2013 (10) TMI 922 - AT - Income Tax

Disallowance u/s 14A Held that - Relying upon Godrej & Boyce Ltd. Mfg. Co. VS. DCIT 2010 (8) TMI 77 - BOMBAY HIGH COURT Rule 8 D of the Income Tax Rules for calculating disallowance under section 14A of the I.T. Act is applicable from A.Y.2008-09 onwards - The present case is relating to the A.Y. 2007-08. In such year, obviously Rule 8D could not have been applied, but the disallowance was required to be worked out on some reasonable basis - The ld. CIT(A) did not consider the computation made by the assessee while adopting his formula to calculate the disallowance - He also did not consider the contention of the assesse that the entire shares were taken as stock in trade and the dividend income was just incidental to it. The order set aside and the matter restored to the file of the AO for deciding the quantum of disallowance afresh, in accordance with law - The assessee will be at liberty to raise its contentions in this respect - The A.O. will give proper opportunity to the assessee to present its case and produce documents, if any - The AO will be at liberty to call for any record/evidences or statement etc. from the assessee as may be required by him for deciding the issue under consideration Decided in favour of Assessee.

Summary

Issues involved:
1. Disallowance made under section 14A of the income tax act for assessment year 2007-08.
2. Disallowance under Rule 8D of the Income Tax Rules for assessment year 2008-09.

Analysis of the judgment for the issue of disallowance made under section 14A for assessment year 2007-08:
- The assessee earned dividend income and long-term capital gain claimed as exempt from income tax.
- The Assessing Officer (AO) added back the expenditure as per Rule 8D and disallowed it.
- The CIT(A) held that Rule 8D was not applicable for the year 2007-08 and directed the AO to calculate the disallowance on a reasonable basis.
- The CIT(A) observed that the assessee did not maintain separate accounts for expenses related to earning exempt income.
- The AO was instructed to determine the expenditure incurred for earning exempt income using a reasonable methodology.
- The Tribunal noted that for the year 2007-08, Rule 8D could not have been applied, and the disallowance had to be worked out on a reasonable basis.
- The Tribunal set aside the order and directed the AO to decide the disallowance quantum afresh, allowing the assessee to present its case and produce necessary documents.

Analysis of the judgment for the issue of disallowance under Rule 8D for assessment year 2008-09:
- The AO confirmed the disallowance under Rule 8D without recording any dissatisfaction with the assessee's computation.
- The CIT(A) also upheld the disallowance without considering that the shares were held as stock in trade and dividend income was incidental.
- The Tribunal observed that the AO applied Rule 8D without calling for details from the assessee or recording dissatisfaction with the computation.
- The Tribunal directed the AO to re-examine the computation made by the assessee, allowing the assessee to present its case and provide documents if needed.
- The AO was instructed to make the assessment afresh, either accepting the assessee's computation or recording dissatisfaction with reasoning if not in agreement.
- Both appeals of the assessee for the year 2008-09 were allowed for statistical purposes, subject to the observations made.

This judgment highlights the importance of correctly determining disallowances under section 14A and Rule 8D, emphasizing the need for a reasonable basis for calculations and proper consideration of the facts of each case. The Tribunal's decision ensures a fair assessment process by directing the AO to follow the law and provide opportunities for the assessee to present their case effectively.