2011 (1) TMI 41 - AT - Income Tax

Dis allowance of expenditure u/s 14A - Dividend income - rule 8D - Held that - the AO was duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The AO must adopt a reasonable basis and method consistent with all relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record. Thus, it is clear from the said decision that even if Rule 8D is not applicable but AO is duty bound to compute the disallowance under sub-section (1) of Section 14A and AO must adopt a reasonable basis and method consistent with all relevant facts and circumstances. - AO directed to recompute the dis allowance in view of decision of Hon ble Bombay High Court in the case of Godrej & Boyce (2010 (8) TMI 77 - BOMBAY HIGH COURT)

Summary

Issues:
Disallowance of expenditure under Section 14A for assessment years 2005-06, 2006-07, and 2007-08.

Analysis:
The appeals were filed by the assessee against orders passed by CIT(A) for the three assessment years, all concerning the disallowance of expenditure under Section 14A. The issue raised in all appeals was identical, focusing on the disallowance of expenditure under Section 14A. The facts of the cases were similar, except for the assessment year 2005-06, where the AO computed the disallowance under Rule 8D following the directions of the Tribunal. The disallowance was made by the AO in all cases by applying Rule 8D, which was considered retrospective based on the decision in the case of Daga Capital Management. The assessee contended that no expenditure was incurred to earn exempted dividend income, citing legal precedents and arguing that Rule 8D should not be applied retrospectively. The assessee also highlighted that surplus funds were used for investments, with no identifiable expenditure incurred for earning exempted income.

The learned AR argued that the disallowance made by the AO should be deleted, relying on the decision in the case of Minda Investments Ltd. where similar disallowances were deleted. However, the learned DR contended that the matter should be recomputed by the AO based on subsequent Tribunal orders restoring similar cases for reevaluation. The Tribunal acknowledged that Rule 8D cannot be applied retrospectively but emphasized that the AO must compute the disallowance under Section 14A using a reasonable basis and method consistent with all relevant facts and circumstances. Therefore, the Tribunal directed the AO to recompute the disallowance in line with the decision in the case of Godrej & Boyce, providing the assessee with a reasonable opportunity to present relevant material.

The Tribunal rejected the plea to delete the disallowance based on the Minda Investments Ltd. case, citing the rule of precedence to follow later decisions of similar strength. Consequently, the Tribunal restored the matter back to the AO for recomputation of the disallowance as directed, allowing all appeals of the assessee for statistical purposes. The decision was pronounced on December 31, 2010.