2013 (10) TMI 224 - HC - Income Tax

Disallowance u/s 14A - Appointment of remuneration of the directors, travelling expenses - Held that - since the amount involved is not very large, we reserve our final conclusion on such an issue in appropriate case. Therefore, we are not inclined to entertain this Tax Appeal. However, we should not be seen to have confirmed the Tribunal s view on the aspect that in absence of Rule 8D, no disallowances can be made under Section 14A of the Act, by proportionate bifurcation of the expenditure - Decided against Revenue.

Summary

Issues:
Disallowance of part of the remuneration paid to directors under Section 14A of the Income-tax Act, 1961.

Detailed Analysis:
The primary issue in this case revolves around the disallowance of part of the remuneration paid to directors by the Assessing Officer. The Assessing Officer contended that since the assessee had earned exempt income under Section 10(35) of the Income-tax Act, the expenditure incurred for earning this exempt income should be disallowed under Section 14A of the Act. As the assessee did not provide a bifurcation, the Assessing Officer disallowed the total expenditure, specifically adding back a sum of Rs. 3,25,868 being the amount of salary.

The Commissioner (Appeals) and the Tribunal disagreed with the Assessing Officer's decision. The Tribunal, in particular, referred to its earlier decision on the matter, which was supported by the Bombay High Court's ruling in the case of Godrej & Boyce Mfg. Co. Ltd. v. DCIT and the Kerala High Court's decision in CIT v. Catholic Syrian Bank Ltd., Trissur. These judgments highlighted that in the absence of Rule 8D of the Income-tax Rules, no disallowances can be made under Section 14A of the Act.

The High Court concurred with the Bombay High Court's stance that Rule 8D is not retrospective in operation. However, the High Court clarified that the absence of Rule 8D does not preclude making disallowances under Section 14A by reasonably bifurcating the expenditure towards earning taxable and tax-exempt income. Although the High Court did not provide a final conclusion due to the small amount involved in this case, it dismissed the Tax Appeal. The High Court also emphasized that its decision should not be interpreted as confirming the Tribunal's view that in the absence of Rule 8D, no disallowances can be made under Section 14A through proportionate expenditure bifurcation.

In conclusion, the High Court upheld the Tribunal's decision to dismiss the Tax Appeal, highlighting the importance of appropriately bifurcating expenditures for taxable and tax-exempt income under Section 14A of the Income-tax Act, 1961.