2011 (12) TMI 102 - HC - Income Tax

High Court Upholds Tribunal Decision on Income Tax Assessment Order

The High Court upheld the Income Tax Appellate Tribunal's decision to quash the Commissioner of Income Tax's order under Section 263 of the Income Tax Act ... Dis-allowance of expenditure u/s 14A of the Act - depreciation on computer software, peripherals @ 60% without considering whether assets were used for more than 180 days- Held that:- Rule 8D has been held to be prospective in nature and applicable from assessment year 2008-09 by High Court in Maxopp Investment Ltd. v. CIT, New Delhi . However, in the said decision it has been observed that direct and indirect expenses have to be disallowed u/s 14A, when an assessee earns exempt income. In the present case no dis-allowance was made u/s 14A further, Assessing Officer had not examined whether the computer peripherals were used for more than 180 days or not. Under these observations A.O. is directed to pass fresh order. -Decided in favor of Revenue Issues:1. Whether the Income Tax Appellate Tribunal was right in quashing the order under Section 263 of the Income Tax Act, 1961Rs.Detailed Analysis:- The appeal was against the order of the Income Tax Appellate Tribunal related to the assessment year 2005-06 of a company.- The Tribunal quashed the order passed by the Commissioner of Income Tax under Section 263 of the Income Tax Act.- The Commissioner had issued notice under Section 263 based on two grounds: non-disallowance of expenditure under Section 14A for exempt dividend income and the allowance of depreciation on certain computer peripherals without verifying their usage duration.- The Tribunal's decision was based on the retrospective nature of Rule 8D and the admissibility of depreciation at 60% for the computer peripherals.- The High Court clarified that Rule 8D was prospective from the assessment year 2008-09 and emphasized the need for disallowance under Section 14A when earning exempt income.- The Court highlighted the conditions for invoking supervisory jurisdiction under Section 263, stating that an order is erroneous if provisions are not correctly applied or necessary inquiries are not made.- It was noted that the Assessing Officer had not applied Section 14A or verified the usage duration of computer peripherals, justifying the Commissioner's intervention.- The Court directed the Assessing Officer to consider the usage duration of computer peripherals and to pass a fresh order in accordance with the directions given.In conclusion, the question of law was answered in the negative against the Assessee and in favor of the Revenue, subject to the directions provided for the Assessing Officer to pass a fresh order in compliance with the Court's instructions.