2016 (1) TMI 1355 - AT - Income Tax

Disallowance u/s 14A read with Rule 8D - investment yielding tax free return were made out of borrowed funds - Held that - We delete the addition under rule 8D(2)(ii) - merely because there was a common pool of funds and a presumption cannot be drawn that investment yielding tax free return were made out of borrowed funds. In the case of Pr. CIT Vs. India Gelatine and Chemicals Ltd.(2015 (11) TMI 392 - GUJARAT HIGH COURT) it was held that tribunal categorically found on the basis of material on record that assessee has tax free return out of which the investments was made and the deletion of disallowance u/s 14A read with Rule 8D was justified. The case of the assessee is squarely covered by the above decisions and we, therefore, delete the disallowance of ₹ 23,58,695/- on account of interest made under rule 8D(ii). As regards the disallowance u/s 14A read with Rule 8D(iii) of ₹ 21,65,696/-, it is pertinent to state that Rule 8D was made applicable w.e.f. AY 2008-09. We are of the view that Rule 8D is not applicable to the AY 2007-08 in view of the judgment of the Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Vs. CIT (2010 (8) TMI 77 - BOMBAY HIGH COURT). Moreover, the disallowance of ₹ 21,65,696/- was excessive. We, therefore, set aside the order of the CIT(A) and restore back the matter to the file of the AO with the direction to work out disallowance u/s 14A on a reasonable basis - Decided in favour of assessee for statistical purposes

Summary

Issues involved:
1. Disallowance under Section 14A read with Rule 8D
2. Applicability of Rule 8D retrospectively
3. Invocation of Rule 8D without objective satisfaction
4. Computation of Book Profit under section 115JB
5. Allocation of expenditure under Section 14A read with Rule 8D

Analysis:

1. The issue raised in grounds 1, 2, 3, and 5 pertains to the disallowance of Rs. 45,24,390 under Section 14A read with Rule 8D. The assessee, engaged in trading and investments, filed its return for assessment year 2007-08. The Assessing Officer (AO) disallowed Rs. 46,39,435 under Rule 8D, based on dividend income received. The CIT(A) confirmed the disallowance. However, the Tribunal found the disallowance excessive and not in line with judicial precedents. It deleted the disallowance of Rs. 23,58,695 under Rule 8D(ii) and set aside the disallowance of Rs. 21,65,696 under Rule 8D(iii) for a reasonable reassessment, as Rule 8D was not applicable for the relevant assessment year.

2. Regarding additional grounds of appeal for AY 2007-08, the issue of TDS credit was raised. The CIT(A) allowed Rs. 16,13,545 instead of the claimed Rs. 22,80,044. The Tribunal directed the AO to grant full credit for TDS claimed, considering all certificates were submitted, thereby allowing the appeal for statistical purposes.

3. Ground no. 4 dealt with the computation of income under section 115JB. Since the disallowance under Section 14A was addressed earlier, the decision on grounds 1, 2, 3, and 5 was applied mutatis mutandis to ground no. 4. The AO was directed accordingly, resulting in the appeal being allowed for statistical purposes.

In conclusion, the Tribunal's judgment addressed the disallowance under Section 14A read with Rule 8D, applicability of Rule 8D retrospectively, proper computation of Book Profit under section 115JB, and allocation of expenditure. The Tribunal set aside excessive disallowances, directed reassessment, and allowed the appeal partly while providing clear directions to the Assessing Officer for appropriate actions.