2010 (9) TMI 1183 - AT - Income Tax

Summary

Issues Involved:

1. Invoking the provisions of Section 14A of the Income Tax Act, 1961.
2. Application of Rule 8D of the Income Tax Rules, 1962.

Summary:

Issue 1: Invoking the provisions of Section 14A of the Income Tax Act, 1961

The assessee, a public company, declared a total income of Rs. 63,07,481 for the assessment year 2006-07. During scrutiny, the AO noticed that the assessee had received Rs. 60,27,520 as dividend income, which was claimed as exempt. The AO asked for details of expenses incurred to earn this dividend income. The assessee claimed no expenditure was incurred for earning the dividend income. However, the AO, after examining the books of accounts, did not accept this claim and made a disallowance of Rs. 13,91,511 u/s 14A, using a formula to calculate the proportionate expenses attributable to the exempt income.

The assessee appealed to the CIT(A), arguing that the AO failed to establish a nexus between the expenditure and the exempt income and that the formula used by the AO was arbitrary. The CIT(A) upheld the AO's decision, stating that the disallowance was in line with the method prescribed in Rule 8D and supported by precedents.

Issue 2: Application of Rule 8D of the Income Tax Rules, 1962

The assessee contended that Rule 8D, applied by the AO, was not applicable for the assessment year 2006-07 as it was effective from the assessment year 2008-09. The assessee relied on the judgment of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. vs. Dy.CIT, which stated that Rule 8D is applicable prospectively.

The Tribunal observed that the AO invoked Section 14A and applied Rule 8D, which is effective from the assessment year 2008-09. The Tribunal referred to the Bombay High Court's judgment in Godrej & Boyce Mfg. Co. Ltd., which clarified that Rule 8D is not retrospective. Consequently, the Tribunal set aside the CIT(A)'s order and remanded the issue back to the AO for fresh adjudication, directing the AO to compute the disallowance using a reasonable method in line with the guidelines laid down by the Bombay High Court.

Conclusion:

The appeal was allowed for statistical purposes, and the AO was directed to re-evaluate the disallowance by applying a reasonable method, considering the facts and circumstances of the case, and in accordance with the guidelines from the Bombay High Court's judgment in Godrej & Boyce Mfg. Co. Ltd. vs. Dy.CIT.