2018 (11) TMI 1060 - HC - Income Tax

Disallowance u/s 14A - calculation of disallowance of expenditure attributable to exempted income to be made under Section 14A - whether for assessment year 2006-07 the assessing Officer could rely upon Rule 8D of the Rules for working out the disallowance of expenses under Section 14A? - Held that - Rule 8D of the Rules is prospective in operation and could not have been applied to any assessment prior to assessment year 2008-09. Hence, the issue is decided against the revenue. Whether the Tribunal was justified in restricting the disallowance made under Section 14A of the Act to ₹ 5 lakhs without any sound and valid reason, the same need not be gone into as the assessee-company has not challenged the order. Moreover, it would be pertinent to mention here that the AO in the assessment order recorded that there is no prescribed method for working of disallowance and thereafter only relied upon Rule 8D of the Rules.

Summary

Issues:
1. Interpretation of Rule 8D of Income Tax Rules for working out the disallowance of expenses under Section 14A of the Income Tax Act for assessment year 2006-07.
2. Justification of restricting the disallowance under Section 14A to a specific amount without sound and valid reasons.

Issue 1: Interpretation of Rule 8D for Disallowance of Expenses:
The High Court dealt with the question of whether the Assessing Officer could rely on Rule 8D of the Income Tax Rules for calculating the disallowance of expenses under Section 14A of the Income Tax Act for the assessment year 2006-07. The appellant-revenue contended that Rule 8D provided only a guideline for calculation and that the disallowance of only ?5,00,000 by the Tribunal was unjustified. However, the counsel for the assessee-company argued that the Supreme Court had affirmed the decision that Rule 8D was prospective in operation. The High Court referred to the Supreme Court's ruling in the case of ESSAR Teleholding Ltd. and held that Rule 8D was intended to operate prospectively, not retrospectively. The Court also highlighted the Bombay High Court's decision, which concluded that Rule 8D is prospective in nature. Therefore, the High Court decided against the revenue, stating that Rule 8D could not have been applied to any assessment year before 2008-09.

Issue 2: Justification of Restricting Disallowance under Section 14A:
Regarding the appellant's query on whether the Tribunal was justified in limiting the disallowance under Section 14A to ?5 lakhs without any sound and valid reason, the High Court noted that the assessee had not challenged the order. Additionally, the Assessing Officer had acknowledged that there was no prescribed method for calculating the disallowance and had only relied on Rule 8D of the Rules. The High Court concluded that no interference was required in the Tribunal's order, as no substantial question of law arose. Consequently, the appeals were dismissed, upholding the Tribunal's decision to restrict the disallowance under Section 14A to ?5 lakhs.

In summary, the High Court clarified the interpretation of Rule 8D for the disallowance of expenses under Section 14A for the assessment year 2006-07, emphasizing its prospective application. The Court also addressed the justification for limiting the disallowance under Section 14A to a specific amount, ultimately dismissing the appeals and upholding the Tribunal's decision.