2010 (12) TMI 461 - AT - Income Tax

Disallowance u/s 14A - Rule 8D of the Income Tax Rules - The major source of income of the exchange is membership fee on grant of membership to new members, annual recurring fees and transaction processing charges for transaction carried out on the platform provided by the exchange - Even prior to Assessment Year 2008-09, when Rule 8D was not applicable, the Assessing Officer has to enforce the provisions of sub section (1) of Section 14A - The AO as well as the CIT(A) had made the disallowance on the basis of Rule 8-D of the IT Rules, 1962, which are not applicable - Decided in favour of the assessee by way of remand to AO

Summary

Issues:
Disallowance of expenses under section 14A of the Income Tax Act 1961 for assessment years 2005-06 to 2007-08.

Analysis:
The appellant, a company engaged in commodity exchange business, faced a common issue in multiple appeals regarding the disallowance of expenses alleged to have been incurred to earn income not forming part of the total income under section 14A of the Income Tax Act 1961. The appellant's main source of income included membership fees, recurring fees, and transaction charges. The appellant also earned dividend income from investments made using deposits received from constituents. The appellant contended that it had not incurred direct expenses to earn dividend income, but computed indirect expenses related to investment decisions and accounting entries. However, the Assessing Officer disallowed expenses under Rule 8D for the respective assessment years.

On appeal, the CIT(A) upheld the Assessing Officer's order, citing the decision of the ITAT Special Bench in Daga Capital Management Pvt. Ltd. The CIT(A) directed the Assessing Officer to recompute the disallowance based on certain observations. The appellant then approached the Tribunal challenging the CIT(A)'s decision.

The Tribunal noted the Bombay High Court's judgment in a related case, emphasizing that even before Rule 8D's applicability from 2008-09, the Assessing Officer must enforce section 14A(1) by determining expenses related to income not forming part of the total income. As the assessment years in question predated 2008-09, the disallowance should align with the High Court's directions. Consequently, the Tribunal remitted the issue back to the Assessing Officer for fresh consideration in line with the High Court's guidelines, setting aside the CIT(A)'s orders.

Ultimately, all appeals were allowed for statistical purposes, with the Tribunal's decision pronounced in open court on 22.12.2010.