2014 (12) TMI 1010 - AT - Income Tax

Deletion made u/s 14A expenses attributable to earning exempt income or not - Held that - In Maxopp Investment Ltd. & Others Versus Commissioner of Income Tax 2011 (11) TMI 267 - Delhi High Court it has held that Rule 8D is applicable from AY 2008-09, that does not mean that prior to the introduction of this Rule, no amount can be considered as incurred for the purpose of earning tax free income - The disallowance has to be made, first examining the accounts of the assessee and if the AO is satisfied that the accounts do not depict true picture, then he can work out the disallowance on the basis of a reasonable and acceptable method of apportionment - CIT (A) ought to have not deleted the disallowance in Toto, rather ought to have examined whether any disallowance is possible or not - she should have examined whether any expenditure attributable to earning exempt income can be identified for disallowance u/s 14A of the Act - the order of the CIT (A) is not sustainable thus, the order is set aside and the matter is remitted back to the AO for re-adjudication. CIT in an order u/s 263 had made a clear direction that the amount disallowed u/s 14A would be adjusted in the book profit - if any disallowance is being made by the AO, in the regular course of assessment, then that disallowance would be included in the book profit, to be computed for the purpose of section 115JB - only the amount of computation can be replaced, because the Commissioner took it from the original assessment order which has been set aside Decided in favour of assessee.

Summary

Issues:
1. Disallowance made under section 14A of the Income Tax Act.
2. Adjustment in book profit pursuant to section 263 order.

Analysis:

Issue 1: Disallowance made under section 14A of the Income Tax Act
The appeals were against the CIT (A)'s deletion of additions made by the Assessing Officer under section 14A of the Income Tax Act for the assessment year 2006-07. The CIT (A) held that Rule 8D, which was applied by the Assessing Officer for disallowance, was not applicable retrospectively. The CIT (A) referred to judgments by the Bombay High Court and Delhi High Court to support her decision that Rule 8D was effective from the assessment year 2008-09. The ITAT held that the CIT (A) should not have deleted the disallowance entirely based on Rule 8D's inapplicability. Instead, she should have examined if any expenditure attributable to earning exempt income could be identified for disallowance under section 14A. The ITAT set aside the CIT (A)'s order and directed the Assessing Officer to re-adjudicate the issue considering relevant legal precedents.

Issue 2: Adjustment in book profit pursuant to section 263 order
The CIT (A) had directed that the disallowance made under section 14A should be adjusted in the book profit for the purpose of section 115JB. The ITAT clarified that if any disallowance was made by the Assessing Officer, it should be included in the book profit as per the CIT (A)'s order under section 263. The ITAT stated that this was a consequential order to the regular assessment and the Assessing Officer could not go beyond the CIT (A)'s order under section 263. The ITAT allowed the appeals for statistical purposes, directing the Assessing Officer to replace any disallowed amount under section 14A and include it in the book profit as per the CIT (A)'s directions.

In conclusion, the ITAT set aside the CIT (A)'s orders, directing the Assessing Officer to re-examine the disallowance under section 14A and make necessary adjustments in the book profit as per the directions given under section 263. Both appeals were allowed for statistical purposes.