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2012 (7) TMI 244 - AT - Income TaxDis-allowance u/s 14A of expenditure incurred in earning dividend income - application of Rule 8D - AY 07-08 - Revenue contesting restriction of dis-allowance by CIT(A) - Held that - It has been held in case of Godrej & Boyce Manufacturing Co. Ltd. vs. DCIT (2010 (8) TMI 15 (HC)) that provisions of Rule 8D would apply with effect from AY 2008-09. In the case before us the AY involved is AY 2007-08. Therefore, Rule 8D will not be applicable in the case of the assessee. However, disallowance can be made in relation to exempt income on reasonable basis. The assessee had himself disallowed Rs.1,73,98,255/- in the proportion of exempt and taxable income earned by way of dividend and interest income, which is reasonable. Since Rule 8D is not applicable for AY under consideration, the disallowance made by the assessee on proportionate basis of exempt income and taxable income in our considered opinion is justified - Decided against Revenue.
Issues:
Disallowance under section 14A of the Income-tax Act for Assessment Year 2007-08. Analysis: The only issue in this case pertains to the disallowance under section 14A of the Income-tax Act. The appellant, a company, earned dividend income during the relevant year and claimed it as exempt from tax. The Assessing Officer (AO) required the appellant to explain why disallowance under section 14A read with Rule 8D should not be made. The AO disallowed an amount higher than what the appellant had calculated. On appeal, the appellant argued that the disallowance of interest and other expenses under Rule 8D was erroneous. The Commissioner of Income-tax (Appeals) considered the submissions and restricted the disallowance to a lower amount based on the appellant's proportionate disallowance of expenses. The Commissioner noted arithmetical errors made by the AO and held that Rule 8D was not applicable for the assessment year in question. The key legal principles applied in this judgment include the retrospective effect of section 14A enacted by the Finance Act of 2001, which aimed to disallow direct and indirect expenditure related to income not forming part of the total income. The judgment also referenced the Supreme Court's decision in Rajasthan State Warehousing Corporation vs. CIT, emphasizing the need for a reasonable basis to determine expenditure related to exempt income. Additionally, the judgment cited the Bombay High Court's ruling in Godrej & Boyce Manufacturing Co. Ltd. vs. DCIT regarding the applicability of Rule 8D from Assessment Year 2008-09 onwards. The Delhi High Court's decision in Maxopp Investment Ltd. vs. CIT was also mentioned, clarifying that Rule 8D is not retrospective and that the AO must determine the expenditure based on a reasonable method. Ultimately, the Tribunal dismissed the Revenue's appeal, upholding the Commissioner's order to restrict the disallowance under section 14A to the amount the appellant had voluntarily disallowed. The Tribunal reasoned that since Rule 8D was not applicable for the assessment year in question, the appellant's proportionate disallowance was justified. The judgment highlights the importance of applying a reasonable and acceptable method to determine expenditure related to exempt income and emphasizes the need for consistency with relevant facts and circumstances.
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