Tribunal limits disallowance under Section 14A, excludes Rule 8D for AY 2006-07.

The Tribunal allowed the appeal of the assessee, directing the Assessing Officer to re-compute the disallowance under Section 14A, limiting it to the amount of dividend earned during the year and verifying the dividend income. The Tribunal held that Rule 8D was not applicable for Assessment Year 2006-07 and that the disallowance should not exceed the exempt income. The order of the CIT (A) was set aside, and the issue was remanded to the AO for further verification.

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Issues Involved:
1. Disallowance under Section 14A of the Income Tax Act.
2. Applicability of Rule 8D for Assessment Year 2006-07.
3. Calculation of disallowance in relation to exempt income.
4. Assessment of book profits under Section 115JB of the Income Tax Act.

Issue-wise Detailed Analysis:

1. Disallowance under Section 14A of the Income Tax Act:
The assessee, a company engaged in the production and sale of beverages and snack food products, filed its return declaring a loss and claimed a minuscule sum as exempt dividend income. The Assessing Officer (AO) disallowed Rs. 6,04,09,910 under Section 14A, contending that expenses were incurred to earn exempt income. The AO computed this disallowance using Rule 8D, which included interest not attributable to any specific income and 0.5% of the average investment.

2. Applicability of Rule 8D for Assessment Year 2006-07:
The assessee argued that Rule 8D, introduced by notification in 2008, is prospective and not applicable for AY 2006-07. The Delhi High Court in Maxopp Investment Ltd. vs CIT (347 ITR 272) held Rule 8D to be prospective, applicable from AY 2008-09 onwards. Therefore, for AY 2006-07, the AO could not apply Rule 8D for disallowance under Section 14A.

3. Calculation of Disallowance in Relation to Exempt Income:
The assessee contended that no direct or indirect expenditure was incurred to earn the exempt dividend income. The investments yielding the dividend were acquired by a company that later amalgamated with the assessee, and no new investments were made during the subject AY. The assessee also highlighted that the disallowance should not exceed the exempt income of Rs. 34,562. The Tribunal agreed, stating that the disallowance cannot exceed the exempt income and directed the AO to re-compute the disallowance, restricting it to the amount of dividend earned during the year.

4. Assessment of Book Profits under Section 115JB of the Income Tax Act:
The AO also made a similar disallowance while computing book profits under Section 115JB. The CIT (A) upheld the disallowance under Rule 8D(2)(iii) amounting to Rs. 1,18,04,860. However, the Tribunal, following the Delhi High Court's judgment, ruled that the disallowance under Rule 8D cannot be applied for AY 2006-07 and should not exceed the exempt income. The issue was restored to the AO for verification of the dividend income earned by the assessee during the year.

Conclusion:
The Tribunal set aside the order of the CIT (A) and directed the AO to re-compute the disallowance under Section 14A, restricting it to the amount of dividend earned during the year, and to verify the dividend income. The appeal of the assessee was allowed.

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