2021 (5) TMI 61 - AT - Income Tax

Disallowance u/s 14A rws 8D(2)(iii) - HELD THAT - We set aside the order of the CIT(A) and remit the matter back to the file of AO with a direction to decide the issue following the said case of Maxopp Investment Ltd 2018 (3) TMI 805 - SUPREME COURT We further direct the AO that the disallowance should be made under rule 8D(2)(iii) @ 0.5% on the average value of the investment in which exempt income has been received. Therefore the grounds raised in both the appeals are treated as allowed for statistical purposes.

Summary

Issues:
Cross appeals by revenue and assessee against CIT(A) order for AY 2010-11 regarding disallowance under section 14A of the Income Tax Act, 1961.

Analysis:
1. Revenue's Grounds of Appeal:
The revenue contended that the CIT(A) erred in reducing the disallowance under section 14A from Rs. 20,14,13,586 to Rs. 1,45,00,000. They argued that the disallowance should be quantified as per Rule 8D of Income Tax Rules, 1962. The revenue raised concerns about the methodology applied in determining the disallowance.

2. Assessee's Grounds of Appeal:
The assessee challenged the CIT(A)'s order confirming the disallowance under section 14A. They disagreed with the invocation of Rule 8D and the specific amounts disallowed under different provisions of the rule. The assessee argued that Rule 8D should not be applied in their case and proposed alternative calculations for the disallowance.

3. Adjudication by ITAT:
Upon review, the ITAT noted a delay in the revenue's appeal filing, which was condoned. The case involved an assessee firm trading in securities/derivatives, which claimed exempt dividend income but faced disallowance under section 14A by the AO. The CIT(A) reduced the disallowance to Rs. 1,45,00,000 from the initial amount determined by the AO.

4. Judgment and Directions:
The ITAT observed the nature of the assessee's business activities and financial structure. Referring to relevant legal precedents, including the decision in Maxopp Investment Ltd. vs. CIT, the ITAT set aside the CIT(A)'s order. They directed the AO to decide the issue considering the business purpose of holding shares as stock-in-trade and to apply the disallowance under Rule 8D(2)(iii) at 0.5% of the average value of investments generating exempt income.

5. Conclusion:
Both appeals were allowed for statistical purposes, and the matter was remitted back to the AO for further assessment in line with the directions provided by the ITAT. The judgment emphasized the need for a nuanced approach in determining disallowances under section 14A based on the specific facts and circumstances of each case, especially concerning investments held as stock-in-trade.