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2023 (7) TMI 138 - HC - Income TaxDisallowance u/s 14A r.w.r.8D - expenditure as incurred on earning the dividend income, that much of the expenditure which is attributable to the dividend income - HELD THAT - If an expenditure incurred has no causal connection with the exempted income, then such an expenditure would obviously be treated as not related to the income that is exempted from tax, and such expenditure would be allowed as business expenditure. To put it differently, such expenditure would then be considered as incurred in respect of other income which is to be treated as part of the total income. Rule 8D provides for method for determining amount of expenditure in relation to income not includible in total income. In view of the judgment of Maxopp Investment Ltd 2018 (3) TMI 805 - SUPREME COURT we hereby quash and set aside the order impugned passed by ITAT and direct the AO to give effect to this order passed by us. .
Issues involved:
The appeal by the Principal Commissioner of Income Tax against the order of the Income Tax Appellate Tribunal (ITAT) regarding the assessment of the respondent for the Assessment Year 2010-11. Details of the Judgment: Issue 1: Assessment and Disallowances The respondent, engaged in construction and real estate business, declared a loss in the return of income. The assessment order under Section 143(3) of the Income Tax Act, 1961, disallowed certain amounts under Sections 14A and 36(i)(iii) of the Act. The Commissioner of Income Tax (Appeal)-36, Mumbai partly allowed the appeal and restricted the disallowance based on a previous decision. The ITAT upheld the decision of the Commissioner and directed the Assessing Officer to compute the disallowance based on fixed/semi-variable expenditure incurred by the respondent. The ITAT observed that the investments made by the respondent were strategic and not for earning exempt income. Issue 2: Questions of Law Proposed The substantial questions of law proposed in the case included whether the ITAT was justified in confirming the computation of disallowance without appreciating Rule 8D, whether disallowance was required in relation to share income exempted under the Act, and whether the ITAT should have corrected the computation made by the Assessing Officer. Issue 3: Application of Legal Principles Citing the judgment in Maxopp Investment Ltd. Vs. Commissioner of Income Tax, the court held that expenditure attributable to income not forming part of the total income should be disallowed. The court emphasized that only expenditure related to exempted income should be disallowed, and Rule 8D provides the method for determining such expenditure. Final Decision In light of the legal principles established in the Maxopp case, the court quashed the ITAT's order and directed the Assessing Officer to follow the law laid down in Maxopp Investment Ltd. The Assessing Officer was instructed to provide the respondent with a reasonable opportunity to show cause before passing any order. The appeal was disposed of, clarifying that no observations were made on the computation part.
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