2010 (11) TMI 183 - AT - Income Tax

Computation of Dis allowance u/s 14A - Condonation of delay in filling the appeal of 67 days - The delay has been occurred due to the reason of non availability of one of the directors which is a bonafide, non intentional or not deliberate - It is settled law that while condoning the delay, the court should take a lenient view It was held that delay is condoned Disallowance u/s 14A of the Act - Assessee company is engaged in the business of trading in shares and securities as well as in private projects and investment in shares and securities - High Court has held that the provisions of section 14A and Rule 8D cannot be applied prior to the assessment year 2008-09 Disallowance of proportionate Interest - The investment has been made only to the extent of their own funds. - assessee declared short term as well as the long term capital gain from investment then the question of disallowance u/s 14A regarding the interest expenditure on borrowed funds if any utilized for investment purposes does not arise specifically when no dividend income is earned on the shares purchase for investment. Disallowance of proportionate administrative expenses - There cannot be a parity or equal basis for apportionment of the administrative expenses between the delivery based transaction and non-delivery based transaction as well as trading and investment activities. Undisputedly the labour hours and other overhead expenses will be less in case of non-delivery based transaction of purchase and sale of shares & securities in comparison to the delivery based transaction. Similarly in case of collection of dividend through cheques or vouchers will costs more than direct credit in D-mat account. It is undisputable fact that the dividend was directly credited in the D-mat account. Secondly, the dividend income is on the shares held for trading purposes. - Matter remanded to the file of AO with direction.

Issues Involved:
1. Condonation of delay in filing the appeal.
2. Disallowance under section 14A of the Income Tax Act.
3. Applicability of Rule 8D of the Income Tax Rules.

Condonation of Delay in Filing the Appeal:
The assessee filed an appeal with a delay of 67 days, justifying the delay due to the non-availability of a key director who was an NRI. The Tribunal, considering the reasons provided, found them to be sufficient and bonafide, and thus condoned the delay. The Tribunal emphasized that courts should prefer substantial justice over technical considerations and take a justice-oriented approach when deciding on the condonation of delay.

Disallowance under Section 14A of the IT Act:
The assessee, engaged in trading shares and securities, claimed exemption on dividend income under section 10(33). The AO disallowed a portion of the expenses related to earning the exempt dividend income under section 14A, including interest on borrowed funds and administrative expenses. The AO's disallowance was based on the proportion of borrowed funds to total funds and the ratio of dividend income to total income. The assessee argued that the shares were purchased for trading purposes and not for earning dividend income, and hence, no part of the interest or administrative expenses should be disallowed under section 14A. The Tribunal noted that the AO must establish a proximate relationship between the expenditure and the income not forming part of the total income. The Tribunal found that the AO's basis for disallowance was incorrect and directed the AO to reconsider the disallowance in light of the actual expenditure incurred for earning the exempt income.

Applicability of Rule 8D:
The CIT(A) directed the AO to re-compute the disallowance under section 14A by applying Rule 8D of the Income Tax Rules. However, the Tribunal noted that the Hon'ble jurisdictional High Court in the case of Godrej and Boyce Mfg Co. Ltd. v. DCIT held that Rule 8D is applicable from the assessment year 2008-09 and cannot be applied retrospectively. Since the assessment year in question was 2004-05, Rule 8D was not applicable. The Tribunal directed the AO to re-compute the disallowance under section 14A without applying Rule 8D.

Detailed Analysis:

Condonation of Delay:
The Tribunal condoned the delay of 67 days in filing the appeal, emphasizing that the reasons provided by the assessee were sufficient and bonafide. The Tribunal highlighted that courts should take a lenient view while condoning delays and prefer substantial justice over technical considerations.

Disallowance under Section 14A:
The Tribunal found that the AO's disallowance of interest and administrative expenses under section 14A was based on incorrect assumptions. The Tribunal noted that the AO must establish a proximate relationship between the expenditure and the exempt income. The Tribunal referred to various judicial precedents, including the Hon'ble Supreme Court's decision in M/s. Walfort Share & Stock Brokers P. Ltd. and the Hon'ble jurisdictional High Court's decision in Godrej and Boyce Mfg Co. Ltd. v. DCIT, which emphasized that only actual expenditure incurred for earning exempt income should be disallowed. The Tribunal directed the AO to reconsider the disallowance in light of these principles.

Applicability of Rule 8D:
The Tribunal noted that Rule 8D of the Income Tax Rules, which provides a method for determining the disallowance under section 14A, is applicable from the assessment year 2008-09. Since the assessment year in question was 2004-05, Rule 8D was not applicable. The Tribunal directed the AO to re-compute the disallowance under section 14A without applying Rule 8D, following the principles laid down by the Hon'ble jurisdictional High Court in Godrej and Boyce Mfg Co. Ltd. v. DCIT.

Conclusion:
The appeal was partly allowed. The Tribunal condoned the delay in filing the appeal, directed the AO to reconsider the disallowance under section 14A without applying Rule 8D, and emphasized that only actual expenditure incurred for earning exempt income should be disallowed.

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