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2014 (7) TMI 306 - AT - Income TaxDisallowance u/s 14A of the Act Dividend income - Tax Audit Report Held that - The relevant AY is 2007-08 under consideration is outside the scope of provisions of Rule 8D - The provisions cannot be treated as applicable to the AY 2006-07 under consideration, as it is already decided in Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT 2010 (8) TMI 77 - BOMBAY HIGH COURT - percentage of the exempt income can constitute a reasonable estimate for making disallowance in the years earlier to the assessment year 2008-09 - the disallowance made by the assessee is in accordance with the judgment in the case of M/s. Godrej Agrovet which is more than 2% and therefore, no addition is call for Decided in favour of Assessee.
Issues:
1. Disallowance under section 14A of the Income Tax Act. 2. Invocation of Rule 8D of IT Rules without recording dissatisfaction by AO. 3. Applicability of Rule 8D from AY 2008-2009. 4. Interpretation of expenses directly incurred for earning exempt income under section 14A. Analysis: Issue 1 - Disallowance under section 14A: The appeal filed by the assessee challenged the disallowance under section 14A of the Income Tax Act. The AO invoked Rule 8D and quantified the disallowable expenditure at a higher amount than what the assessee had offered. The CIT (A) confirmed this addition. The assessee contended that the disallowance should be restricted to 2% of the dividend income based on a judgment of the Bombay High Court. The ITAT agreed with this argument, holding that the disallowance made by the assessee was in accordance with the High Court judgment and no further addition was warranted. Issue 2 - Invocation of Rule 8D without recording dissatisfaction: The assessee argued that the AO invoked Rule 8D without recording any dissatisfaction on the correctness of the claim made under section 14A(2) of the Act. The ITAT did not delve deeply into this issue as the main focus was on the applicability of Rule 8D and the quantum of disallowance based on the High Court judgment. Issue 3 - Applicability of Rule 8D from AY 2008-2009: The ITAT emphasized that the relevant assessment year was 2006-07, falling outside the scope of Rule 8D. Citing the judgment of the Bombay High Court, the ITAT clarified that Rule 8D could not be applied to the assessment year in question. The High Court had held that a percentage of the exempt income could be a reasonable estimate for disallowance in years preceding 2008-09, supporting the ITAT's decision to restrict the disallowance to 2% of the exempt income. Issue 4 - Interpretation of expenses directly incurred for earning exempt income: The assessee contended that only expenses directly incurred for earning exempt income should be disallowed under section 14A. The ITAT did not directly address this argument but focused on the applicability of Rule 8D and the High Court judgment regarding the quantum of disallowance based on a percentage of exempt income. In conclusion, the ITAT allowed the appeal filed by the assessee, emphasizing the adherence to the High Court judgment regarding the disallowance under section 14A and the inapplicability of Rule 8D for the relevant assessment year. The decision highlighted the importance of judicial precedents in determining the quantum of disallowance for expenses related to earning exempt income.
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