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2012 (12) TMI 131 - AT - Income TaxDisallowance u/s 14A - Held that - sec 14A and Rule 8D would operate prospectively (and, not retrospectively) does not mean that the assessing officer is not to satisfy himself with the correctness of the claim of the assessee with regard to such expenditure. Even where the assessee claims that no expenditure has been incurred in relation to income which does not form part of total income, AO is required to verify the correctness of such claim. In case, the AO is not, on the basis of objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. There is nothing in the assessment order or impugned order as to whether the assessee placed the relevant details & accounts before AO nor CIT(A) seems to have undertaken any exercise to ascertain the details of expenditure objectively in managing and supervising the aforesaid huge investments - it is fair and appropriate to set aside the order of CIT(A) and restore the matter to the file of AO for deciding the issue, afresh in accordance with law , after allowing sufficient opportunity to the assessee - Matter remanded back - Decided in favor of revenue. Decision in Maxopp Investment Ltd. & Others Versus Commissioner of Income Tax 2011 (11) TMI 267 - DELHI HIGH COURT followed.
Issues Involved:
1. Reduction of disallowance under Section 14A. 2. Applicability of Rule 8D and relevant judicial precedents. 3. Determination of expenditure incurred in relation to exempt income. Issue-wise Detailed Analysis: 1. Reduction of Disallowance under Section 14A: The Revenue challenged the CIT(A)'s decision to reduce the disallowance under Section 14A to Rs. 9,91,465, which was 10% of the dividend income. The CIT(A) justified this reduction by stating that no income, whether taxable or exempt, can be earned without incurring some expenses. The CIT(A) noted that the assessee had significant investments and must have incurred overhead and administrative expenses. However, the CIT(A) did not apply Rule 8D retrospectively, as per the Bombay High Court's ruling in Godrej & Boyce Mfg. Co. Ltd. vs. DCIT. The CIT(A) estimated the expenses at 10% of the dividend received, granting the assessee relief of Rs. 26,53,747. 2. Applicability of Rule 8D and Relevant Judicial Precedents: The Revenue contended that the CIT(A) ignored the Bombay High Court's judgment in Godrej & Boyce Mfg. Co. Ltd. vs. DCIT, which upheld the disallowance made under Section 14A read with Rule 8D. However, the ITAT noted that Rule 8D, inserted with effect from 24.3.2008, was not applicable retrospectively. The ITAT referred to several judicial precedents, including the Supreme Court's decisions in CIT v. Walfort Share & Stock Brokers (P.) Ltd. and the Bombay High Court's ruling in Godrej & Boyce, which clarified that Rule 8D applies only from AY 2008-09 onwards. For prior years, the AO must determine the disallowable expenditure by a reasonable method. 3. Determination of Expenditure Incurred in Relation to Exempt Income: The ITAT emphasized that even where the assessee claims no expenditure was incurred for earning exempt income, the AO must verify the correctness of such claims. The AO is required to record satisfaction regarding the correctness of the assessee's claim. The ITAT referred to the jurisdictional High Court's decision in Maxopp Investment Ltd., which mandates that the AO must determine the amount of expenditure incurred in relation to exempt income based on a reasonable and acceptable method. The ITAT observed that neither the AO nor the CIT(A) had sufficient details or accounts to ascertain the expenditure incurred by the assessee for managing and supervising the investments. Conclusion: The ITAT set aside the CIT(A)'s order and restored the matter to the AO for fresh consideration. The AO was directed to decide the issue afresh, in accordance with law and judicial pronouncements, after allowing the assessee a reasonable opportunity to furnish relevant details of expenditure incurred in managing and supervising the investments. The AO was instructed to pass a speaking order, providing reasons for satisfaction or otherwise, regarding the disallowance under Section 14A. Additional Grounds: No additional grounds were raised, and the appeal was allowed for statistical purposes.
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