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Income Tax : INCOME TAX NOTIFICATION NO-45/2008, DT: March 24, 2008 Method for determining amount of expenditure in relation to income not incl...
Disallowance under section 14A has to be made in accordance with the principle laid down by the Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg.Co.Ltd. Mumbai. Vs. Dy. Commissioner of Income . Rule 8D should not be applied and the AO has to adopt a reasonable basis or method consistent with all relevant facts and circumstances and after affording reasonable opportunity to the assessee to place all germane material on the record.
The matter came up in appeal before ITAT in the assessee’s own case and other cases in ITAs No. 453,454,456/M/2010 & 458 & 455/M/2010. During the continuance of these appeals, Hon’ble Bombay High Court came up with the decision in Godrej & Boyce Manufacturing Co. Ltd. V/s DCIT, reported in 328 ITR 81 (Bom), wherein the Hon’ble Bombay High Court held that the operation of Rule 8D shall only be from 2008-09 onwards, and not being retrospective.
Kama Holding Ltd. Vs. ACIT (ITAT Delhi)- Rule 8D has been held to be retrospective in nature and the dis allowance has been worked out by applying Rule 8D. Hon’ble Bombay High Court in subsequent judgment in the case of Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT & Another (2010) 234 CTR (Bom) 1 has held Rule 8D to be prospective in nature. Thus, Rule 8D would not be applicable to the assessment year in question i.e. 2007-08. The Hon’ble High Court, however, has directed that indirect expenses which may be attributable on a reasonably proper basis can only be disallowed.
Since the assessment year involved in this appeal is 2005-06 Rule 8D of the IT Rules is not applicable in the present case keeping in view of the decision of the Hon’ble Bombay High Court in the case of Godrej and Boyce Mfg. Pvt. Ltd. In this case the ld. CIT-Admn has issued jurisdiction u/s 263 of the IT Act based on the order of the ITAT, Special Bench, which has been subsequently over ruled by Hon’ble Bombay High Court (supra). Therefore we are of the view that invoking of provision of section 263 of the IT Act is not justifiable in the facts and circumstances of the case. Hence we squash the order of ld. CIT-Admn and allow the appeal of assessee.
Maxopp Investment Ltd vs. CIT (Delhi High Court) – Even for the pre-Rule8D period, whenever the issue of section 14A arises before an Assessing Officer, he has, first of all, to ascertain the correctness of the claim of the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income under the said Act. Even where the assessee claims that no expenditure has been incuured in relation to income which does not form part of total income, the assessing officer will have to verify the correcteness of such claim.
Mitsutor Shipping Agency Pvt Ltd Vs DCIT (ITAT Mumbai)- The assessee was owner of the premises in which it was carrying on business. The assessee paid maintenance charges to the society of Apartment Owners. According to the AO the assessee ought to have deducted tax at source on the payment of maintenance charges to the society as the payment by the assessee to the society was in the nature of contract and, therefore, the provisions of section 194C was applicable.
Mid-Day Multimedia Ltd Vs Dy. CIT (ITAT Mumbai)- 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 after furnishing a reasonable opportunity to the assessee to place all germane material on the record.
The AO can not apply Rule 8D without pointing out any inaccuracy in the method of apportionment or allocation of expenses as adopted by the assessee. Rule 8D r.w.s. 14A(2) can be invoked only if the AO “having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred” in relation to tax-free income.
This Article summarizes recent decisions Bombay and Kerala High Courts on the issue of disallowance of expenditure incurred in relation to exempt income by way of dividend on shares.
Godrej & Boyce Mfg. Co. Ltd. Vs DCIT,, ITA 626/2010 and W.P. 758/2010 dated 12 August 2010, – Bombay High Court rules on prospective operation of Rule 8D and upholds the constitutional validity of sub-sections (2) and (3) of section 14A and Rule 8D.
