Case Law Details
By Finance Act of 2001, the Parliament enacted section 14A of the Income-tax Act, 1961 with retrospective effect from 1.04.1962. Prior to insertion of sec. 14A, the Revenue had sought to disallow expenditure incurred in relation to exempt income. However, the Hon’ble Supreme Court in the case of Rajasthan State Warehousing Corporation vs. CIT, 242 ITR 450, held that where there was one indivisible business giving rise to taxable income as well as exempt income, the entire expenditure incurred in relation to that business would have to e allowed even if a part of income earned from the business was exempt. The basic object of sec. 14A is to disallow the direct and indirect expenditure incurred in relation to income which does not form part of total income. Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co. Ltd. vs. DCIT, 328 ITR 81, has held that provisions of Rule 8D which have been notified with effect from 24th March, 2008 would apply with effect from Assessment Year 2008-09. Even prior to Assessment Year 2008-09 when Rule 8D was not applicable, the AO had to enforce provisions of sub-sec.(1) of sec. 14A. For that purpose the AO was duty bound to determine the expenditure which had been incurred in relation to income which does not form part of total income. The AO must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on record. In the case before us the Assessment Year involved is Assessment Year 2007-08. Therefore, Rule 8D will not be applicable in the case of the assessee. However, disallowance can be made in relation to exempt income on reasonable basis. The assessee had himself disallowed Rs.1,73,98,255/- in the proportion of exempt and taxable income earned by way of dividend and interest income. This, in our view is reasonable. Since Rule 8D is not applicable for Assessment Year under consideration, the disallowance made by the assessee on proportionate basis of exempt income and taxable income in our considered opinion is justified. Hon’ble Delhi High Court in the case of Maxopp Investment Ltd. vs. CIT, 203 Taxman 364, has also held that Rule 8D is not retrospective. The AO has to determine amount of such expenditure on the basis of a reasonable and acceptable method of apportionment. Since in the instant case the assessee himself has disallowed Rs.1,73,98,255/- on proportionate basis, in our considered opinion, the learned CIT(A) is justified in upholding the disallowance to the extent of Rs.1,73,98,255/-. Accordingly, we do not find any infirmity in the order of the CIT(A).
INCOME TAX APPELLATE TRIBUNAL, DELHI
I.T. A. No.977/Del/2012 – Assessment Year: 2007-08
Asstt. Commissioner of Income-tax
Vs.
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