) The AO shall provide reasonable opportunity of being heard to the assessee. The assessee shall produce all the details of depreciation before the AO so as to enable him to decide the issue in its right and correct perspective and as per the provisions of law. The appeal filed by the assessee is partly allowed.

Summary

Issues:
1. Disallowance under section 14A of the Income-tax Act, 1961 for expenditure incurred to earn exempt dividend income.
2. Addition of expenditure to earn exempt income while computing book profit under section 115JB of the Act.
3. Non-quantification of unabsorbed depreciation to be carried forward to subsequent years.

Issue 1 - Disallowance under section 14A:
The appeal was filed against the disallowance under section 14A of the Income-tax Act, 1961 for expenditure incurred to earn exempt dividend income. The Assessing Officer (AO) applied Rule 8D to calculate the disallowance, considering the assessee's investments in shares and mutual funds. The Commissioner of Income-tax (Appeals) upheld the disallowance, citing the decision of a Special Bench of Mumbai ITAT in the case of M/s. Daga Capital Management. The CIT(A) emphasized that managerial and administrative manpower was utilized for investment decisions, justifying the disallowance under section 14A. The Appellate Tribunal noted the CIT(A)'s reliance on Rule 8D and the Mumbai High Court's decision in Godrej Boyce vs. DCIT, ruling that Rule 8D was only applicable from assessment year 2008-09 onwards. Consequently, the Tribunal set aside the orders and directed the AO to identify actual expenditure incurred for earning dividend income, providing the assessee with an opportunity to present legal contentions.

Issue 2 - Addition of expenditure to earn exempt income for book profit:
The second issue involved the addition of expenditure to earn exempt income while computing book profit under section 115JB of the Act. Both the AO and the CIT(A) applied Rule 8D to disallow the expenditure under section 14A. However, the Tribunal highlighted that Rule 8D was not applicable for the assessment year in question. As no actual expenditure was debited in the profit & loss account related to earning exempt income, the Tribunal ruled that section 14A could not be imported into computing book profit under section 115JB. Citing a decision by ITAT Delhi Bench in a similar case, the Tribunal deleted the disallowance of expenses confirmed by the CIT(A) for computing book profit under section 115JB, deciding in favor of the assessee.

Issue 3 - Non-quantification of unabsorbed depreciation:
The third issue pertained to the non-quantification of unabsorbed depreciation to be carried forward to subsequent years. The Tribunal decided to restore this issue back to the AO to quantify the unabsorbed depreciation of the current year for carry forward to the next assessment year as per the provisions of section 32(2) of the Act. The AO was directed to provide a reasonable opportunity for the assessee to present relevant details, ensuring a correct perspective and compliance with the law.

In conclusion, the appeal was partly allowed, with the Tribunal providing detailed analysis and directions on each issue raised in the case, ensuring compliance with legal provisions and precedents.