2013 (10) TMI 475 - AT - Income Tax

Applicability of Rule 8D for computation of disallowance - Disallowance of expenses relating to exempt income u/s 14A of the Income Tax Act Held that - Reliance has been placed upon the judgment in the case of Godrej Boyce Mfg Co Ltd. 2010 (8) TMI 77 - BOMBAY HIGH COURT , wherein it has been held that Rule 8D is applicable only from assessment year 2008-09 In the present case, assessment years involved in the present appeal are assessment years 2006-07 and 2007-08. Therefore, application of Rule 8D by the authorities below in the assessment years under reference is not correct - Restored this issue back to the file of AO in both the years for passing fresh orders after necessary examination in the light of Judgment of Hon ble High Court of Bombay in case of Godrej Boyce Mfg Co Ltd. (Supra) Decided in favor of Assessee.

Summary

Issues:
1. Allowability of loss incurred on account of sale of repossessed assets.
2. Disallowance of expenses u/s 14A of the Income Tax Act.

Analysis:

Issue 1: Allowability of loss incurred on account of sale of repossessed assets:
The appellant, engaged in leasing and financing motor vehicles, incurred losses on the sale of repossessed assets and claimed deductions for the same. The Assessing Officer (AO) disallowed the claim, considering the loans related to the sale of capital assets as capital in nature. The appellant contended that the loss was not capital but incurred during the course of business activity. The Commissioner of Income Tax (Appeals) rejected the claim, stating that the loss was directly related to the sale of capital assets and could not be allowed as a deduction. The appellant argued that the loss should be treated as bad debt under section 36(1) r.w.s 36(2) of the Income Tax Act. The Tribunal, citing precedent cases, held in favor of the appellant, allowing the claim of bad debt as the loss was incurred in the business of financing and lending, similar to the cases of ACIT Vs. Citicorp Maruti Finance Ltd. and DCIT Vs. Maruti Countrywide Auto Financial Services Pvt. Ltd.

Issue 2: Disallowance of expenses u/s 14A of the Income Tax Act:
The AO disallowed expenses related to exempt income under section 14A, computed as per Rule 8D, for the assessment years 2006-07 and 2007-08. However, the Tribunal noted that Rule 8D was applicable only from assessment year 2008-09, as per the judgment of the Hon'ble High Court of Bombay in Godrej Boyce Mfg Co Ltd. The Tribunal set aside the orders of the CIT(A) and directed the AO to re-examine the disallowance of expenses on a reasonable basis without applying Rule 8D, following the principles laid down by the Hon'ble High Court of Bombay.

In conclusion, the Tribunal partly allowed both appeals of the assessee, allowing the claim of bad debt for loss on repossessed assets and directing a re-examination of the disallowance of expenses u/s 14A without applying Rule 8D.