2017 (1) TMI 1322 - AT - Income Tax

Disallowance u/s. 14A of the Act r. w. r. 8D - Held that - AO directed to restrict the disallowance to 2% of the exempt income.

Summary

Issues:
1. Disallowance under section 14A of the Income Tax Act.
2. Applicability of Rule 8D of the Income-tax Rules, 1962.
3. Interpretation of judgments by the Hon'ble Bombay High Court.
4. Assessment of administrative expenses for disallowance under section 14A.

Analysis:
1. The case involved a dispute regarding the disallowance under section 14A of the Income Tax Act. The Assessing Officer (AO) had made a disallowance of &8377; 3.02 crores under this section based on the assessee's receipt of exempt dividend income. However, during the appellate proceedings, the First Appellate Authority (FAA) considered the company's share capital, reserves, and investments. Citing judgments and previous decisions, the FAA deleted the addition made on interest expenditure and directed the AO to compute administrative expenses at 0.5% of the average investment, excluding certain foreign investments.

2. Another crucial issue was the applicability of Rule 8D of the Income-tax Rules, 1962. The Tribunal referred to the decision of the Hon'ble Bombay High Court, which clarified that Rule 8D is applicable only from the assessment year 2008-09. The Tribunal emphasized the need for a reasonable method to calculate disallowance under section 14A for years before 2008-09. It was noted that the investment in shares was made out of the company's own funds, and no interest expenditure was incurred in relation to earning exempt dividend income. The Tribunal upheld the FAA's decision to delete the addition made by the AO on account of disallowance under section 14A.

3. The interpretation of judgments by the Hon'ble Bombay High Court was crucial in this case. The Tribunal relied on previous decisions and findings to determine the appropriate disallowance under section 14A. It was emphasized that the disallowance should be made after considering the facts and circumstances of each case. The Tribunal dismissed the appeal filed by the Revenue based on the findings and interpretations of the Hon'ble Bombay High Court.

4. Lastly, the assessment of administrative expenses for disallowance under section 14A was a significant aspect of the case. The Tribunal considered the findings of the FAA and the Tribunal's previous decisions in the assessee's case for the assessment year 2005-06. Based on these considerations and specific findings, the Tribunal upheld the decision of the FAA to delete the addition made by the AO on account of disallowance under section 14A. The Tribunal dismissed the remaining grounds raised by the assessee in the cross objection, as they were not pressed during the hearing.