2012 (7) TMI 466 - AT - Income Tax

Disallowance under Rule 8D - business of activities of sales purchase in shares and securities - assessee also earned dividend from these shares and securities Held that - Disallowance u/s 14A can only be invoked where Assessing Officer is not satisfied with the correctness with the claim of expenditure made by the assessee or no expenditure has been incurred - application of Rule 8D of the Rules is not automatic. When the assessee makes the claim regarding the quantum of expenses to be disallowed in terms of section 14A of the Act, it was incumbent on the part of the Assessing Officer to consider the claim of the assessee - Assessing Officer has proceeded to apply Rule 8D without giving any finding with regard to the correctness of the claim made by the assessee regarding the disallowance to be made u/s 14A of the Act. The CIT(A) has also proceeded on the same basis - matter is remitted to the file of the Assessing Officer - appeal filed by the department allowed for statistical purposes.

Summary

Issues:
Challenge to disallowance under Rule 8D of the I.T. Rules.

Analysis:
The appeal was against the CIT(A)'s order restricting the disallowance under Rule 8D of the I.T. Rules. The assessee, engaged in sales-purchase activities of shares and securities, earned income under 'business income' and 'capital gain', along with dividends. The Assessing Officer disallowed Rs.14,13,064 under section 14A of the Act read with Rule 8D, treating it as expenditure related to exempt income. The assessee contended that disallowance under section 14A should be based on actual expenses incurred, not hypothetical calculations. The CIT(A) deleted the addition made by the Assessing Officer, citing the need for the Assessing Officer to establish a nexus between expenditure and tax-free income before disallowing under the relevant section.

The CIT(A) relied on precedents and concluded that the Assessing Officer must be satisfied with the correctness of the claim of expenditure made by the assessee before applying Rule 8D. In this case, the Assessing Officer did not provide any finding regarding the correctness of the claim made by the appellant. Therefore, the addition made by the Assessing Officer was set aside, and the issue was remanded for fresh consideration.

The department filed an appeal against the CIT(A)'s order, arguing that Rule 8D's applicability was confirmed by the Delhi High Court in a specific case. However, the matter was remanded back by the Delhi High Court for re-decision. The ITAT decided to examine the issue in light of the jurisdictional High Court's exposition on Section 14A and Rule 8D. Consequently, the orders of the authorities below were set aside, and the matter was remitted to the Assessing Officer for fresh consideration.

In conclusion, the department's appeal was accepted for statistical purposes, and the matter was remanded to the Assessing Officer for reconsideration in line with the jurisdictional High Court's decision. The assessee was to be granted an adequate opportunity to present their case during the fresh consideration.