2011 (10) TMI 743 - AT - Income Tax

Summary

Issues Involved:

1. Disallowance of Rs. 33,48,120/- as expenditure related to exempt dividend u/s 14A by applying Rule 8D.
2. Applicability of Rule 8D for Assessment Year 2006-07.
3. Directions given by CIT(A) to AO without providing an opportunity of hearing to the assessee.

Summary:

Issue 1: Disallowance of Rs. 33,48,120/- u/s 14A by applying Rule 8D

The assessee contested the disallowance of Rs. 33,48,120/- as expenditure incurred in relation to exempt dividend u/s 14A by applying Rule 8D. The AO disallowed the amount based on Rule 8D(2)(iii), which prescribes disallowance as 0.5% of the average value of investments. The CIT(A) upheld this disallowance. The Tribunal noted that the AO did not establish a direct nexus between borrowed funds and the investment in shares.

Issue 2: Applicability of Rule 8D for Assessment Year 2006-07

The assessee argued that Rule 8D, introduced w.e.f. 01.04.2007, is not applicable for AY 2006-07. The Tribunal referred to the decision in Godrej & Boyce Manufacturing Co. Ltd. Vs. DCIT, where it was held that Rule 8D is applicable from AY 2008-09. The Tribunal concluded that the amended provisions u/s 14A and Rule 8D were not applicable for AY 2006-07. The Tribunal remanded the matter to the AO to determine if any expenditure was incurred in relation to exempt income on a reasonable basis, consistent with relevant facts and circumstances, after providing the assessee an opportunity to present relevant material.

Issue 3: Directions by CIT(A) without Opportunity of Hearing

The assessee raised an alternative ground that CIT(A) directed the AO to verify the interest expenditure without giving an opportunity of hearing. The Tribunal found that this grievance was addressed by remanding the matter to the AO for fresh determination, thus rejecting this ground.

Conclusion:

The appeal was partly allowed. The Tribunal deleted the disallowance of Rs. 33,48,120/- made by applying Rule 8D for AY 2006-07 and remanded the matter to the AO for fresh determination of any expenditure incurred in relation to exempt income, ensuring a reasonable opportunity for the assessee to present relevant material. Ground No. 4 was rejected as the remand addressed the grievance. The order was pronounced on 21st October 2011.