2016 (9) TMI 1685 - HC - Income Tax

HC Confirms 2% Expense Allocation for Exempt Dividend Income, Upholding Established Tax Interpretation Standard

HC upheld ITAT's decision allowing 2% of exempt dividend income as expenditure. Relying on precedent, the court affirmed the 2% rule as a fair and ... Disallowance u/s 14A of exempt income - Tribunal fixing arbitrary amount of 2% expenditure as being towards earning exempted income - AO had apportioned the expenditure in a scientific manner proportionate to the income earned HELD THAT:- Since the consistent view of this Court is in favour of accepting 2% of the exempted income as legitimate or reasonable expenditure that the Assessee can indulge, we preserve the contention canvassed by the learned Standing Counsel for a better case, as there is force in the submission that expenditure can not be booked on a hypothetical basis, particularly viewed in the backdrop of amount involved in this case being too marginal, the contention raised by Department can be preserved for a better case. Following the two different judgments rendered earlier by this Court referred to supra by us, we find no merit in this appeal and it is dismissed accordingly The Madras High Court, in a Tax Case Appeal under Section 260A of the Income Tax Act, upheld the Income Tax Appellate Tribunal's decision allowing only 2% of exempt dividend income as expenditure incurred to earn that income. The Court framed two substantial questions of law regarding the reasonableness of the 2% expenditure allowance versus the Assessing Officer's scientific apportionment.Relying on precedent, including Division Bench judgments in EID Parry v. ACIT (2012) and India Nippon Electricals Ltd. v. DCIT (2015), the Court affirmed that 'incurring 2% of the exempted income is a fair and reasonable proposition.' Although the Revenue contended that expenditure must be demonstrated as actually incurred and not assumed hypothetically, the Court noted the consistent judicial view favoring the 2% rule and preserved the Revenue's argument for a better case.Ultimately, the Court dismissed the appeal, holding that the Tribunal's approach was justified and that the 2% benchmark remains an accepted standard for expenditure attributable to earning exempt income. No costs were awarded.