2012 (10) TMI 130 - AT - Income Tax

Applicability of Sub-section(2) to section 14A and Rule 8D - Held that - Rule 8D cannot be applied keeping in view the decision in the case of Godrej & Boyce Mfg. Co. Ltd. (2010 (8) TMI 77 - BOMBAY HIGH COURT) as disallowance u/s 14A r.w.r. 8D are not retrospective. Rule 8D applicable from Assessment Year 2008-09. sub-section (2) of section 14A says that the AO shall determine the amount of expenditure incurred and in relation to such income which does not form part of the total income under this Act. Thus, the onus is on the AO to determine the amount of expenditure. The Legislature has used word shall before the word determine , which goes to mean the AO has to take into account all relevant facts and surrounding circumstances to determine expenditure incurred in relation to income not forming part of total income. As in the present case the AO has not made any attempt to determine the amount of expenditure incurred in relation to the income not forming part of total income - thus set aside the order of the CIT(A) on the issue of 14A and direct the AO to determine reasonable expenses, attributable to exempt income, taking into account all surrounding circumstances - in favour of assessee for statistical purposes.

Summary

Issues:
Applicability of Rule 8D and computation of allowable expenses under section 14A of the Income Tax Act, 1961.

Detailed Analysis:
1. The appeal challenged the order of the Commissioner of Income Tax (Appeals) regarding the retrospective application of Sub-section to section 14A and Rule 8D to the Assessment Year (A.Y.) 2007-08.
2. The appellant contended that Rule 8D was inserted in 2008 and should not apply to A.Y. 2007-08.
3. The issue revolved around the application of section 14A and Rule 8D to the appellant's case concerning tax-free dividend income for A.Y. 2007-08.
4. Additional grounds included the rejection of the appellant's claim of no expenses related to earning tax-free dividend income.
5. The appellant disputed the calculation of disallowance of interest, arguing for a specific calculation based on the interest paid on unsecured loans.
6. Interpretation of sub-sections of section 14A based on the connection between expenditure and income not forming part of total income.
7. The appellant requested a reduction in interest paid while calculating disallowable interest.
8. Clarification on the application of Rule 8D(ii) when determining interest paid.
9. The appellant claimed no expenditure incurred to earn tax-free dividend income based on their books of accounts.
10. Assertion that no special efforts or expenditure were made to receive the dividend income once declared.

Detailed Analysis (Continued):
1. The main issue concerned the applicability of Rule 8D and the computation of allowable expenses under section 14A.
2. The assessee claimed dividend income exempt under section 10(34), with the Assessing Officer calculating disallowable expenses based on a previous case law.
3. The CIT(A) upheld the disallowance, leading to the appeal before the ITAT.
4. The appellant argued that the Rule 8D computation was settled by the Bombay High Court, applying only from A.Y. 2008-09 onwards, not for A.Y. 2007-08.
5. The appellant contended that no expenses could be attributed under section 14A due to specific circumstances, including receiving dividends from a subsidiary and no change in holding pattern.
6. The ITAT agreed that Rule 8D could not be applied for A.Y. 2007-08 based on the High Court decision.
7. Emphasis was placed on the Assessing Officer's duty to determine expenditure under section 14A based on relevant facts and circumstances.
8. The ITAT noted the Assessing Officer's failure to determine the expenditure related to exempt income in the case.
9. The ITAT set aside the CIT(A)'s order and directed the Assessing Officer to determine reasonable expenses attributable to exempt income considering all circumstances.

This detailed analysis covers the issues raised in the legal judgment, providing a comprehensive understanding of the arguments, decisions, and reasoning involved.