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2016 (10) TMI 323 - AT - Income TaxDisallowance u/s 14A - fair and reasonable amount for the purpose of making disallowance u/s.14A - Held that - As during the course of assessment proceedings AO noticed that assessee has earned dividend income of ₹ 1,65,924/- and claimed the same as exempt u/s. 10(34) of the Act. The AO required the assessee to furnish the details of expenditure incurred for earning this dividend income. The assessee in reply stated that no expenditure has been incurred to earn the said dividend income. The AO was not convinced with the reply of the assessee and made disallowance by making calculation by applying Rule 8D of the Rules. The Tribunal supra held that the AO has not examined the accounts of the assessee and there is no satisfaction recorded by the AO about the correctness of the claim of the assessee and without the same he invoked Rule 8D of the Rules. While holding the action of AO invoking the Rule 8D is bad under law, the Tribunal taken support from the ratio of the Hon ble Delhi High Court in the case of Maxopp Investment Ltd and Others v. CIT 2011 (11) TMI 267 - Delhi High Court . The facts in the aforementioned case are clearly applicable to the facts of the case, In view of the same, we hold that the AO did not verify the accounts and claim of the assesse while applying Rule 8D and computing expenditure thereon, and, therefore, the order of the CIT-A is quashed and the grounds raised by the assesse are allowed.
Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act. 2. Allowability of flying rights charges as business expenditure. 3. Allowability of retainership fees as business expenditure. 4. Allowability of guest house expenses as business expenditure. 5. Allowability of license fee paid to RPG Enterprises as business expenditure. 6. Addition of disallowance under Section 14A to book profits for the purposes of Section 115JB. Detailed Analysis: 1. Disallowance under Section 14A of the Income Tax Act: Issue: Whether the CIT(A) was justified in holding that ?1,22,89,710/- was not allowable disallowance under Section 14A based on the ITAT Kolkata's decision in the assessee's own case for the Assessment Year 2004-05. Analysis: The AO applied Rule 8D to disallow expenses related to earning exempt income. The CIT(A) ruled that Rule 8D, notified on 24-03-2008, did not have retrospective application and was applicable only from A.Y 2008-09. Thus, the CIT(A) restricted the disallowance to 1% of the exempt income, which was found fair and reasonable by the Third Member in the assessee’s own case for AY 2004-05. The Tribunal upheld this view, dismissing the revenue’s ground. 2. Allowability of Flying Rights Charges as Business Expenditure: Issue: Whether the CIT(A) was justified in holding that expenditure of ?85,00,000/- as flying rights charge was allowable business expenditure. Analysis: The AO disallowed 25% of the flying rights charges as non-business expenditure. The CIT(A), relying on earlier orders and the Hon’ble Calcutta High Court’s decision in the assessee’s own case for AY 2005-06, deleted the disallowance. The Tribunal upheld the CIT(A)’s decision, noting the High Court’s dismissal of the revenue’s appeal on this matter. 3. Allowability of Retainership Fees as Business Expenditure: Issue: Whether the CIT(A) was justified in holding that expenditure of ?12,26,700/- as retainership fee was allowable business expenditure. Analysis: The AO disallowed the retainership fees paid to M/s. Sreebala P.Ltd. The CIT(A) found that similar payments had been allowed as business expenses in earlier years by the Tribunal. The Tribunal upheld the CIT(A)’s decision, referencing the Hon’ble Calcutta High Court’s dismissal of the revenue’s appeal on this issue. 4. Allowability of Guest House Expenses as Business Expenditure: Issue: Whether the CIT(A) was justified in holding that expenditure of ?19,33,576/- as 25% of guest house expenses was allowable business expenditure. Analysis: The AO disallowed 25% of the guest house expenses. The CIT(A), following earlier Tribunal decisions, deleted the disallowance. The Tribunal upheld the CIT(A)’s decision, noting the Hon’ble Calcutta High Court’s dismissal of the revenue’s appeal on this matter. 5. Allowability of License Fee Paid to RPG Enterprises as Business Expenditure: Issue: Whether the CIT(A) was justified in holding that expenditure of ?2,91,00,000/- as license fee paid to RPG Enterprises was allowable business expenditure. Analysis: The AO disallowed the license fee, citing past disallowances. The CIT(A) allowed the claim, relying on earlier Tribunal orders. The Tribunal upheld the CIT(A)’s decision, referencing the Hon’ble Calcutta High Court’s dismissal of the revenue’s appeal on this issue. 6. Addition of Disallowance under Section 14A to Book Profits for the Purposes of Section 115JB: Issue: Whether the CIT(A) erred in upholding the action of the AO in disallowing a part of the interest and other expenses under Section 14A read with Rule 8D. Analysis: The AO applied Rule 8D without verifying the correctness of the assessee’s claim. The CIT(A) upheld the AO’s action. The Tribunal, referencing the ITAT Kolkata’s decision in DCIT vs. REI Agro Ltd, held that the AO must verify the correctness of the assessee’s claim before invoking Rule 8D. The Tribunal quashed the CIT(A)’s order and allowed the assessee’s grounds. Conclusion: The appeals of the Revenue in ITA 2123/Kol/13 and ITA 2124/Kol/13 were dismissed, and the Cross Objection in CO 30/Kol/2014 of the assessee was allowed.
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