2014 (6) TMI 37 - AT - Income Tax

Deletion of disallowance made u/s 14A of the Act r.w. Rule 8D of the Act Expenses incurred for earning dividend income Held that - In the absence of any materials regarding incurring of expenditure, the Tribunal was justified in confirming the order of the CIT(A) that deduction of 2% managerial expenses had to be made while calculating the deduction u/s 14A of the Act thus, the AO is directed to restrict the deduction to 2% of the dividend income earned by the assessee as expenditure attributable for earning dividend income Decided partly in favour of Revenue.

Summary

Issues involved:
- Disallowance under section 14A of the Income Tax Act for the assessment year 2006-07.
- Applicability of Rule 8D of Income Tax Rules.
- Judicial precedents regarding disallowance under section 14A.
- Nexus between interest expenditure and dividend income.
- Reasonableness of disallowance under section 14A.

Analysis:

The appeal before the Appellate Tribunal ITAT Chennai pertains to the disallowance made under section 14A of the Income Tax Act for the assessment year 2006-07. The Revenue contested the order of the Commissioner of Income Tax (Appeals) which had deleted the disallowance. The Assessing Officer disallowed Rs.47,69,464 under section 14A of the Act, citing expenditure attributable to earning dividend income. However, the Commissioner of Income Tax (Appeals) overturned this disallowance based on judicial precedents, including decisions of the Bombay High Court and Punjab & Haryana High Court.

The Departmental Representative supported the Assessing Officer's decision, arguing for the application of section 14A read with Rule 8D, even though it might not be applicable for the assessment year in question. The representative suggested a reasonable disallowance should still be made, relying on the Madras High Court decision in a similar case. The Counsel for the assessee, on the other hand, supported the Commissioner's order in deleting the disallowance.

After hearing both sides and examining the lower authorities' orders and relevant case laws, the Tribunal noted that the Assessing Officer had disallowed Rs.47,69,464 under section 14A against a dividend income of Rs.30,88,638 received by the assessee. The Commissioner had deleted the disallowance based on the judgments of the Bombay High Court and Punjab & Haryana High Court. These judgments emphasized the necessity of a direct nexus between interest expenditure and dividend income.

However, the Tribunal found a different approach necessary based on the jurisdictional High Court's decision in another case. In line with this decision, the Tribunal directed the Assessing Officer to restrict the deduction to 2% of the dividend income earned by the assessee as expenditure attributable to earning dividend income. Consequently, the appeal of the Revenue was partly allowed by the Tribunal.

In conclusion, the Tribunal's judgment addressed the disallowance under section 14A, the applicability of Rule 8D, relevant judicial precedents, the nexus between interest expenditure and dividend income, and the reasonableness of the disallowance. The decision provided a nuanced approach based on various legal interpretations and directed a specific percentage for deduction in this particular case.