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2012 (6) TMI 700 - AT - Income TaxDividend - assessee claimed the entire dividend income as exempt - CIT exercised the powers of revision of the assessment order u/s 263 - CIT directed the AO to invoke the provisions of Section 14A of the Income-tax Act, 1961 Held that - As per the provisions of section 14A read with Rule 8D. Assessing Officer shall determine the amount of expenditure incurred in relation to such exempt income in accordance with the provisions of Section 14A read with Rule 8D. AO had not discussed about the expenditure relating to dividend income earned by the assessee. Therefore, the ld. CIT was justified in remanding the matter to the AO by invoking the provisions of section 263 of the I.T. Act However, the ld. CIT has directed the AO to apply the provisions contained in Rule 8D which are applicable from A.Y. 2008-09 - order of CIT modified to this extent - Assessing Officer should decide the issue in accordance with the guidelines laid down in the case of Godrej & Boyce Mfg. Co. Ltd. (2010 (8) TMI 77 (HC)) and compute the disallowance. - Appeal filed by the assessee is allowed for statistical purposes.
Issues Involved:
1. Validity of the CIT's order under Section 263 of the Income-tax Act. 2. Applicability of Section 14A read with Rule 8D for the assessment year 2007-08. 3. Determination of expenditure incurred in relation to tax-exempt income. 4. Use of own funds versus borrowed funds for investments yielding tax-exempt income. 5. Application of legal principles when two views are possible. Detailed Analysis: 1. Validity of the CIT's Order Under Section 263: The primary issue is whether the CIT's order under Section 263 of the Income-tax Act, 1961, is valid. The CIT exercised revisionary powers, stating that the original assessment order was erroneous and prejudicial to the interests of revenue because it did not apply Section 14A read with Rule 8D to disallow expenditure related to tax-exempt income. The Tribunal acknowledged that the Assessing Officer (AO) did not discuss the expenditure related to dividend income, thus justifying the CIT's remand of the matter to the AO. 2. Applicability of Section 14A Read with Rule 8D for the Assessment Year 2007-08: The CIT applied Section 14A read with Rule 8D to the assessment year 2007-08. However, Rule 8D was inserted by the Income-tax (Fifth Amendment) Rules, 2008, effective from 24.03.2008, and applicable from the assessment year 2008-09 onwards. The Tribunal referred to the Bombay High Court's decision in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT, which held that Rule 8D is not retrospective. Therefore, the Tribunal modified the CIT's order, directing the AO to decide the issue in accordance with the guidelines laid down in the Godrej & Boyce case and to compute any disallowance using a reasonable method for the assessment year 2007-08. 3. Determination of Expenditure Incurred in Relation to Tax-Exempt Income: The CIT argued that the assessee should have applied Rule 8D to determine the expenditure related to tax-exempt income, even if no direct expenditure was incurred. The Tribunal noted that the AO and the CIT did not establish a nexus between the expenditure and the exempted income. The Tribunal emphasized that Section 14A is intended to prevent claims for deduction of expenditure in relation to income that does not form part of the total income. The Tribunal agreed with the CIT's decision to remand the matter but directed the AO to apply a reasonable method, not Rule 8D, for the assessment year 2007-08. 4. Use of Own Funds Versus Borrowed Funds for Investments Yielding Tax-Exempt Income: The assessee claimed that the investments yielding tax-exempt income were made from its own funds, not borrowed funds. The CIT rejected this argument, stating that investments were made from a common pool of funds, including current or cash credit/overdraft accounts, making it impossible to determine if investments were made exclusively from non-interest-bearing funds. The Tribunal did not specifically address this issue but implied agreement with the CIT's reasoning by remanding the matter for further examination by the AO. 5. Application of Legal Principles When Two Views Are Possible: The assessee argued that when two views are possible, the one beneficial to the assessee should be applied, citing the Supreme Court's decision in Vegetable Products Ltd. The CIT countered that the language of Section 14A read with Rule 8D is clear and unambiguous, and thus, there is no room for alternative interpretations. The Tribunal did not explicitly address this argument but implicitly supported the CIT's stance by emphasizing the need for a reasonable method to determine the disallowance for the assessment year 2007-08. Conclusion: The Tribunal allowed the appeal for statistical purposes, upholding the CIT's decision to remand the matter to the AO but modifying the order to exclude the application of Rule 8D for the assessment year 2007-08. The AO was directed to decide the issue based on the guidelines from the Godrej & Boyce case and to use a reasonable method to compute any disallowance.
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