2014 (4) TMI 156 - AT - Income Tax

Tribunal Overturns Disallowances, Orders Reevaluation

The Tribunal set aside the disallowances made under section 14A for various assessment years, directing a reevaluation by the Assessing Officer without ... Disallowance u/s 14A of the Act – Invocation of Rule 8D of the Rules – Whether or not the CIT(A) was justified in confirming the disallowance u/s 14A for the assessment year 2002–03, 2004–05, 2005–06 and 2007–08 - Held that:- The decision in GODREJ AND BOYCE MFG. CO. LTD. Versus DEPUTY COMMISSIONER OF INCOME-TAX AND ANOTHER [2010 (8) TMI 77 - BOMBAY HIGH COURT] followed – No deduction shall be allowed in respect of expenditure incurred by the assessee in relation to such income which does not form part of the total income under the Act, by virtue of the provisions of Section 14A(1) - The provisions of Rule 8D of the Income Tax Rules as inserted by the Income Tax (Fifth Amendment) Rules 2008. The AO is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act – thus, the matter is remitted back to the AO for fresh consideration as to the analysis of administrative expenses shown by the assessee and to examine the nature of interest expenditure and if the interest expenditure does not pertain to any investment which has yielded or is capable of yielding any exempt income, then such interest expenditure cannot be allocated or can be considered for making any disallowance and if general administrative expenditure cannot be properly allocated or attributable for the purpose of exempt income, then while arriving at the 0.5% average investment, the Assessing Officer shall remove those investments which are not capable of earning exempt income – Decided in favour of Assessee. Issues:Challenge to disallowance under section 14A for multiple assessment years.Analysis:The appeals were filed challenging orders confirming disallowances under section 14A for various assessment years. The common ground raised was the justification of the disallowance made by the Commissioner (Appeals) after invoking rule 8D. The Tribunal noted that all appeals pertained to the same assessee and common issues, thus heard together. The facts of one appeal were highlighted for clarity. The Tribunal had previously set aside a disallowance under section 14A and directed the Assessing Officer to decide afresh. However, the Assessing Officer again applied rule 8D for calculation, which was confirmed by the Commissioner (Appeals).The Counsel for the assessee argued against the application of rule 8D for pre-2008-09 assessment years and presented an analysis of administrative expenditure. They contended that investments not capable of yielding exempt income should be excluded from the disallowance calculation. The Departmental Representative defended the disallowance as reasonable. The Tribunal found the application of rule 8D incorrect for pre-2008-09 assessment years, as per a jurisdictional High Court decision. It agreed with the assessee's arguments regarding investments not generating exempt income and the nature of interest expenditure.The Tribunal directed the matter to be sent back to the Assessing Officer for reevaluation. It instructed a detailed analysis of administrative expenses, exclusion of investments not yielding exempt income, and proper allocation of general administrative expenditure. The issue of section 14A was to be decided without applying rule 8D. The impugned orders were set aside, and the appeals were partly allowed for statistical purposes. The decision was pronounced on 28th March 2014.