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2015 (12) TMI 1423 - HC - Income TaxDisallowance under Section 14A - whether the ITAT was correct in affirming the order of CIT(A) which had confined the disallowance under Section 14A - whether the ITAT could read down Rule 8D (2)(ii) of the Income Tax Rules 1962 and whether that was beyond the jurisdiction of the ITAT? - Held that - In the case in hand, in Note 4 of the computation of income submitted by the Assessee, the total interest debited to the profit and loss account was ₹ 5,52,83,131. There was an entry regarding interest on loans given to two entities. After accounting for the other interest expenditure, the Assessee computed the total interest expenditure which was allowable as ₹ 83,90,178. In the computation drawn up by the Assessee, the entire interest expenditure was incurred for earning either taxable income or exempt income. There was no interest amount which was not directly attributable to either the tax exempt or taxable income. The ITAT, therefore, correctly observed in the present case no portion of interest really survives for allocation under Rule 8D (2) (ii) . However, as rightly pointed out by the ITAT, since the Assessee did not challenge the order of the CIT (A) to the extent it restricted the disallowance, that part of the order of the CIT (A) remained. The point concerning Rule 8D (2) (iii) does not appear to have been urged by the Revenue before the ITAT and therefore not considered by it. In any event that does not affect the interpretation of Rule 8D (2) (ii) which was the only issue considered by the ITAT in the impugned order. For the aforementioned reasons, the impugned order of the ITAT does not call for any interference - Decided in against revenue.
Issues Involved:
1. Whether the ITAT was correct in affirming the order of the CIT(A) which confined the disallowance under Section 14A of the Income Tax Act to Rs. 30,26,552 for the AY in question. 2. Whether the ITAT could read down Rule 8D (2)(ii) of the Income Tax Rules, 1962, and whether that was beyond the jurisdiction of the ITAT. Issue-wise Detailed Analysis: 1. Affirmation of CIT(A)'s Order on Disallowance under Section 14A: The Assessee Company, engaged in the promotion of international telecom and insurance business, filed a revised return for AY 2008-09 declaring a loss of Rs. 13,93,37,943. The AO scrutinized the return and noted that the Assessee had shown dividend income of Rs. 89,02,540, out of which Rs. 68,44,790 was claimed as exempt under Section 10(34) of the Act. The AO disallowed the Assessee's claim of 10% of the exempt income as expenditure and reworked the disallowance to Rs. 2,85,86,881, adding Rs. 2,79,02,402 to the taxable income. The Assessee appealed to the CIT(A), arguing that Rule 8D would apply only if the AO was not satisfied with the correctness of the claim of expenditure made by the Assessee. The CIT(A) noted that the AO had not recorded reasons for rejecting the Assessee's claim and reworked the disallowance to Rs. 37,11,031, restricting it to Rs. 30,26,552 after adjusting the sum offered by the Assessee. The Revenue appealed to the ITAT, which upheld the CIT(A)'s decision. The ITAT referred to the decision of the Kolkatta Bench in ACIT v. Champion Commercial Co. Ltd. and the Bombay High Court in Godrej & Boyce Mfg. Co. Ltd., concluding that no portion of interest survived for allocation under Rule 8D(2)(ii). The ITAT observed that the Assessee did not file any appeal, and the relief granted by the CIT(A) did not require interference. 2. Jurisdiction of ITAT in Reading Down Rule 8D (2)(ii): The Revenue contended that the ITAT could not have read down Rule 8D (2)(ii) as it was a Tribunal of limited jurisdiction. The ITAT, however, interpreted Rule 8D (2)(ii) by following its earlier decision in Champion Commercial, which in turn followed the Bombay High Court's decision in Godrej & Boyce Mfg. Co. Ltd. The ITAT did not on its own read down Rule 8D (2)(ii) but adopted the stand taken by the Revenue before the Bombay High Court that variable A in the formula would exclude both interest attributable to tax-exempt income and taxable income. The High Court observed that the object behind Section 14A (1) is to disallow only such expense which is relatable to tax-exempt income and not expenditure in relation to any taxable income. Rule 8D (2)(ii) should exclude interest relatable to taxable income to avoid incongruity. The Court found that the ITAT's interpretation was consistent with the intention behind Rule 8D (2)(ii) read with Section 14A of the Act. Conclusion: The High Court concluded that the ITAT was justified in its interpretation of Rule 8D (2)(ii) and upheld the order of the CIT(A). The Court dismissed the Revenue's appeal, stating that no substantial question of law arose for consideration. The appeal was dismissed.
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