2011 (12) TMI 550 - AT - Income Tax

Summary

Issues involved: Appeal against order u/s 263 of the Income-tax Act, 1961 for assessment year 2006-07 regarding disallowance under sec. 14A read with Rules 8D of the Income-tax Rules, 1962.

Summary:
1. The assessee appealed against the order of the Learned Commissioner u/s 263, challenging the setting aside of the assessment order and direction to make necessary disallowance under sec. 14A read with Rules 8D.

2. The assessee declared a loss in the return of income for the assessment year 2006-07. The Assessing Officer accepted the return without detailed examination.

3. The Learned Commissioner found that the Assessing Officer did not examine the disallowance u/s 14A as required. The assessee claimed exemption for dividend income under sec. 10(34) and made a suo-moto disallowance under sec. 14A.

4. The assessee contended that Rule 8D was not applicable for the assessment year 2006-07 based on a Bombay High Court decision. However, the Learned Commissioner disagreed and set aside the assessment order for necessary disallowance u/s 14A read with Rule 8D.

5. The assessee argued that the Assessing Officer had accepted the disallowance made by the assessee, and the order was not erroneous or prejudicial to revenue. Reference was made to a Delhi High Court decision.

6. The ITAT analyzed the principles under sec. 263, emphasizing that the order must be erroneous and prejudicial to revenue for the section to apply. The ITAT found that the foundation for the show-cause notice was flawed, and the Commissioner failed to appreciate the facts correctly.

7. The ITAT concluded that in the absence of Rule 8D, disallowance should be made on a reasonable basis. The Commissioner's order was deemed unsustainable due to lack of highlighting non-application of mind by the Assessing Officer.

8. The appeal of the assessee was allowed, and the decision was pronounced on 16.12.2011.