2011 (9) TMI 239 - AT - Income Tax

Disallowing the deduction u/s 80 IB - insurance claimed in respect of Dadra and Sambha Unit.3 - As decided in the case of Shri Ram Honda Power Equipments 2004 -TMI - 52669 - CESTAT, NORTHERN BENCH, NEW DELHI , it is held that the AO was justified in excluding the interest income pertaining to Dadra and Sambha Units for the purpose of calculation of deduction u/s 80 IB of the Act - Therefore, decided in favour of Revenue. Restricting the addition u/s 14A - assessee, it has been contended that Rule 8D of the I.T. Rules was not applicable for that year - Held that As such, Rule 8D of the Rules was not appropriately applied by the AO as correctly held by the CIT (A) - onus was on the AO to establish any such expenditure - disallowance u/s 14A of the Act requires a clear finding of incurring of expenditure and that no disallowance can be made on the basis of presumptions - Thus appeal filed by the Department is dismissed and the cross objections filed by the assessee are allowed

Summary

Issues:
1. Disallowance of deduction u/s 80 IB on account of insurance claimed in respect of Dadra and Sambha Unit
2. Disallowance under section 14A of the Income Tax Act
3. Application of Rule 8D of the Income Tax Rules, 1962 for disallowance calculation

Issue 1: Disallowance of deduction u/s 80 IB on account of insurance claimed in respect of Dadra and Sambha Unit:
The Department challenged the deletion of additions made by the AO regarding disallowing the deduction u/s 80 IB on account of insurance claimed for Dadra and Sambha Unit. The CIT(A) upheld the AO's action based on previous decisions. However, the Tribunal, in a previous order for assessment year 2007-08, decided in favor of the assessee citing relevant case laws. The Tribunal held that the claim of deduction u/s 80 IB for insurance claim receipt was acceptable, relying on the jurisdictional High Court's decision. As the facts for the current year were similar to the previous case, the Tribunal rejected the Department's appeal regarding this issue.

Issue 2: Disallowance under section 14A of the Income Tax Act:
The Department alleged that the CIT(A) erred in restricting the addition u/s 14A to a certain amount, contrary to the AO's disallowance. The Tribunal referred to a previous order for assessment year 2007-08 where the AO had made a disallowance without establishing the correctness of the claim of the assessee. The Tribunal held that Rule 8D of the Rules was not appropriately applied by the AO, as there was no evidence of expenditure incurred by the assessee for earning dividend income. The burden to establish the nexus of expenses with exempt income was on the revenue. Therefore, the Tribunal rejected the Department's grievance on this issue and allowed the cross objections raised by the assessee.

Issue 3: Application of Rule 8D of the Income Tax Rules, 1962 for disallowance calculation:
The dispute revolved around the application of Rule 8D for calculating the disallowance under section 14A of the Act. The assessee argued that Rule 8D was not applicable for the relevant year, and the AO did not provide any satisfaction regarding the incorrectness of the assessee's calculation. The CIT(A) partially approved the AO's action. The Tribunal held that the AO's satisfaction was necessary to invoke Rule 8D, and as such, the CIT(A) erred in partially approving the AO's action. Consequently, the Department's grievance on this matter was unjustified, and the cross objections raised by the assessee were accepted. Ultimately, the appeal filed by the Department was dismissed, and the cross objections filed by the assessee were allowed.

This detailed analysis of the judgment covers the issues related to the disallowance of deductions and the application of relevant rules under the Income Tax Act, providing a comprehensive understanding of the legal aspects involved in the case.