2017 (8) TMI 1449 - HC - Income Tax

Disallowance u/s 14A read with general principles of section 37(1) of the Income Tax Act, 1961 - expenditure expended wholly and exclusively for the purposes of business or profession - Held that - the issue is squarely covered by the decision of Bombay High Court in Godrej & Boyce MFG. Co. Ltd. vs. Deputy Commissioner of Income Tax & anr. 2010 (8) TMI 77 - BOMBAY HIGH COURT - the issues are answered in favour of the assessee and against the department.

Summary

Issues:
- Disputed deletion of addition in income tax assessment
- Interpretation of Section 14A of the Income Tax Act, 1961
- Application of Rule 8D for determining expenditure in relation to income

Issue 1: Disputed deletion of addition in income tax assessment
The appellant challenged the Tribunal's decision to dismiss the department's appeal regarding the addition of a specific amount to the appellant's income. The substantial questions of law raised by the appellant focused on whether the investment in shares of another company, not directly related to the appellant's business, should be considered for taxation purposes. The appellant argued that the investment did not contribute to the appellant's business profits. The Tribunal's decision was crucial in determining the tax liability of the appellant.

Issue 2: Interpretation of Section 14A of the Income Tax Act, 1961
The appellant contended that the Tribunal erred in deleting the addition without considering the provisions of Section 14A of the Income Tax Act, 1961. The appellant highlighted that the section requires the disallowance of expenditures not wholly and exclusively for the business or profession. The appellant referred to a decision of the Bombay High Court and the subsequent confirmation by the Supreme Court, emphasizing the need to prove the actual incurring of disallowed expenditures in earning dividend income. The court analyzed the requirement for the Assessing Officer to be satisfied with the claim of the Assessee before applying the provisions of Section 14A(2) and (3) along with Rule 8D of the Rules.

Issue 3: Application of Rule 8D for determining expenditure in relation to income
The court examined the application of Rule 8D for determining the expenditure incurred concerning income not forming part of the total income under the Act. It emphasized the importance of the Assessing Officer's satisfaction regarding the correctness of the Assessee's claim before applying the formula prescribed under Rule 8D. The court noted the absence of reasons justifying the Assessing Officer's rejection of the Assessee's claims for the relevant assessment year. The court highlighted the necessity of establishing a reasonable nexus between the disallowed expenditure and the dividend income received, emphasizing the importance of consistency and certainty in tax assessments.

In conclusion, the High Court upheld the Tribunal's decision, ruling in favor of the assessee and against the department. The court found no justification for a different view in the assessment year under consideration based on the facts presented. The appeal was dismissed, affirming the decision regarding the disputed addition in the income tax assessment.