2012 (12) TMI 121 - AT - Income Tax

Rebate under sec. 88E(1) of the Income tax Act, 1961 alleged that the assessee earned income on scrips which were not listed on the stock exchange or traded in securities before those were listed thereby implying that no STT was paid on such transactions - contention of the assessee is that the assessee has not claimed the rebate in respect of transactions which have not been made through Stock Exchange Held that - According to the AO, the assessee had earned income on scrips which were not listed on Stock Exchange or traded in securities before those were listed. Therefore, the contention of the assessee has to be verified whether the assessee has claimed the rebate in respect of any transaction on which no STT was paid. Subject to verification, the AO is directed to allow rebate in respect of Income-tax payable on the income from taxable securities transactions reckoned at average rate of tax payable or securities transaction tax, whichever is lower Disallowance made under sec. 14A of the Act Held that - AO can make disallowance under sec. 14A if there is a direct nexus between the expenditure incurred and the exempt income - AO has made disallowance under Rule 8D which is not applicable for the year under consideration - AO was not justified in invoking the provisions of Rule 8D of the Income-tax Rules. As regards estimation of disallowance @ 10% of exempt income, learned CIT(A) has estimated disallowance on ad hoc basis without establishing any nexus between the expenditure incurred and the exempt income - neither the AO nor the ld. CIT(A) has examined any nexus between the exempt income and expenditure incurred matter remanded to AO

Summary

Issues:
1. Allowance of rebate under sec. 88E of the Income-tax Act.
2. Disallowance made under sec. 14A of the Income-tax Act.

Issue 1 - Allowance of rebate under sec. 88E:
The dispute arose regarding the allowance of rebate under sec. 88E of the Income-tax Act. The appellant claimed a rebate under sec. 88E(1) for a certain amount, but the Assessing Officer disallowed the entire claimed amount. The appellant contended that they were entitled to a rebate of 30% of the Securities Transaction Tax (STT) payment. The Commissioner of Income-tax (Appeals) agreed partially with the appellant and restricted the disallowance to a lesser amount. The Revenue challenged this decision, while the appellant raised a cross objection for a higher rebate amount.

The Tribunal noted that sec. 88E(1) allows a deduction from the income tax on profits from taxable securities transactions equal to the STT paid by the assessee. The rebate is to be allowed from the income tax, not the STT paid. The Tribunal directed the Assessing Officer to verify if the appellant claimed the rebate for transactions without STT payment and allow the rebate accordingly.

Issue 2 - Disallowance made under sec. 14A:
The second issue concerned the disallowance made under sec. 14A of the Income-tax Act related to exempt dividend income. The Assessing Officer disallowed a certain amount under Rule 8D, which the appellant contested as not applicable for the assessment year in question. The Commissioner of Income-tax (Appeals) agreed that Rule 8D was not applicable but upheld a partial disallowance based on an ad hoc estimation.

The Tribunal observed that Rule 8D was not applicable for the relevant assessment year. The Commissioner's estimation of disallowance lacked a nexus between the exempt income and expenditure incurred. Therefore, the Tribunal set aside the issue to the Assessing Officer for further examination to establish a valid nexus between the exempt income and the expenditure incurred before making any disallowance.

In conclusion, the Tribunal partly allowed the appeal filed by the Revenue and the cross objection filed by the assessee for statistical purposes, providing directions for the Assessing Officer to re-examine both issues on their merits.