2013 (12) TMI 660 - AT - Income Tax

Re-computation of disallowance u/s 14A Held that - Rule 8D was applicable from the assessment year 2008-09 For earlier years dis-allowance of expenditure had to be determined by adopting some reasonable method having regard to all facts and circumstances Following Godrej Agrovet Ltd. Vs. ACIT 2010 (9) TMI 291 - ITAT, MUMBAI Disallowance of 10% is justified Decided against Revenue.

Summary

Issues:
1. Disallowance under Section 14A of the Income Tax Act.
2. Applicability of Rule 8D for computation of disallowance.
3. Interpretation of judgments by the Bombay High Court.
4. Challenge to the order of the First Appellate Authority (FAA).
5. Disallowance percentage determination.

Issue 1 - Disallowance under Section 14A:
The Assessing Officer (AO) disallowed Rs. 15.71 Lakhs under Section 14A of the Income Tax Act, as the assessee had declared dividend income claimed as exempt under Section 10(34). The First Appellate Authority (FAA) directed the AO to recompute the disallowance on a reasonable basis, relying on the judgment of the Bombay High Court. The FAA held that a portion of administrative and other expenses were attributable to earning exempt income, directing a 10% disallowance of the dividend received during the assessment year.

Issue 2 - Applicability of Rule 8D:
The FAA held that Rule 8D was applicable from the assessment year 2008-09, and in earlier years, the disallowance of expenditure had to be determined by a reasonable method considering all facts and circumstances. The FAA referred to various cases and directed the AO to disallow 10% of the dividend received during the assessment year under consideration.

Issue 3 - Interpretation of Bombay High Court Judgments:
The FAA interpreted the judgment of the Bombay High Court in the case of Godrej & Boyce Manufacturing Company Ltd., stating that in earlier years, the disallowance had to be determined by a reasonable method. The FAA also relied on other judgments to support the decision to disallow 10% of the dividend income.

Issue 4 - Challenge to FAA's Order:
The Departmental Representative (DR) relied on the AO's order, while the Authorized Representative (AR) supported the FAA's order. The Income Tax Appellate Tribunal (ITAT) upheld the FAA's decision to restrict the disallowance to 10% of the dividend income, noting that the assessee did not challenge this finding. Consequently, Ground Nos. 1 to 3 were decided against the AO, and the appeal filed by the Revenue was dismissed.

In conclusion, the ITAT Mumbai upheld the FAA's decision regarding the disallowance under Section 14A, considering the judgments of the Bombay High Court and other relevant cases. The ITAT affirmed the 10% disallowance of dividend income as justified, dismissing the appeal filed by the Revenue.