2018 (4) TMI 498 - AT - Income Tax

Disallowance u/s. 14A r.w. Rule 8D - Held that - Bombay High Court in the case of Godrej & Boyce Manufacturing Company Pvt. Ltd., Vs. DCIT 2010 (8) TMI 77 - BOMBAY HIGH COURT held that before invoking the provisions of Section 14A, AO has to record his satisfaction with regard to the correctness of the claim of assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. Sub-section (3) of Section 14A provides that provisions of Sub-section 2 would also apply in relation to a case where assessee claims that no expenditure has been incurred by him in relation to income, which does not form part of the income under this Act. As find that in the case before us, the AO had issued a show cause notice to the assessee and after considering assessee s written objections dt. 25-11-2011 and not being satisfied with the same, has held that the disallowance u/s. 14A r.w. Rule 8D is to be made. The Hon ble Bombay High Court has held that Rule 8D is applicable from the AY. 2009-10. Working out disallowance u/s 8D - Held that - Direct the AO to consider only the investments which have yielded exempt income during the relevant financial year for working out the disallowance u/s. 8D(2)(iii) of the Act.

Summary

Issues Involved:
- Disallowance made by the Assessing Officer under Section 14A r.w. Rule 8D of the Income Tax Rules for AY 2009-10.
- Admissibility of additional grounds raised by the assessee.
- Consideration of investments yielding exempt income for disallowance under Rule 8D(2)(iii).

Analysis:

1. Disallowance under Section 14A r.w. Rule 8D:
The case involved an appeal by the assessee against the disallowance made by the Assessing Officer (AO) under Section 14A of the Income Tax Act. The AO invoked Section 14A due to the substantial income not forming part of the total income. The AO disallowed ½ % of the average value of investments, amounting to &8377; 8,55,666, under Rule 8D. The assessee contended that no direct expenditure could be attributed to earning exempt income. However, both the AO and the Commissioner of Income Tax (Appeals) upheld the disallowance. The Tribunal noted that Rule 8D is applicable from AY 2009-10 and held that the AO had issued a show cause notice, considered the objections, and was justified in making the disallowance. The Tribunal rejected the grounds challenging the disallowance, citing the necessity of the AO's satisfaction under Section 14A.

2. Admissibility of Additional Grounds:
The assessee raised additional grounds during the appeal process, which were similar to the original grounds. The Tribunal admitted and adjudicated these additional grounds, emphasizing the legal nature of the issues raised. The Tribunal cited a decision of the Bombay High Court regarding the necessity of the AO's satisfaction before invoking Section 14A, supporting the admission of the additional grounds for consideration.

3. Consideration of Investments for Disallowance:
Regarding the computation of disallowance under Rule 8D(2)(iii), the assessee argued that only investments yielding exempt income should be considered for the average investment calculation. The Tribunal agreed with this contention, referencing a decision of a Co-ordinate Bench. The Tribunal directed the AO to consider only investments that yielded exempt income during the relevant financial year for calculating the disallowance under Rule 8D(2)(iii). This decision favored the assessee's position and provided specific guidance on the treatment of investments for disallowance purposes.

In conclusion, the Tribunal partially allowed the appeal of the assessee, emphasizing the importance of the AO's satisfaction under Section 14A, admitting and adjudicating additional grounds, and directing the consideration of specific investments for disallowance calculations under Rule 8D(2)(iii). The judgment provided detailed analysis and legal reasoning for each issue raised during the appeal process.