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2012 (9) TMI 467 - AT - Income TaxDisallowance u/s 14A r/w Rule 8D - Do Rule 8D read with Section 14A apply retrospectively Section 14A, as introduced by virtue of the Finance Act, 2001, was with retrospective effect from 01.04.1962. Rule 8D, which was introduced by virtue of the Notification No.45/2008 dated 24.03.2008. Held that - Following the decision of Delhi High Court in case of Maxopp Investment Ltd. (2011 (11) TMI 267) & Bombay High Court in case of Godrej & Boyce Mfg. Co. Ltd. (2010 (8) TMI 15) that Rule 8D of the which was introduced by virtue of Notification No.45/2008 dated 24.3.2008 is prospective in operation and cannot be regarded as being retrospective. Therefore provisions of Rule 8D shall apply with effect from assessment year 2008-09 onwards. The Order of CIT (A) & AO is perverse and supported by misinterpretation of the provisions of the Act and rules made thereunder. Case remand back to AO.
Issues Involved:
1. Disallowance under Rule 8D read with Section 14A of the Income Tax Act, 1961. 2. Nexus between expenses and tax-exempt income. 3. Fault in allocation of expenses. 4. Interest charged under Section 234. 5. Interest withdrawn under Section 244A. Detailed Analysis: 1. Disallowance under Rule 8D read with Section 14A: The primary issue revolves around the disallowance made by the Assessing Officer (AO) under Rule 8D read with Section 14A of the Income Tax Act, 1961. The AO processed the returns and made disallowances amounting to Rs. 46,49,831 and Rs. 7,50,033 for the respective appellants. The CIT(A) upheld these disallowances, referencing the ITAT Mumbai Special Bench decision in the case of Daga Capital Management Ltd., which held that Section 14A is retrospective, clarificatory, and procedural. However, the appellants argued that the judgment of the Delhi High Court in Maxopp Investment Ltd. vs CIT clarified that Rule 8D is prospective and applicable from AY 2008-09 onwards. 2. Nexus between expenses and tax-exempt income: The appellants contended that no direct nexus was established between the expenses incurred and the earning of tax-exempt income. The CIT(A) dismissed the appeals, upholding the AO's disallowance by stating that the expenditure related to exempt income should be disallowed regardless of whether the income was earned during the year. The appellants argued that the AO did not record any dissatisfaction with the correctness of their claim, which is a prerequisite for invoking Rule 8D. 3. Fault in allocation of expenses: The appellants claimed that both authorities failed to identify specific faults in the allocation of expenses. They argued that the disallowance was made mechanically, without considering the basis of allocation used in previous years. The Delhi High Court in Maxopp Investment Ltd. vs CIT emphasized that the AO must record dissatisfaction with the correctness of the assessee's claim before determining the expenditure under Rule 8D. This procedural requirement was not met, rendering the disallowance unsustainable. 4. Interest charged under Section 234: The appellants contested the interest charged under Section 234 of the Income Tax Act. However, the judgment does not provide a detailed analysis of this issue, suggesting it was not a primary focus of the appeals. 5. Interest withdrawn under Section 244A: Similarly, the appellants challenged the withdrawal of interest under Section 244A. The judgment does not elaborate on this issue, indicating it was secondary to the main contention regarding disallowance under Section 14A. Conclusion: The Tribunal found merit in the appellants' arguments, particularly in light of the Delhi High Court's judgment in Maxopp Investment Ltd. vs CIT, which clarified that Rule 8D is prospective and applicable from AY 2008-09 onwards. The Tribunal set aside the CIT(A)'s order and remanded the matter back to the AO for de novo consideration, ensuring compliance with the procedural requirements outlined in the Maxopp Investment Ltd. judgment. The appeals were allowed for statistical purposes, with instructions for the AO to provide a reasonable opportunity for the appellants to be heard.
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