2016 (9) TMI 1150 - AT - Income Tax

Disallowance u/s 14A - correctness of the claim - expenditure or no-expenditure for earning exempt income - Held that - sub-section (2) deals with cases where the assessee specifies a positive amount of expenditure in relation to income which does not form part of the total income under the said Act and sub-section (3) applies to cases where the assessee asserts that no expenditure had been incurred in relation to exempt income. In both cases, the Assessing Officer, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of Section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed method. Since, no expenses were incurred by the assessee for earning the exempt income, therefore, there is no question of making any disallowance. Even otherwise, no disallowance can be made by the Assessing Officer more than the exempt income, thus, appeal of the assessee is allowed. The Assessing Officer is directed to delete the disallowance. - Decided in favour of assessee

Summary

Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act, 1961.
2. Applicability and interpretation of Rule 8D of the Income Tax Rules, 1962.
3. Legislative history and judicial interpretation of Section 14A and Rule 8D.

Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act, 1961:
The primary issue in this appeal was whether the disallowance of ?4,61,358/- under Section 14A of the Income Tax Act, 1961, was justified. The assessee contended that no expenses were incurred for earning exempt income, and thus, no disallowance should be made. The Revenue defended the disallowance made by the Assessing Officer and confirmed by the Commissioner of Income Tax (Appeal). The Tribunal examined the facts and concluded that since the assessee had not claimed any expenditure for earning the exempt income, no disallowance could be made. The Tribunal's view was supported by various judicial precedents, including ACIT vs. Iqbal M. Chagla, Maxoop Investment Ltd., Walfort Share & Stock Broker, and Hero Cycles Ltd.

2. Applicability and Interpretation of Rule 8D of the Income Tax Rules, 1962:
The Tribunal discussed the applicability of Rule 8D, which was introduced by the Central Board of Direct Taxes (CBDT) through Notification No. 45/2008 dated 24/03/2008. Rule 8D prescribes the method for determining the amount of expenditure in relation to income not includible in total income. The Tribunal noted that Rule 8D would apply prospectively from the date of its publication in the Official Gazette and not retrospectively. The Tribunal also emphasized that the Assessing Officer must record dissatisfaction with the correctness of the assessee's claim regarding expenditure before invoking Rule 8D. The Tribunal cited the decision of the Bombay High Court in Godrej and Boyce Mfg. Co. Ltd v. DCIT, which held that Rule 8D has prospective effect from the assessment year 2008-09 onwards.

3. Legislative History and Judicial Interpretation of Section 14A and Rule 8D:
The Tribunal examined the legislative history of Section 14A, which was inserted by the Finance Act, 2001, with retrospective effect from 01/04/1962. The purpose of Section 14A is to disallow expenditure incurred in relation to income that does not form part of the total income under the Act. The Tribunal referred to the Supreme Court's decision in CIT v. Walfort Share and Stock Brokers P Ltd, which clarified that expenses can only be allowed to the extent that they are relatable to earning taxable income. The Tribunal also discussed the introduction of sub-sections (2) and (3) of Section 14A by the Finance Act, 2006, with effect from 01/04/2007, and the subsequent introduction of Rule 8D by Notification No. 45/2008.

The Tribunal concluded that for the pre-Rule 8D period, the Assessing Officer must first ascertain the correctness of the assessee's claim regarding expenditure incurred in relation to exempt income. If the Assessing Officer is satisfied with the claim, no disallowance can be made. If not, the Assessing Officer must reject the claim with cogent reasons and determine the expenditure based on a reasonable method. In the present case, since no expenditure was incurred by the assessee for earning exempt income, no disallowance could be made under Section 14A.

Conclusion:
The Tribunal allowed the appeal of the assessee and directed the Assessing Officer to delete the disallowance of ?4,61,358/-. The order was pronounced in the open court on 17/05/2016.