2012 (7) TMI 211 - AT - Income Tax

Applicability of Rule 8D - dividend income - assessee claimed the same as a case of exempt income u/s 10(33) of the Income Tax Act, 1961 Held that - AO has not specifically dealt with the claim of the assessee to the effect that no expenditure had been incurred in the AY in hand particularly in view of the fact that the shares in question had been purchased long back - issue in hand has to be remitted back to the AO who shall re-decide the instant ground in view of the evidence if any lead by the assessee by following the principles of reasonable computation as it existed before the insertion of Rule 8D after affording the assessee opportunity of hearing. Interest free security deposit - assessee company had received non-interest bearing security deposit - Refundable at the time of termination of lease - assessee has included the amount as miscellaneous income. But immediately after realizing the mistake it also filed its revised computation Held that - Interest free security deposit to be paid back, the same can never termed as income - AO has also not examined this issue matter remanded to AO

Summary

Issues Involved:
1. Applicability of Rule 8D of the Income Tax Rules for disallowance of expenditure incurred in earning exempt income.
2. Addition of rental deposit as income.
3. Disallowance of proportionate interest.

Issue-wise Detailed Analysis:

1. Applicability of Rule 8D of the Income Tax Rules for Disallowance of Expenditure:
The assessee filed a return declaring total income, including dividend income claimed as exempt under Section 10(33) of the Income Tax Act, 1961. The Assessing Officer (AO) disallowed Rs. 2,81,867/- as expenditure incurred for earning exempt income, calculated at 2% of the total income under this head. The CIT (A) directed the AO to recompute the expenses under Rule 8D, following the ITAT Mumbai decision in ITO vs. Daga Capital Management. The assessee contested this, arguing that Rule 8D is applicable only from AY 2008-09, relying on the Godrej Boyce case. The Tribunal found that the AO did not specifically address the assessee's claim that no expenditure was incurred since the shares were purchased long before the relevant AY. The Tribunal noted that the CIT (A) erred in relying on Daga Capital Management, which was overruled by the Godrej Boyce judgment. Consequently, the Tribunal remitted the issue back to the AO for re-examination, following pre-Rule 8D principles and allowing the assessee an opportunity of hearing.

2. Addition of Rental Deposit as Income:
The assessee received a non-interest-bearing security deposit of Rs. 13,07,740/- from a lessee, which was initially shown as miscellaneous income. Upon realizing the mistake, the assessee revised the computation to exclude this amount, but the AO did not consider the revised computation. The CIT (A) upheld the AO's decision, stating that the return of income is akin to a sworn statement and can only be superseded by a revised return, not merely by a revised computation. The Tribunal observed that the amount in question was a refundable security deposit and could not be treated as income. It directed the AO to re-examine the matter, considering the additional evidence and the Tribunal's observations, and to pass a fresh order after hearing the assessee.

3. Disallowance of Proportionate Interest:
The assessee challenged the disallowance of Rs. 48,87,945/- as proportionate interest. The AO had disallowed the total interest expenditure of Rs. 58,46,663/- for AY 2001-02, which the CIT (A) allowed only for that year. The assessee claimed the remaining interest for AY 2002-03, but the AO did not discuss this in the assessment order. The CIT (A) dismissed the claim, stating that the expenditure must be claimed through a revised return, not merely a revised computation. The Tribunal noted that the ITAT Mumbai had upheld the staggering of interest liability over AYs 2001-02 and 2002-03 in the assessee's own case. The Tribunal directed the AO to re-examine the issue, allowing the assessee an opportunity of hearing and following the law.

Conclusion:
The Tribunal allowed the appeal for statistical purposes, remitting the issues back to the AO for re-examination and fresh orders, ensuring the assessee is given an opportunity of hearing. The Tribunal emphasized adherence to legal principles and proper examination of evidence in each issue.