2015 (9) TMI 1343 - AT - Income Tax

Disallowance u/s 14A - Held that - No justifiable reason to interfere with the conclusion drawn by the CIT(A). Notably, the disallowance computed by the Assessing Officer based on Rule 8D of the Rules is not tenable in as much as Rule 8D is applicable only w.e.f. assessment year 2008-09 as laid down by the Hon ble Bombay High Court in the case of Godrej & Boyce Mfg. Company Ltd. vs. DCIT (2010 (8) TMI 77 - BOMBAY HIGH COURT ). Nevertheless, the provisions of section 14A of the Act, require disallowance of expenses related to the earning of exempt income. In this context, the Assessing Officer has not made any effort to demonstrate that the estimation of such expenditure at ₹ 3800/- made during the original assessment proceedings was unreasonable. The CIT(A), on the other hand, has noted that estimation of such expenditure at ₹ 3800/- made in the course of original proceedings was reasonable, a finding which has not been shown to be untenable by the Revenue before us. Therefore, we find no justifiable reason to interfere with the ultimate conclusion drawn by CIT(A) for assessment year 2005-06, which is hereby affirmed. - Decided against revenue. Disallowance of interest expenditure - Held that - CIT(A) has directed the Assessing Officer to examine whether the investments made in mutual funds were out of non-interest bearing funds or not; and if the Assessing Officer found it to be made out non-interest bearing funds, he has been further directed to exclude such investments in mutual funds from the total tax free investments as well as total assets for the purposes of calculation of interest disallowable in terms of clause (ii) of Rule 8D(2) of the Rules. The aforesaid direction of CIT(A), in our view is unexceptional and no error has been brought out by the Revenue on this aspect. In the same manner, with respect to quantification of disallowance out of administrative expenditure is concerned, on this aspect also we find no error on the part of the CIT(A) in directing the Assessing Officer to determine the disallowance on a reasonable basis following the judgement of the Hon ble Bombay High Court in the case of Godrej & Boyce Mfg. Company Ltd.(supra).- Decided against revenue.

Summary

Issues:
- Disallowance under section 14A of the Income Tax Act
- Applicability of Rule 8D of the Income Tax Rules
- Expenditure related to earning exempt income
- Assessment years 2005-06, 2004-05, and 2007-08

Analysis:
1. The appeals by the Revenue concern three separate orders passed by CIT(A)-39, Mumbai for assessment years 2005-06, 2004-05, and 2007-08, relating to disallowances under section 14A of the Income Tax Act.

2. The common issue raised by the Revenue in all appeals is the disallowance made by the Assessing Officer under section 14A, based on Rule 8D of the Income Tax Rules, which the Revenue contested citing a judgment of the Bombay High Court.

3. The dispute arose following a search and seizure action, with the Assessing Officer finalizing assessments under section 143(3) r.w.s. 153A, focusing on disallowances related to earning exempt incomes.

4. For the assessment year 2005-06, the disallowance was primarily based on dividend income claimed as exempt under section 10(33), with the Assessing Officer applying Rule 8D, leading to a total disallowance amount.

5. The CIT(A) held that Rule 8D was not applicable for the year under consideration, citing the Bombay High Court judgment, and found the original assessment's estimation of expenses related to exempt income to be reasonable.

6. The Tribunal affirmed the CIT(A)'s decision, emphasizing that the Assessing Officer failed to show the original estimation as unreasonable, thereby dismissing the Revenue's appeal for the year 2005-06.

7. The same rationale applied to the assessment year 2004-05, with the Tribunal dismissing the Revenue's appeal based on similar facts and circumstances.

8. In the assessment year 2007-08, the Assessing Officer computed a disallowance under section 14A using Rule 8D, including interest and administrative expenditure related to exempt income.

9. The CIT(A) found that the investments in mutual funds generating exempt income were made from non-interest bearing funds, directing the Assessing Officer to exclude such investments for interest disallowance calculation, as per the Bombay High Court judgment.

10. The Tribunal upheld the CIT(A)'s decision, noting no errors in the disallowance under section 14A, interest expenditure considerations, or administrative expenditure quantification, ultimately dismissing the Revenue's appeal for the year 2007-08.