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2012 (7) TMI 276 - AT - Income TaxJustification on restricting the addition u/s 14A - AO applied Rule 8D in order to disallow interest expenditure relatable to the investments - Held that - For AY 2007-08 which is under consideration provisions of Rule 8D are not applicable and held that prior to Rule 8D the AO was bound to examine the application of sec. 14A(2)as decided in GODREJ AND BOYCE MFG. CO. LTD. Versus DCIT AND ANOTHER 2010 (8) TMI 77 (HC) - CIT(A) has agreed with the contention of the assessee without examining the case whether out of Rs.31.5 crores only expenditure of Rs.2 crore was out of borrowed funds. Since the CIT(A) has not examined the issue and has accepted the contention of the assessee without verification it is proper to set aside the issue to the file of the AO with the directions to examine the issue afresh - in favour of revenue.
Issues:
Restriction of addition under section 14A of the Income Tax Act. Analysis: The only issue in this case pertains to restricting the addition under section 14A of the Income Tax Act. The Assessing Officer disallowed an amount of Rs. 99,92,186, applying Rule 8D, as interest expenditure related to investments made by the assessee. However, the assessee contended that the provisions of sub-section (2) of section 14A were not applicable as no exempt income was claimed, except for the share of net profit from a partnership firm. The assessee argued that out of the total investment of Rs. 31.50 crores, Rs. 2 crores were from borrowed funds, and only that portion should be disallowed under section 14A. The Commissioner of Income-tax (Appeals) agreed with the assessee and restricted the disallowance to Rs. 29,00,000, holding that Rule 8D was not applicable for the year under consideration. The Commissioner of Income-tax (Appeals) based the decision on the judgment of the Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd., which held that Rule 8D was not applicable for the relevant assessment year. The Commissioner held that the Assessing Officer should have computed the disallowance using a reasonable method considering all facts and circumstances. The Commissioner accepted the assessee's contentions regarding the borrowed funds and other overheads, limiting the disallowance to Rs. 29,00,000. The Commissioner emphasized that the ends of justice would be met by this restricted disallowance. However, the Revenue contended that the issue was covered by the Delhi High Court's decision in the case of Maxopp Investment Ltd., which supported a different approach to disallowance under section 14A. The Revenue argued that the matter should be remanded to the Assessing Officer for a fresh decision. The Income Tax Appellate Tribunal noted that the Bombay High Court and Delhi High Court had differing views on the applicability of Rule 8D, with the former holding it prospective from Assessment Year 2008-09 onwards. Since the Assessing Officer had applied Rule 8D without proper examination of the case, the Tribunal set aside the issue for fresh consideration, directing the Assessing Officer to re-examine the matter after providing the assessee with a hearing opportunity. In conclusion, the Tribunal allowed the appeal filed by the Revenue for statistical purposes, emphasizing the need for a thorough examination of the disallowance under section 14A in light of the differing judicial views on the applicability of Rule 8D for the relevant assessment year.
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