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2011 (4) TMI 869 - AT - Income TaxDisallowance u/s 14A r.w.r. 8D - Held that The AO must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record - The AO should determine as to whether the assessee had incurred any expenditure (direct or indirect) in relation to dividend income/income from mutual funds which does not form part of the total income as contemplated under section 14A - remit the matter back to the file of the AO with a direction decide the issue afresh in the light of judgment of GODREJ AND BOYCE MFG. CO. LTD. Versus DEPUTY COMMISSIONER OF INCOME-TAX AND ANOTHER 2010 (8) TMI 77 - BOMBAY HIGH COURT - in favour of assessee for statistical purpose Re opening of assessment - non-convertible debentures write off against inter corporate deposits not charged to P/L A/c - Held that - There is no additional material on record before the Assessing Officer to come to the above conclusion and reopening the assessment u/s 147 for the reason that the income of the assessee had escaped assessment. As decided in CIT vs. Kelvinator India Ltd. 2010 (1) TMI 11 - SUPREME COURT OF INDIA that after 1st April, 1999 the Assessing Officer has power to reopen the assessment u/s 147 provided the Assessing Officer has reason to believe that the income has escaped assessment and there is a tangible material to come to the conclusion that there is an escapement of income. Mere change of opinion cannot per-se be the reason to reopen the assessment - in favour of assessee.
Issues Involved:
1. Disallowance of expenses under Section 14A of the Income Tax Act. 2. Validity of reopening assessment under Section 147 of the Income Tax Act. 3. Applicability of Section 14A to tax-free dividend and interest income. Issue-Wise Detailed Analysis: 1. Disallowance of Expenses under Section 14A of the Income Tax Act: The primary issue in ITA No. 3533/Mum/2010 pertains to the disallowance of expenses amounting to Rs. 9,94,23,807/- under Section 14A of the Income Tax Act. The Assessing Officer (AO) had disallowed these expenses, and the CIT(A) directed the AO to compute the disallowance following the ITAT's decision in Daga Capital Investment Ltd., in accordance with Rule 8D read with Section 14A. The parties agreed that the issue is covered by the jurisdictional High Court in Godrej and Boyce Mfg. Co. Ltd., which held that Rule 8D is applicable from the assessment year 2008-09 onwards. For prior years, the AO must adopt a reasonable basis to determine the expenditure related to income not forming part of the total income. Consequently, the matter was remanded back to the AO to decide afresh in light of the High Court's judgment, ensuring reasonable opportunity for the assessee to present relevant material. 2. Validity of Reopening Assessment under Section 147 of the Income Tax Act: In ITA No. 3534/Mum/2010, the issue revolves around the reopening of assessment under Section 147. The assessee argued that the reopening was based on a mere change of opinion, which is impermissible as per the Supreme Court's decision in Kelvinator of India Ltd. The assessee had disclosed all material facts regarding the write-off of non-convertible debentures as irrecoverable. The AO reopened the assessment on the grounds that the investment in non-convertible debentures did not constitute the ordinary course of business. The CIT(A) upheld the reopening, relying on the Tribunal's decision in CIBA India P. Ltd., which was not applicable as it dealt with reopening under Section 143(1), not 143(3). The ITAT found that there was no new material before the AO to justify the reopening and quashed the reassessment, following the Supreme Court and jurisdictional High Court precedents that mere change of opinion cannot justify reopening under Section 147. 3. Applicability of Section 14A to Tax-Free Dividend and Interest Income: In ITA No. 3535/Mum/2010, the assessee contested the applicability of Section 14A to tax-free dividend and interest income. The AO had apportioned interest expenditure to all activities, including tax-free income, resulting in a disallowance of Rs. 2,92,15,306/-. The CIT(A) directed the AO to verify the disallowance based on Rule 8D, following the ITAT's decision in Daga Capital Investment Ltd. The parties agreed that the issue is covered by the jurisdictional High Court in Godrej and Boyce Mfg. Co. Ltd., which held that Rule 8D is applicable from the assessment year 2008-09 onwards. For prior years, the AO must determine the expenditure related to tax-free income on a reasonable basis. The matter was remanded back to the AO to decide afresh in light of the High Court's judgment, ensuring reasonable opportunity for the assessee to present relevant material. Conclusion: In conclusion, the appeals were decided as follows: - ITA No. 3533/Mum/2010: The appeal was allowed for statistical purposes, remanding the matter back to the AO. - ITA No. 3534/Mum/2010: The appeal was allowed, and the reopening of assessment under Section 147 was quashed. - ITA No. 3535/Mum/2010: The appeal was allowed for statistical purposes, remanding the matter back to the AO.
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