2014 (6) TMI 810 - AT - Income Tax

Disallowance u/s 14A of the Act Dividend income Held that - Expenditure has no direct relationship with the income that may arise on its incurring or from investment, so that estimating the expenditure that stands incurred in relation thereto with reference to income arising there-from is without basis, both on facts as well as in law, even as observed by us during hearing - the Revenue also must bear in mind that the disallowance u/s 14A is only of the expenditure actually incurred, so that the assessee s claim of having in fact not incurred any expenditure or a lower expenditure would need to be examined on merits, and the estimation per rule 8D made, having regard to the common expenditure actually incurred, i.e., on activities yielding taxable income and income which does not form part of the total income under the Act, which would therefore need to be apportioned, and toward which r. 8D stands prescribed by law - Relying upon GODREJ AND BOYCE MFG. CO. LTD. Versus DEPUTY COMMISSIONER OF INCOME-TAX AND ANOTHER 2010 (8) TMI 77 - BOMBAY HIGH COURT - the matter is to be remitted back to the AO for fresh adjudication Decided in favour of Assessee.

Summary

Issues: Disallowance u/s.14A

Analysis:
The judgment pertains to an appeal by the Assessee against the Order by the Commissioner of Income Tax (Appeals) for the assessment year 2008-09. The primary issue in this appeal is the disallowance u/s.14A, where the Revenue disallowed Rs. 30,65,140 following Rule 8D of the Income Tax Rules, as opposed to the Rs. 18,696 disallowed by the assessee. The difference of Rs. 30,46,444 is under dispute.

The parties presented their arguments regarding the disallowance. The assessee based its disallowance on a percentage of dividend income, while the Revenue followed Rule 8D. The assessee contended that most of its investments were in subsidiary and group companies, making the investment decision almost automatic, with minimal indirect expenditure. The Revenue was criticized for not following the prescribed procedure under section 14A(2).

The Tribunal acknowledged the merits of both parties' arguments. It emphasized that estimating expenditure based on income without a direct relationship is unfounded in fact and law. The Tribunal referred to previous decisions to support its stance. It clarified that the initial burden to demonstrate lower expenditure lies with the assessee, failing which the AO can proceed with disallowance under section 14A. The Tribunal highlighted the need for factual determination in such cases, citing relevant case laws.

The Tribunal concluded that the matter should be sent back to the AO for a fresh determination in accordance with the law, allowing the assessee to present its case. It clarified that the disallowance cannot exceed the statutory mandate under Rule 8D. Ultimately, the assessee's appeal was allowed for statistical purposes.

In summary, the judgment focused on the disallowance u/s.14A, highlighting the need for factual determination and adherence to legal procedures in such cases. The Tribunal emphasized the importance of following the law and providing a reasonable opportunity for the assessee to present their case.