2014 (4) TMI 550 - AT - Income Tax

Confirmation of disallowance u/s 14A of the Act - Held that - The decision in Godrej & Boyce Manufacturing Co. Ltd. 2010 (8) TMI 77 - BOMBAY HIGH COURT followed - Rule 8D r.w.s. 14A(2) is not arbitrary or unreasonable but can be applied only if the assessee s method is not satisfactory - Rule 8D is not retrospective and applies from A.Y. 2008-09 - under section 14A of the Income Tax Act, resort can be made to Rule 8D of the Income Tax Rules for determining the amount of expenditure in relation to exempt income, if, the AO is not satisfied with the correctness of the claim made by the assessee in respect of such expenditure. The assessee has maintained separate books of account for investment and business purposes - the AO without recording any dissatisfaction with regard to the claim of the assessee that no expenditure was incurred by the assessee for earning the exempt income, straightway applied Rule 8D against the mandate of the provisions of section 14A of the Income Tax Act - CIT(A) also failed to consider the submissions of the assessee that the assessee had been maintaining separate accounts for business and investment purposes while confirming the disallowance thus, the disallowance made by the lower authorities is set aside and the matter is remitted back to the AO for fresh adjudication Decided in favour of Assessee. Confirmation of House property income u/s 23 of the Act Held that - The quantum amount assessed by lower authorities as ALV of the property is upheld - the issue is kept open so far so the method of calculation of ALV is concerned - The assessee will be at liberty to raise his contentions in this respect in subsequent years - The method adopted by lower authorities for ascertaining ALV for the current year will not be binding upon the assessee in subsequent years Decided against Assessee. Disallowance of expenses on adhoc basis No evidences produced - Held that - CIT(A) while confirming the adhoc disallowance has rightly noted that the assessee did not submit any evidence to rebut the findings of the AO regarding none verifiable nature of expenses and personal element involved thus, there was no infirmity in the order of CIT(A) Decided against Assessee.

Summary

Issues:
1. Applicability of section 14A r.w.r.8D in relation to exempt income.
2. Calculation of deemed let out value for house property income.
3. Disallowance of expenses on adhoc basis.

Analysis:

Issue 1: Applicability of section 14A r.w.r.8D in relation to exempt income
- The appeals pertained to the same assessment year, involving family members with a common issue of section 14A r.w.r.8D applicability.
- The AO disallowed Rs.11,11,673/- under section 14A as the assessee claimed no expenditure to earn exempt income.
- The CIT(A) upheld the disallowance, attributing common expenses to earning exempt income.
- The Tribunal referred to 'Godrej & Boyce Manufacturing Co. Ltd.' case, stating Rule 8D applies if the assessee's method is unsatisfactory.
- The Tribunal emphasized the need to examine the availability of own funds for investments before applying Rule 8D.
- The Tribunal set aside the disallowance, directing the AO to verify the availability of own funds and decide accordingly.

Issue 2: Calculation of deemed let out value for house property income
- The AO calculated deemed let out value at 8% of the property's book value, differing from the assessee's method.
- The CIT(A) confirmed the disallowance, leading to the appeal.
- The Tribunal upheld the ALV assessed by the lower authorities but allowed the assessee to challenge the method in subsequent years.

Issue 3: Disallowance of expenses on adhoc basis
- The AO disallowed expenses at a rate of 10% on an adhoc basis, which the CIT(A) confirmed.
- The Tribunal dismissed the appeal, upholding the adhoc disallowance due to lack of evidence rebutting AO's findings.

In conclusion, the Tribunal allowed one appeal for statistical purposes and partly allowed another while setting aside disallowances and providing directions for further assessment. The judgment emphasized the importance of examining own funds for investments, allowing challenges to calculation methods in subsequent years, and requiring evidence to contest adhoc disallowances.