Case Law Details
Provisions of rule 8D of the Rules which have been notified with effect from March 24, 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 the provisions of sub-section (1) of section 14A. For that purpose, 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.
The AO must adopt a reasonable basis or method consistent with all the relevant facts and circumstances af ter furnishing a reasonable opportunity to the assessee to place all germane material on the record. The proceedings for assessment year 2002-03 would stand remanded to the AO. The AO should determine as to whether the assessee had incurred any expenditure (direct or indirect) in relation to dividend income/income from mutual funds which does not form part of the total income as contemplated under section 14A. The AO can adopt a reasonable basis for effecting the apportionment. While making that determination, the AO should provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case.
INCOME TAX APPELLATE TRIBUNAL, MUMBAI
ITA No. 6974/Mum/2010- Assessment Year: 2005-06
Abbott Healthcare P. Ltd.
Vs.
Addl. Commissioner of Income-tax
Date of Pronouncement: 17/04/2012
ORDER
PER V. DURGA RAO, J.M.:
This appeal filed by the assessee is directed against the order of CIT(A) – 4, Mumbai, passed on 30/08/2010 for the assessment year 2006-07.
2. The ground raised by the assessee in this appeal is in respect of disallowance u/s 14A of the Act.
2. The facts, in brief, are that in the assessment order the AO had noted that assessee had shown dividend income of Rs. 98,59,980/-, which is exempt. However, the assessee had not disallowed any expenditure for earning exempt income. The AO, therefore, had made the disallowance u/s 14A of the Act, read with Rule 8D, of Rs. 11,99,438/- being the expenses directly and indirectly relatable to the exempted income of Rs. 98,59,980/-. Aggrieved, the assessee carried the matter in appeal before the CIT(A). Before the CIT(A), the assessee contended that the AO was not justified in disallowing a sum of Rs. 11,99,438/-, as according to him Rule 8D is not retrospective as held by the Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd., Vs. DCIT. After considering the submissions of the assessee, held as under:-
“4. I have duly considered the submissions of the authorized representative and I find that the AO has made the disallowance following Rule 8D which was held as retrospective in nature by Bombay ITAT (Special Bennch) in the case of Daga Capital Management P. Ltd. However, the Bombay High Court has held in the case of Godrej & Boyce Manufacturing Co. ltd. that rule 8D is not retrospective. However, the Bombay high Court has ruled that a reasonable disallowance should be made by the AO u/s 14A. Following the decision of Hon.Bombay High Court I would hold that disallowance of 0.5% of average investments which yields the exempt income would meet the ends of justice. Accordingly, I direct the Ao to restrict the disallowance u/s 14A to 0.5% of the average investment of R. 21,91,41,761/- at Rs. 10,95,708/- as reasonable disallowance u/s 14A. To my mind some disallowance is called for earning exempt income. The Hon. Bombay High Court has directed that a reasonable disallowance should be made. The Hon. High Court has not struck down the Rule 8D. Hence, the method prescribed in Rule 8D would give a proper disallowance for earning exempt income. Since the assessee has used its own funds no direct interest expenditure is disallowable. Disallowance of only 0.5% of average investment would give proper disallowance in respect of section 14A. Accordingly this ground of appeal is allowed.”
The assessee is in appeal before us challenging the action of the CIT(A) in partially upholding the action of the AO of making disallowance u/s 14A of the Act.
4. We have heard both the parties, perused the record and gone through the orders of the authorities below. The issue is squarely covered by the Hon’ble jurisdictional High Court in the case of Godrej & Boyce Mfg. Co. Ltd., [2010] 328 ITR 81 (Bom.) wherein the Hon’ble Court held as under:-
“That the provisions of rule 8D of the Rules which have been notified with effect from March 24, 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 the provisions of sub-section (1) of section 14A. For that purpose, 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. The AO must adopt a reasonable basis or method consistent with all the relevant facts and circumstances af ter furnishing a reasonable opportunity to the assessee to place all germane material on the record. The proceedings for assessment year 2002-03 would stand remanded to the AO. The AO should determine as to whether the assessee had incurred any expenditure (direct or indirect) in relation to dividend income/income from mutual funds which does not form part of the total income as contemplated under section 14A. The AO can adopt a reasonable basis for effecting the apportionment. While making that determination, the AO should provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case.”
5. In view of the ratio laid down by the Hon’ble jurisdictional High court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra), we remit the matter back to the file of the AO with a direction to decide the issue afresh in the light of the said judgment of the Hon’ble Jurisdictional High court after providing reasonable opportunity of being heard to the assessee. However, the AO make sure that the disallowance of interest cannot be more than Rs. 11,99,438/-.
6. In the result, appeal of the assessee is treated as allowed for statistical purposes.
Pronounced in the open court on 17th April, 2012
