2018 (9) TMI 152 - HC - Income Tax

Assessing Officer's Discretion on Expenditure Disallowance Upheld

PRINCIPAL COMMISSIONER OF INCOME TAX, KOLKATA-3, KOLKATA Versus BRITANNIA INDUSTRIES LIMITED

The Tribunal held that the assessing officer has discretion in determining the disallowance of expenditure related to exempted income and is not obligated ... Revision u/s 263 - addition u/s 14A - If an assessing officer doubts the quantum of expenditure incurred towards exempted income, is it mandatory for the assessing officer to apply the formula prescribed in Rule 8D of the Income Tax Rules, 1962 or can he take a view otherwise ? - Held that:- The Tribunal in substance has followed the principle enunciated by the Hon’ble Supreme Court GODREJ & BOYCE MANUFACTURING COMPANY LIMITED VERSUS DY. COMMISSIONER OF INCOME-TAX & ANR. [2017 (5) TMI 403 - SUPREME COURT OF INDIA] with regard to the applicability of Rule 8D. We have set out the relevant passage from the decision of the Tribunal on that point and do not find any error in the decision of the Tribunal which is under appeal. We do not think that any point of law is involved in this appeal as the same stands covered by the decision of the Hon’ble Supreme Court. The appeal and the stay petition are accordingly dismissed. AO has adopted one of the possible course open to him in law. The CIT cannot invoke jurisdiction u/s. 263 of the Act just because he does not agree with the view of the AO We are apprised by Mr. Murarka, learned counsel for the assessee-respondent that although his advocate-on-record has not filed vakalatnama yet, he has instructions to appear in this matter. On the undertaking that such vakalatnama shall be filed by 23rd July, 2018, counsel has been permitted to represent the assessee before us. Issues:1. Whether the assessing officer is required to apply the formula prescribed in Rule 8D of the Income Tax Rules, 1962 when doubting the quantum of expenditure towards exempted income.Analysis:The primary issue in this judgment revolves around the assessing officer's obligation to utilize the formula stipulated in Rule 8D of the Income Tax Rules, 1962 when questioning the amount of expenditure related to exempted income. The assessee had initially claimed a disallowance of &8377; 26,07,177 as expenditure incurred for earning exempted income, specifically income from dividends. However, the assessing officer increased this disallowance to &8377; 36,09,734. The Commissioner, exercising revisional power under section 263, directed the assessing officer to compute the disallowance as per Rule 8D, emphasizing the mandatory nature of this provision when the correctness of the expenditure claim is in doubt.The subsequent appeal before the Income Tax Appellate Tribunal challenged the Commissioner's order. The Tribunal, considering various decisions and the interpretation of Rule 8D, concluded that the assessing officer has the discretion to determine the disallowance based on a reasonable basis rather than blindly applying Rule 8D. It highlighted that Rule 8D should be a last resort when a just conclusion on the disallowance amount cannot be reached through other means. The Tribunal also emphasized that the assessing officer's decision-making process should be objective and that invoking Rule 8D should not be automatic upon rejecting the assessee's computation method.Moreover, the Tribunal held that the assessing officer had acted within the scope of the law, and the Commissioner's intervention under section 263 was unwarranted. It emphasized that the Commissioner cannot substitute his view for that of the assessing officer, and the decision relied upon supported the assessee's position. The Tribunal's decision was further reinforced by the Supreme Court's ruling in the Godrej and Boyce Manufacturing Company case, clarifying the application of Rule 8D and the assessing officer's discretion in determining expenditure related to exempted income.In conclusion, the judgment underscores the assessing officer's discretion in assessing expenditure towards exempted income, highlighting the need for a reasonable and objective approach rather than a mechanical application of Rule 8D. It establishes that the Commissioner's intervention under section 263 is not justified if the assessing officer's decision is within the legal framework and supported by a rational basis, as outlined in relevant judicial precedents.