2012 (2) TMI 384 - AT - Income Tax

Expenditure in respect of exempt Income - Investment in shares - Tax free Income - Held That - In view of Godrej & Boyce Manufacturing (2010 -TMI - 78448 - BOMBAY HIGH COURT) and Maxopp Investments Ltd (2011 - TMI - 208569 - Delhi High Court), we remand the matter back to AO to consider varios aspects.

Summary

Issues:
1. Disallowance under sec. 14A of the Act read with Rule 8D of the Income-tax Rules, 1962.
2. Interpretation of expression "expenditure incurred by the assessee in relation to income" under sec. 14A.

Analysis:

Issue 1: Disallowance under sec. 14A of the Act read with Rule 8D of the Income-tax Rules, 1962

The assessee-company filed its return declaring total income, including income from shares not includible in the total income. The Assessing Officer initiated proceedings under sec. 143(2) and 142(1) and made a disallowance of &8377; 10,69,839/- under sec. 14A read with Rule 8D. The CIT(A) partly upheld the disallowance, stating it is unlikely no expenditure was incurred for significant share investments. The assessee appealed, arguing against the application of sec. 14A. The Tribunal noted that sec. 14A requires disallowance of expenditure related to income not forming part of the total income. It was observed that expenditure for earning tax-free income is deductible even if no such income was earned. The Tribunal found that the lower authorities did not sufficiently examine the issue and decided to restore the matter to the Assessing Officer for a thorough investigation, considering relevant case laws.

Issue 2: Interpretation of expression "expenditure incurred by the assessee in relation to income" under sec. 14A

The Tribunal analyzed the expression "expenditure incurred by the assessee in relation to income" under sec. 14A. It emphasized the need for a nexus between income and expenditure, as mentioned by the CIT(A) regarding the substantial investments made by the assessee. The Tribunal highlighted that the management's time devoted to investment decisions should also be considered in determining expenditure related to tax-free income. It was noted that the lower authorities did not adequately address these aspects, leading to a lack of proper inquiry. The Tribunal decided to remand the case to the Assessing Officer for a detailed examination in light of relevant legal precedents, ensuring the assessee's right to a fair hearing.

In conclusion, the Tribunal allowed the appeal for statistical purposes and directed a re-examination of the disallowance issue by the Assessing Officer, granting the assessee an adequate opportunity to present their case.