2014 (5) TMI 697 - AT - Income Tax

Disallowance made u/s 14A of the Act r.w. Rule 8D of the Rules Held that - The assessee has incurred the expenses which could be either directly or indirectly attributed to the income or for earning the same, a disallowance to the proportionate extent would follow Relying upon Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT 2010 (8) TMI 77 - BOMBAY HIGH COURT - it is not only the investment in shares, yielding dividend, but also that in the partnership firm that would stand to be reckoned for the purpose of the relevant investment in computing the disallowance under rule 8D, i.e., where no interest income is contracted for, so that the only income that could arise from the said investment is the share of profit, which is tax exempt. Inclusion of bank FDRs - Held that - The Revenue authorities mechanically apply the formula of r. 8D and did not apply the corrective even at the appellate stage thus, the matte is liable to be remitted back to the AO for fresh adjudication Decided in favour of Assessee.

Summary

Issues:
Appeal against CIT(A)'s order dismissing assessment appeal u/s.143(3) for A.Y. 2009-10 - Disallowance u/s.14A of the Act in terms of Rule 8D challenged.

Analysis:
The appeal was filed against the CIT(A)'s order dismissing the assessment appeal for the assessment year 2009-10 under section 143(3) of the Income Tax Act, 1961. The only issue raised in the appeal was the disallowance made under section 14A of the Act in the sum of Rs.7,48,846/- as per Rule 8D of the Income Tax Rules, 1962. The assessee's counsel did not dispute the application of Rule 8D but argued that the Revenue's working had serious mistakes. The Revenue's computation included investments in Bank FDRs and a partnership firm, resulting in a higher amount. The assessee had earned a nominal dividend, and the counsel contended that the disallowance should only apply to the marginal investment of Rs.1.50 lacs.

The Departmental Representative supported the lower authorities' orders, claiming lack of evidence to support the assessee's contentions. The Tribunal observed that the amount of dividend earned was not crucial in determining the disallowance under section 14A. The disallowance should be based on the expenditure incurred by the assessee in relation to income not forming part of the total income. The Tribunal referred to relevant case laws to emphasize that both direct and indirect expenditures related to earning exempt income should be disallowed. Additionally, investments in shares and partnership firms should be considered for computing the disallowance under Rule 8D, especially when no interest income is involved.

The Tribunal criticized the Revenue for mechanically applying Rule 8D without considering the specifics of the case. Consequently, the Tribunal decided to remand the matter back to the Assessing Officer for a fresh consideration of the assessee's case in accordance with Rule 8D and the provisions of section 14A(2) read with section 14A(3) of the Act. The appeal was allowed for statistical purposes, and the order was pronounced on May 12, 2014.