2013 (4) TMI 487 - AT - Income Tax

Disallowance of expenditure related to Exemption u/s. 10(36) in respect of dividend income - Section 14A - Disallowance Under Rule 8D - Held that - The question arising in the present appeal is primarily of fact, i.e., the amount of indirect expenditure by way of administration expenses that can be reasonably attributed to the exempt - The orders of both the authorities are silent in the matter - The Revenue has also not brought on record its figure, with reference to which only, coupled withother relevant information, the reasonability or otherwise of the disallowance, which is being impugned by the Revenue, could be adjudged by us. The disallowance at Rs.10,000/-, which works to 6.17% of the exempt income, cannot be held as unreasonable, particularly considering that there is nothing adverse on record, and the fact that the tribunal has in the cited cases found a disallowance at as low as 2% to 5% of such (exempt) income as sustainable. No interference with the impugned order is, therefore, called for. We decide accordingly.

Summary

Issues:
1. Disallowance under section 14A of the Income Tax Act, 1961 for the assessment year 2007-08.
2. Applicability of Rule 8D of the Income-tax Rules, 1962 for calculating disallowance.
3. Interpretation of retrospective application of section 14A and Rule 8D.
4. Reasonableness of disallowance based on indirect expenditure.

Analysis:

1. The appeal addressed the disallowance under section 14A of the Income Tax Act, 1961 concerning the exemption claimed for dividend income. The Assessing Officer relied on the decision in Cheminvest Ltd. vs. ITO to calculate the disallowance under Rule 8D of the Income-tax Rules, 1962. The tribunal clarified that disallowance under section 14A could be made even if the exempt income was not received in the relevant year.

2. The Commissioner of Income Tax (Appeals) partly allowed the assessee's appeal and restricted the disallowance to Rs.10,000, disagreeing with the application of Rule 8D retrospectively. The tribunal noted that while Rule 8D applied only from A.Y. 2008-09 onwards, section 14A was inserted retrospectively from 01.04.1962, allowing for a reasonable disallowance by the assessing authority.

3. The dispute centered on the applicability of section 14A for years prior to A.Y. 2008-09, with the tribunal emphasizing the authority to make disallowances for expenditure related to income not forming part of the total income. The tribunal considered various tribunal decisions where disallowances as low as 2% of exempt income were deemed justifiable, contrasting with the ad-hoc basis applied by the Assessing Officer.

4. The tribunal's decision hinged on determining the reasonableness of the disallowance based on indirect expenditure attributable to the exempt dividend income. The tribunal found the Rs.10,000 disallowance, amounting to 6.17% of the exempt income, to be reasonable given the lack of adverse information on record. Citing precedents, the tribunal upheld the decision, noting that disallowances ranging from 2% to 5% had been deemed sustainable in similar cases. Consequently, the tribunal dismissed the Revenue's appeal, affirming the lower authority's order.

In conclusion, the judgment addressed the nuanced application of section 14A and Rule 8D, emphasizing the need for a reasonable disallowance based on indirect expenditure related to exempt income. The tribunal's decision underscored the importance of factual assessment in determining the appropriateness of disallowances, ultimately upholding the lower authority's decision in this case.