2023 (6) TMI 441 - HC - Income Tax

Disallowance u/s 14A r.w.r. 8D - method prescribed for the purpose of section 14A - working on reasonable basis - HELD THAT - In the present case, the assessment year is 2006-07 and hence disallowance has to be worked out on reasonable basis u/s 14A. The method prescribed for the purpose of section 14A of the Act is contained in Rule 8D of the Income Tax Rules, 1962. Rule 8D had been inserted vide Notification 45 of 2008 and has been held to be prospective in nature i.e. applicable from AY 2008-09. See CIT vs. Essar Telehodings Ltd. 2018 (2) TMI 115 - SUPREME COURT and Maxopp Investment Ltd. 2018 (3) TMI 805 - SUPREME COURT - The Rule 8D has been amended vide Notification No. 43 dated 2nd June 2016. The sub- rule (2) of the amended Rule 8D, as it stands on date and which is effective from AY 2017-18, provides that the disallowance u/s Section 14A is to be computed as an aggregate. The constitutional validity of provisions of section 14A(2) and (3) read with Rule 8D has been upheld in Godrej and Boyce Mfg Co. Ltd s case 2010 (8) TMI 77 - BOMBAY HIGH COURT However, Rule 8D shall not be applicable for assessment year prior to AY 2008-09; and the AO had to enforce the provisions of section 14A(1) by determining expenditure by adopting a reasonable basis or method consistent with all relevant facts and circumstances. Thus, the Tribunal, vide impugned order had rightly partly allowed the appeal of the assessee by giving direction to work out the disallowance on reasonable basis.

Summary

Issues Involved:
The judgment involves the issues of disallowance of interest on investments in shares under Section 14A of the Income Tax Act, 1961 and disallowance of interest on debit balance of partners under Section 36(1)(iii) of the Act.

Disallowance of Interest on Investments in Shares under Section 14A:
The appellant, a company engaged in manufacturing Hawai Chappals, had invested in shares of Lakhani India Ltd. The Assessing Officer disallowed the interest on these investments as the dividend income was not taxable and the interest was not allowable expenditure under Section 14A. The AO also disallowed interest related to debit balances of partners, citing the case law of CIT Vs. Abhishek Industries Ltd. The CIT (A) allowed the appeal, but the revenue-department challenged it before the Tribunal. The Tribunal set aside the orders below to work out the disallowance on a reasonable basis, following the principle that expenditure incurred in relation to income not includible in the total must be disallowed under Section 14A. The Tribunal found no fault in the CIT (A)'s order regarding this issue.

Disallowance of Interest on Debit Balance of Partners under Section 36(1)(iii):
The Assessing Officer disallowed interest on the debit balances of partners, stating that withdrawals were made from business funds bearing interest cost. The AO relied on the judgment in the case of S.A Builders Pvt. Ltd v. Commissioner of Income Tax, emphasizing that personal withdrawals exceeding the capital amount could not be considered for business purposes. The Tribunal partly allowed the appeal of the assessee, directing the disallowance to be worked out on a reasonable basis. The judgment concluded that the Tribunal's decision did not require any interference, as no substantial question of law arose for consideration.

Separate Judgment by the Judges:
The judgment was delivered by Hon'ble Ms. Justice Ritu Bahri and Hon'ble Mrs. Justice Manisha Batra.