2016 (1) TMI 539 - AT - Income Tax

Allowability of exemption u/s 10(1) - Held that - We are of the opinion that the CIT (A) has rightly adjudicated the issue in favour of the assessee following the binding judgment of the Hon ble jurisdictional High Court in assessee s own case recording finding of the fact that the assessee in fact carried on agricultural operations and that the orders passed to that effect in assessment years 1990-91 to 1992-93 have been accepted by the Revenue. For earning agricultural income, it is not necessary that the assessee must own the land and it is enough if it is established that the agricultural organizations have been actually carried on by the assessee. In view of the finding of the fact recorded - Decided in favour of assessee. Disallowance u/s 14A r.w. Rule 8D of the Act instead of disallowing adhoc amount applying flat rate of 2% of the exempt income - Held that - Assessee submitted that the law on this issue has under gone number of changes so for as the applicability of the provisions of section 14A read with Rule 8D is concerned. There is a need for examining the various aspects of the issue such as own funds v/s borrowed funds; dividend yielding investment v/s other strategic investments, the dividend income which is chargeable to tax otherwise etc. Therefore, he pleaded for remanding this issue also to the file of the AO for adjudication. We accordingly find merit in the said Ld Counsel s argument and direct the AO to examine and decide the issues raised after granting a reasonable opportunity of being heard to the assessee.

Summary

Issues involved:
1. Allowability of exemption u/s 10(1) of the Income Tax Act, 1961
2. Disallowance u/s 14A r.w. Rule 8D of the Act

Issue 1: Allowability of exemption u/s 10(1) of the Income Tax Act, 1961:
The appeal filed by the Revenue challenged the order of the CIT (A) regarding the AY 2008-2009. The Revenue disputed the deduction claimed under section 10(1) of the Act by the assessee, who was engaged in agricultural activities. The AO had denied the deduction, treating a significant portion of income as 'business income.' However, the CIT (A) allowed the claim in favor of the assessee based on a judgment of the jurisdictional High Court in the assessee's own case. The Tribunal upheld the CIT (A)'s decision, emphasizing that the assessee had been engaged in agricultural operations, and ownership of land was not a prerequisite for claiming exemption u/s 10(1) of the Act. Consequently, the Revenue's appeal on this issue was dismissed.

Issue 2: Disallowance u/s 14A r.w. Rule 8D of the Act:
The second issue pertained to the disallowance under section 14A read with Rule 8D of the Act. The CIT (A) had restricted the disallowance to 2% of the exempt income, considering it a 'reasonable basis.' The Revenue contended that the flat rate of 2% was not applicable for the relevant assessment year, as Rule 8D was applicable from AY 2008-09 onwards. The Tribunal agreed with the assessee's counsel that changes in the law necessitated a detailed examination of various aspects, such as funds, investments, and taxability of dividend income. Consequently, the Tribunal directed the AO to re-examine and decide the issue after providing a reasonable opportunity to the assessee. As a result, the Revenue's appeal was partly allowed for statistical purposes.

In the final analysis, the assessee's appeal was allowed for statistical purposes, while the Revenue's appeal was partly allowed for the same reason. The Tribunal's decision was pronounced in open court on 18.12.2015.