2016 (10) TMI 249 - HC - Income Tax

Disallowance of expenditure at 5% of exempted income under Section 14A - Held that - We find that the impugned order of the Tribunal has not disturbed the order of the Commissioner of Income Tax (Appeals), who while applying the test of reasonable disallowance, disallowed the expenditure at 5% of the exempted income. This was by following the decision of the Tribunal in M/s. VIP Industries Ltd. vs. DCIT. 2010 (9) TMI 1097 - ITAT MUMBAI . Thus, the disallowance under Section 14A of the Act is reasonable in the absence of the Revenue showing the same to be perverse. Disallowance u/s. 40(a)(ia) - whether amount of reimbursement does not fall under any of the categories specified u/s. 40(a)(ia)? - Held that - In the present case, the impugned order of the Tribunal prima facie proceeds on the basis that it is an undisputed position that the amount paid by the Respondent Assessee to M/s. Mafatlal Industries was in the nature of reimbursement of expenses. This without considering the grievance of the Revenue that the amount paid to M/s. Mafatlal Industries Ltd. is not reimbursement of expenses. We were inclined to restore this issue to the Tribunal for fresh consideration. However, the Counsel for the Revenue resisted a remand at this stage and expressed a view that at the final hearing he would be able to succeed before this Court without a remand. Appeal admitted on question - Whether on the facts and in the circumstances of the case and in law, the Tribunal is justified by holding that amount of reimbursement does not fall under any of the categories specified u/s. 40(a)(ia) of the I.T. Act, without considering the findings of the CIT(A) that the payment made on the service rendered to the assessee was not reimbursement in nature?

Summary

Issues:
1. Interpretation of Rule 8D of the Income Tax Rules 1961 for computing disallowance of expenditure under Section 14A of the Income Tax Act for Assessment Year 2007-08.
2. Determining the reasonableness of disallowance of expenditure under Section 14A of the Act at 5% on exempted income.
3. Classification of 'reimbursement' under Section 40(a)(ia) of the Income Tax Act.

Analysis:
1. Interpretation of Rule 8D:
The appellant challenged the Tribunal's order regarding the retrospective nature of Rule 8D for the Assessment Year 2007-08. The Court referred to the decision in Godrej And Boyce Mfg. Co. Ltd. vs. Deputy Commissioner of IncomeTax, where it was held that Rule 8D is prospective from the Assessment Year 2008-09 onwards. Consequently, the Court did not entertain the issue as Rule 8D could not be applied for the subject Assessment Year. The Court upheld the Tribunal's decision of a 5% disallowance of expenditure under Section 14A of the Act, considering it reasonable based on previous rulings and absence of evidence showing it to be unreasonable or perverse.

2. Reasonableness of Disallowance:
The appellant contested the adequacy of the 5% disallowance and argued for a higher percentage based on a precedent set in a different Assessment Year. However, the Court reasoned that applying the same measure as in a subsequent year where Rule 8D was applicable would be unreasonable. As Rule 8D could not be applied for the Assessment Year 2007-08, the Court emphasized the need for a reasonable disallowance without relying on Rule 8D. The Court found the 5% disallowance to be reasonable, as it aligned with the decision in M/s. VIP Industries Ltd. vs. DCIT, and no evidence was presented to suggest otherwise.

3. Classification of 'Reimbursement':
Regarding the issue of whether the amount labeled as 'reimbursement' fell under Section 40(a)(ia) of the Income Tax Act, the Court admitted the substantial question of law. The appellant argued that the payment made was not reimbursement, contrary to the Tribunal's understanding. The Court noted the divergence in interpretation between the present case and a previous ruling in CIT vs. OCB Engineers. While the appellant sought a remand for fresh consideration, the Revenue preferred to proceed without it, indicating confidence in their position for the final hearing.

In conclusion, the Court dismissed the appeal on the first issue regarding Rule 8D but admitted the substantial question of law on the classification of 'reimbursement' for further examination. The judgment emphasized the importance of determining reasonable disallowance under Section 14A of the Act without reliance on Rule 8D for the relevant Assessment Year.