2010 (12) TMI 423 - AT - Income Tax

Disallowance - Expenditure u/s 14A - Applicability of Rule 8D - As per the Hon ble Bombay High Court in the case of Godrej and Boyce (234 CTR 1) has held that Rule 8D cannot be applied retrospectively - Hence, direct the AO to recompute the disallowance in accordance with the decision of Hon ble Bombay High Court in the case of Godrej and Boyce and give reasonable opportunity of hearing to the assessee to place all germane material on the record

Summary

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

Analysis:
The appeals were filed by the assessee against orders passed by CIT(A) for the respective assessment years, all concerning the disallowance of expenditure under Section 14A. The issue raised in all appeals was identical, challenging the disallowance of expenditure under Section 14A. The facts of the cases were similar, except for AY 2005-06, where the assessment order was passed by the AO as per Tribunal directions, resulting in disallowance under Rule 8D. The disallowance in all cases was computed by the AO applying Rule 8D, citing the decision of the Special Bench in the case of ITO vs. Daga Capital Management. The assessee contended that no expenditure was incurred to earn exempted dividend income, citing the decision of the Punjab and Haryana High Court in the case of CIT vs. Hero Cycles. Additionally, the assessee argued that the disallowance should be deleted based on the decision of the Delhi Tribunal in the case of Minda Investments Ltd., emphasizing the non-incurrence of expenditure for earning exempted dividend income.

The learned AR for the assessee argued that Rule 8D should not be considered retrospective and that no expenditure was identified to be incurred for earning exempted dividend income, as the investment was made from surplus funds without incurring any interest or administrative expenses. The AR relied on the decision of the Tribunal in the case of Minda Investments Ltd. to support the deletion of disallowance. On the other hand, the learned DR contended that the Tribunal consistently restored similar matters back to the AO for recomputation of disallowance, citing orders in other cases. The Tribunal analyzed the submissions and held that while Rule 8D cannot be applied retrospectively, the AO is duty-bound to compute the disallowance under Section 14A(1) and must adopt a reasonable basis and method consistent with all relevant facts and circumstances, as per the decision of the Bombay High Court in the case of Godrej and Boyce. Therefore, the Tribunal directed the AO to recompute the disallowance in accordance with the decision of the Bombay High Court, providing the assessee with a reasonable opportunity to present relevant material.

Regarding the argument that the disallowance should be deleted based on the Minda Investments Ltd. case, the Tribunal noted that subsequent decisions restored similar matters to the AO for recomputation, following the rule of precedence. Consequently, the Tribunal restored the matter back to the AO for recomputation of disallowance as directed, allowing all appeals of the assessee for statistical purposes.