2016 (1) TMI 1257 - AT - Income Tax

Disallowance u/s 14A - Held that - The relevant assessment year under appeal is 2002-03 at which point of time the provisions of Rule 8D was not in force and the same was made applicable only from Asst Year 2008-09 as decided in the decision of Godrej & Boyce Manufacturing Company Ltd in (2010 (8) TMI 77 - BOMBAY HIGH COURT ). However it is not in dispute that the assessee had derived taxable income as well as tax free income and incurred expenditure for deriving both the incomes and hence disallowance is definitely warranted in terms of section 14A which is brought in the statute book with retrospective effect from 1.4.1962. The disallowance had to be made only on an estimated basis with regard to the expenditure incurred for the purpose of earning tax free income. Thus we direct the Learned AO to disallow 1% of dividend income under this issue and accordingly the grounds raised by the assessee are set aside to the file of Learned AO to make addition as directed above.

Summary

Issues:
- Disallowance under section 14A of the Income Tax Act, 1961.

Analysis:
The appeal before the Appellate Tribunal ITAT Kolkata concerned the disallowance under section 14A of the Income Tax Act, 1961. The dispute arose from the order of assessment framed by the Learned Assessing Officer (AO) under section 143(3) of the Act. The primary issue to be decided was whether the disallowance under section 14A amounting to Rs. 8,89,18,716 was justified in the given circumstances.

The assessee had derived both taxable and tax-free income, including dividend income and interest on tax-free securities. The AO made the disallowance using Rule 8D of the Rules, resulting in the substantial disallowance amount. However, the Learned Commissioner of Income Tax (Appeal) - VI, Kolkata restricted the disallowance to Rs. 1,39,49,000, based on 0.5% of the average value of investments as per Rule 8D(2)(iii) of the Rules.

The grounds of appeal raised by the assessee challenged the application of Rule 8D, the quantum of disallowance, and the disregard of previous decisions. The arguments put forth included the inapplicability of Rule 8D for the assessment year 2002-03 based on the judgment of the Hon'ble Bombay High Court in the case of Godrej & Boyce Manufacturing Company Ltd. The assessee also relied on the decision of the Hon'ble Jurisdictional High Court regarding the adoption of 1% of exempt income for disallowance under section 14A.

After considering the submissions and precedents, the Appellate Tribunal held that Rule 8D was not applicable for the relevant assessment year and directed the AO to disallow 1% of dividend income as per the judicial precedent. Consequently, the appeal of the assessee was allowed, subject to the specified directions, and the disallowance amount was adjusted accordingly.

In conclusion, the Tribunal's decision provided clarity on the disallowance under section 14A, emphasizing the retrospective application of the provision and the necessity of estimating expenditure related to earning tax-free income based on judicial precedents.