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2021 (3) TMI 813 - AT - Income TaxDisallowance u/s 14A - expenses incurred for the purpose of earning exempt income - CIT(A) who restricted the disallowance to the extent of exempt income earned by way of dividend in all the years - HELD THAT - As assessee in its appeal filed relating to assessment years 2006-07 and 2007-08 urging that the entire disallowance made u/s. 14A of the Act needed to be deleted since Rule 8D was not applicable in the impugned years, we are not convinced with the same. Merely because the AO had adopted an incorrect method for working out the disallowance does not mean that the entire disallowance was not tenable in law, more particularly when the ITAT had in the first round held that in the light of the fact that the assessee had earned exempt income, section 14A of the Act was attracted and the AO was only required to work out the disallowance as per the provisions of law. Having held so, however, we are of the view that the incorrect application of formula by the AO for the impugned years needs to be looked into and a proper method for working out the disallowance need to be arrived at in the said two years i.e. 2006-07 and 2007-08. This issue, therefore, also needs reconsideration at the end of the Ld. CIT(A). Therefore, all the appeals are restored back to the Ld. CIT(A) with the direction to rework the amount of disallowance of expenses u/s. 14A for all the assessment years in accordance with law, giving a clear finding of the nature of the expenses disallowed. Application of Rule 8D for calculating disallowance of expenses u/s. 14A of the Act, is restored back to the Ld. CIT(A) with the directions to calculate the same as per appropriate method, in accordance with law.
Issues Involved:
1. Disallowance of expenses incurred for earning exempt income under Section 14A of the Income Tax Act. 2. Applicability of Rule 8D for calculating disallowance of expenses for assessment years 2006-07 and 2007-08. 3. Merits of the disallowance upheld by the Commissioner of Income Tax (Appeals) to the extent of exempt income earned. Issue-wise Detailed Analysis: 1. Disallowance of Expenses Incurred for Earning Exempt Income under Section 14A: The appeals pertain to the disallowance of expenses incurred for earning exempt income as per the provisions of Section 14A of the Income Tax Act. The ITAT had previously held that Section 14A was applicable since the assessee had earned exempt income in the form of dividends. The Assessing Officer (AO) calculated the disallowance using the formula provided in Rule 8D of the Income Tax Rules, 1962. The disallowance amounts were substantial for the assessment years in question. The Commissioner of Income Tax (Appeals) [CIT(A)] restricted the disallowance to the extent of exempt income earned by the assessee, following the jurisdictional High Court's decision in PCIT vs. Empire Package Pvt. Ltd. The CIT(A) found that the AO had failed to prove that borrowed funds were used for investments and that disallowance cannot exceed exempt income, as established by various judicial authorities. 2. Applicability of Rule 8D for Calculating Disallowance of Expenses for Assessment Years 2006-07 and 2007-08: The assessee contended that Rule 8D was not applicable for the assessment years 2006-07 and 2007-08 since it was introduced on 24th March 2008 and became operational from A.Y. 2008-09. The AO had mechanically applied Rule 8D, which was not in force during the impugned years. The Ld. DR argued that the disallowance should still be calculated since Section 14A was applicable, and the AO's incorrect method did not negate the need for disallowance. The Tribunal agreed that the incorrect application of Rule 8D needed reconsideration. The matter was restored to the CIT(A) to rework the disallowance using an appropriate method in accordance with the law. 3. Merits of the Disallowance Upheld by the Commissioner of Income Tax (Appeals) to the Extent of Exempt Income Earned: The assessee argued that no disallowance was warranted since the investments were old and made out of interest-free funds provided by the government. The AO had not brought any evidence of expenses incurred for earning exempt income. Judicial pronouncements were cited to support the claim that disallowance cannot exceed exempt income and that no interest-bearing funds were used for investments. The Tribunal noted that the CIT(A) had not clearly specified whether the disallowance related to interest or administrative expenses. The matter was remanded to the CIT(A) to provide clear findings on the nature of disallowed expenses and to adjudicate afresh, considering the assessee's submissions. Conclusion: The Tribunal restored all the appeals to the CIT(A) to rework the disallowance of expenses under Section 14A for all assessment years in accordance with the law. The CIT(A) was directed to give clear findings on the nature of disallowed expenses and to consider the submissions made by the assessee. The appeals were allowed for statistical purposes.
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