2012 (3) TMI 495 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance u/s 14A of the I.T. Act, 1961 r/w Rule 8D of Income Tax Rules.
2. Applicability of Rule 8D to the assessment year 2007-08.
3. Justification of disallowance when no dividend was received from investment.
4. Nexus of expenses incurred with respect to tax-free earnings.

Summary:

Issue 1: Disallowance u/s 14A of the I.T. Act, 1961 r/w Rule 8D of Income Tax Rules
The CIT(A) confirmed the disallowance of Rs. 15,03,031/- made by the Assessing Officer (AO) u/s 14A r/w Rule 8D. The AO observed that the assessee had investments in shares and received exempt dividend income while also claiming interest expenses of Rs. 27,26,953/-. The AO concluded that disallowance was required u/s 14A for the interest expenses.

Issue 2: Applicability of Rule 8D to the assessment year 2007-08
The assessee argued that Rule 8D was not applicable for the assessment year 2007-08. The CIT(A) disagreed, stating that the provisions of section 14A were applicable as the assessee had exempt dividend income. The Tribunal referred to the jurisdictional High Court judgment in Maxopp Investment Ltd. vs. CIT, which clarified that Rule 8D is prospective and applicable from the assessment year 2008-09 onwards.

Issue 3: Justification of disallowance when no dividend was received from investment
The assessee contended that the dividend income was from trading stock, not investments, and no expenses were incurred to earn this income. The CIT(A) found this claim factually incorrect, noting that the assessee had investments in equity shares and failed to provide evidence that these were made from interest-free funds. Thus, the disallowance was justified.

Issue 4: Nexus of expenses incurred with respect to tax-free earnings
The CIT(A) held that the assessee did not furnish any material to suggest that no expenditure was incurred in relation to the investment activity. The Tribunal emphasized that even for the pre-Rule 8D period, the AO must ascertain the correctness of the assessee's claim regarding expenditure related to exempt income. If the AO is not satisfied, they must determine the expenditure using a reasonable method.

Conclusion:
The Tribunal set aside the orders of the authorities below and remanded the matter back to the AO to re-compute the disallowance u/s 14A in accordance with the jurisdictional High Court judgment, after providing due opportunity to the assessee. The appeal was accepted for statistical purposes.