High Court Validates Disallowance Rule: Assessing Officer to Make Reasonable Disallowance for Non-Taxable Income

The appeal against the sustaining of disallowance under section 14A of the Income Tax Act and Rule 8D of the Income Tax Rules was heard by ITAT DELHI. The High Court held that the provisions are valid from the assessment year 2008-09 onwards. However, for prior years, the Assessing Officer must determine the expenditure for earning non-taxable income and make a reasonable disallowance. As this was not done, the matter was remanded for appropriate decision. The appeal was treated as allowed for statistical purposes, with the order pronounced on 31.03.2011.

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Issues involved: Appeal against sustaining disallowance u/s 14A of the Act and Rule 8D of the I.T. Rules, 1962.

The Appellate Tribunal ITAT DELHI, comprising of I. P. Bansal (Judicial Member) and K. G. Bansal (Accountant Member), heard the appeal where the assessee challenged the disallowance of &8377; 26,76,963/- u/s 14A of the Act and Rule 8D of the I.T. Rules, 1962. Both parties agreed that the decision of the special Bench of Mumbai Tribunal in the case of Daga Capital Management (P) Limited is no longer valid due to the ruling of the Hon'ble Bombay High Court in the case of Godrej and Boyce Manufacturing Company Limited Vs. DCIT. The High Court held that the provisions of section 14A and Rule 8D are valid and applicable from the assessment year 2008-09 onwards. However, for years prior to that, the Assessing Officer must inquire into the expenditure incurred for earning non-taxable income and make a reasonable disallowance based on facts of the case. As this exercise was not conducted by the lower authorities, the matter was remanded to the Assessing Officer for appropriate decision. Any new decisions from other High Courts should also be considered by the Assessing Officer during finalization of the assessment. The appeal was treated as allowed for statistical purposes, with the order pronounced on 31.03.2011.

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