2016 (9) TMI 748 - AT - Income Tax

Disallowance under the provisions of Section 14A - benefit of deduction u/s 10A - Held that - It is an admitted fact that the AO while making the disallowance invoked the provisions contained in Section 14A of the Act r.w.r. 8D of the Income Tax Rules, 1962, the provisions contained in Rule 8D are applicable w.e.f assessment year 2008-09. In other words, the provisions of Rules 8D are not applicable to the year under consideration which is the assessment year 2007-08. It is also noticed that neither the assessee gave the details of the expenses incurred for earning the dividend income nor the AO worked out the expenses directly related to earn the said income. We, therefore, deem it appropriate to set aside this issue back to the file of the AO for adjudicating the same denovo by keeping in view this fact that the Provisions of Rule 8D are not applicable for the year under consideration and only disallowance can be made for the expenses which are directly related to earn the exempt income during the year relevant to the assessment year under consideration i.e. assessment year 2007-08, if there is any increase in the business profit after making the disallowance then the benefit of deduction u/s 10A of the Act if available in accordance with law to the assessee is to be given. - Decided in favour of assessee for statistical purposes.

Issues:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Applicability of Rule 8D of the Income Tax Rules, 1962 for the assessment year 2007-08.
3. Justification of disallowance made by the Assessing Officer (AO) under Section 14A of the Act.
4. Benefit of deduction under Section 10A of the Act in case of disallowance.
5. Recording of satisfaction by the AO regarding expenses incurred by the assessee.

Analysis:

1. Disallowance under Section 14A of the Income Tax Act, 1961:
The appellant contested the disallowance of ?37,25,040 under Section 14A of the Act concerning dividend income claimed exempt under Section 10(34). The AO invoked Rule 8D of the Income Tax Rules, 1962, but the Tribunal noted that Rule 8D was not applicable for the assessment year 2007-08. The Tribunal directed the AO to reevaluate the disallowance considering only expenses directly related to earning exempt income for the relevant assessment year.

2. Applicability of Rule 8D for the assessment year 2007-08:
The Tribunal clarified that Rule 8D was not applicable for the year under consideration, i.e., assessment year 2007-08. This decision was crucial in determining the extent of disallowance under Section 14A and ensuring that only directly related expenses were considered for disallowance.

3. Justification of disallowance by the Assessing Officer:
The AO disallowed expenses under Section 14A, attributing them to the common infrastructure and personnel used for earning income not forming part of the total income. The Tribunal observed that the AO did not calculate the expenses incurred for earning exempt income. Consequently, the Tribunal set aside the issue for fresh consideration by the AO.

4. Benefit of deduction under Section 10A in case of disallowance:
The appellant argued that if disallowance was warranted, the benefit of deduction under Section 10A should be granted. The Tribunal directed the AO to ensure that if any increase in business profit occurred after disallowance, the benefit of deduction under Section 10A should be extended to the assessee.

5. Recording of satisfaction by the AO regarding expenses incurred:
The Tribunal highlighted that the AO did not record satisfaction regarding the expenses incurred by the assessee for earning exempt income. This lack of specific findings by the AO further supported the decision to remand the issue back to the AO for a fresh assessment.

In conclusion, the Tribunal allowed the appeal for statistical purposes, emphasizing the need for a thorough reassessment by the AO in line with the legal provisions applicable for the assessment year in question.

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