2016 (6) TMI 284 - AT - Income Tax

Disallowance under section 14A - Held that - Coming to the facts of the instant appeal, it is seen that the year under consideration is assessment year 2006-07. Rule 8D was introduced by virtue of notification no.45/2008 dated 24.03.2008 and the Hon ble Delhi High Court has held it to be prospective in operation in the case of Maxopp Investment Ltd. vs CIT (2011 (11) TMI 267 - Delhi High Court ). The Assessing Officer calculated the disallowance u/s 14A by adopting the procedure given in Rule 8D and also made a similar disallowance while computing book profits u/s 115JB of the Act. CIT (A) restricted the disallowance both under Rule 8D and u/s 115JB to ₹ 1,18,04,860/-. It is the assessee s plea that the dividend income (exempt income) earned during the year was only ₹ 34,562/- and the disallowance in any case could not have exceeded the exempt income. We are in total agreement with the contention of the Ld. AR that Rule 8D could not have been applied in assessment year 2006-07. We also concur with the contention of the Ld. AR that the disallowance in any case cannot exceed the exempt income. Therefore, on the facts of the case and respectfully following the ratio laid down by the Hon ble Delhi High Court in Maxopp Investment Ltd. vs. CIT (supra), we set aside the order of the Ld. CIT (A) and direct the Assessing Officer to re-compute the disallowance restricting it to the amount of dividend earned during the year. The issue is restored to the file of the Assessing Officer for the limited purpose of verification of the dividend income earned by the assessee during the year. - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Applicability of Rule 8D for Assessment Year 2006-07.
3. Calculation of disallowance in relation to exempt income.
4. Assessment of book profits under Section 115JB of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The assessee, a company engaged in the production and sale of beverages and snack food products, filed its return declaring a loss and claimed a minuscule sum as exempt dividend income. The Assessing Officer (AO) disallowed ?6,04,09,910 under Section 14A, contending that expenses were incurred to earn exempt income. The AO computed this disallowance using Rule 8D, which included interest not attributable to any specific income and 0.5% of the average investment.

2. Applicability of Rule 8D for Assessment Year 2006-07:
The assessee argued that Rule 8D, introduced by notification in 2008, is prospective and not applicable for AY 2006-07. The Delhi High Court in Maxopp Investment Ltd. vs CIT (347 ITR 272) held Rule 8D to be prospective, applicable from AY 2008-09 onwards. Therefore, for AY 2006-07, the AO could not apply Rule 8D for disallowance under Section 14A.

3. Calculation of Disallowance in Relation to Exempt Income:
The assessee contended that no direct or indirect expenditure was incurred to earn the exempt dividend income. The investments yielding the dividend were acquired by a company that later amalgamated with the assessee, and no new investments were made during the subject AY. The assessee also highlighted that the disallowance should not exceed the exempt income of ?34,562. The Tribunal agreed, stating that the disallowance cannot exceed the exempt income and directed the AO to re-compute the disallowance, restricting it to the amount of dividend earned during the year.

4. Assessment of Book Profits under Section 115JB of the Income Tax Act:
The AO also made a similar disallowance while computing book profits under Section 115JB. The CIT (A) upheld the disallowance under Rule 8D(2)(iii) amounting to ?1,18,04,860. However, the Tribunal, following the Delhi High Court's judgment, ruled that the disallowance under Rule 8D cannot be applied for AY 2006-07 and should not exceed the exempt income. The issue was restored to the AO for verification of the dividend income earned by the assessee during the year.

Conclusion:
The Tribunal set aside the order of the CIT (A) and directed the AO to re-compute the disallowance under Section 14A, restricting it to the amount of dividend earned during the year, and to verify the dividend income. The appeal of the assessee was allowed.