2019 (8) TMI 1860 - HC - Income Tax

Disallowance u/s.14A on a reasonable basis - HELD THAT - Tribunal noted the fact that Rule 8D of the Rules would not be applicable prior to the Assessment Year 200809, as held by this Court in Godrej Boyce Manufacturing Company Ltd. 2010 (8) TMI 77 - BOMBAY HIGH COURT In the above view, the Tribunal upheld the reasonable basis for disallowance of expenditure to earn exempted income at 5% of the investment as held by the Commissioner of Income Tax (Appeals). Thus, dismissed the Revenue s appeal for the Assessment Year 2004-05. We note that the decision of the Tribunal is in accord with the view of this Court, as approved by the Hon'ble Supreme Court. Therefore, the question as framed does not give rise to any substantial question of law. Thus, not entertained. Allowing the netting off the prior period income against the prior period expenditure without ascertaining the nexus between income and expenditure - HELD THAT - Tribunal held that the Respondent was justified in computing the disallowance after setting off prior period income against the prior period expenses. In fact, the Tribunal noted the fact that for the Assessment Year 2007-08, the Revenue had accepted the net income offered after set off of prior period income with prior period expenses. This is in that year, where expenses of prior period were less than prior period income. We find that the view taken by the Tribunal on the facts cannot be found fault with. This, particularly, as the Revenue for a subsequent period accepted this practice of set off, which resulted in income and subjected it to tax. The basis/ principles for allowing the set off of prior period income with prior period expenses, has to be consistent for years. Therefore, the view taken by the Tribunal cannot be found faulted with. No substantial question of law.

Summary

Issues:
1. Challenge to the order of the Income Tax Appellate Tribunal under Section 260A of the Income Tax Act, 1961 for Assessment Year 2004-05.
2. Disallowance under Section 14A of the Act for earning dividend income.
3. Netting off prior period income against prior period expenditure for disallowance.

Analysis:

Issue 1: Challenge to Tribunal's Order
The appellant challenged the order of the Income Tax Appellate Tribunal dated 1st February, 2016, for Assessment Year 2004-05 under Section 260A of the Income Tax Act, 1961. The questions of law raised by the revenue for consideration were regarding the re-computation of disallowance under Section 14A and the netting off of prior period income against prior period expenditure without ascertaining the nexus between income and expenditure.

Issue 2: Disallowance under Section 14A
Regarding the disallowance under Section 14A for earning dividend income, the Respondent had invested in a company and received dividend income. The Assessing Officer disallowed the expenditure claimed on earning dividend income. However, the Commissioner of Income Tax (Appeals) allowed the appeal and held that a disallowance of 5% of the dividend income on a reasonable basis would be appropriate. The Tribunal upheld this decision, citing the inapplicability of Rule 8D prior to Assessment Year 2008-09 as per the judgment in Godrej & Boyce Manufacturing Company Ltd. v/s. DCIT. The Tribunal dismissed the Revenue's appeal for Assessment Year 2004-05, aligning with the decisions of the Court and the Supreme Court.

Issue 3: Netting off Prior Period Income
Regarding the netting off of prior period income against prior period expenditure for disallowance, the Respondent set off the two amounts and offered only the net amount of expenses for disallowance. While the Assessing Officer and Commissioner of Income Tax (Appeals) did not accept this method, the Tribunal found the Respondent justified in computing the disallowance after setting off prior period income against prior period expenses. The Tribunal's decision was supported by the consistency in the Revenue's acceptance of this practice for a subsequent period where the set off resulted in income subjected to tax. The Tribunal's view was deemed consistent with principles and not found faulted with, leading to the dismissal of the appeal.

In conclusion, the High Court dismissed the appeal, upholding the Tribunal's decisions on both issues as they did not give rise to any substantial question of law.