The Delhi Bench of the Income Tax Appellate Tribunal ( ITAT ) recently directed an Assessing Officer ( AO ) to disallow 1% of dividend income as expenditure under Section 14A of the Income Tax Act, 1961 for the period prior to the onset of Rule 8D of the Income Tax Rules, 1962.
The Income Tax Appeal was one of multiple Appeals filed by Housing and Urban Development Corporation ( HUDCO ) against the Revenue and vice versa; the ITAT rendered the judgment while disposing of the Appeals in unison.
Understanding Common Mode of Tax Evasion with Practical Scenarios, Click Here
HUDCO is a public sector undertaking under the Ministry of Housing and Urban Affairs, and is involved in financing housing and infrastructure for urban development projects in India.
The Appeal, pertaining to the financials of the Assessee for the Assessment Year (A.Y.) 2004-05 followed the Assessee’s declaration of dividend of Rs.18,20,000/- as exempt from taxability in their Income Tax Returns.
The Income Tax Returns filed by HUDCO were subject to scrutiny by the AO who estimated the dividend income earned by the Assessee at 25% and made a disallowance of Rs.4,55,000/- under Section 14A of the Income Tax Act, 1961. The AO claimed to have made such disallowance under the assumption that the expenditure had been incurred by the Assessee for the purpose of earning income.
Understanding Common Mode of Tax Evasion with Practical Scenarios, Click Here
The two-member Bench of the Income Tax Appellate Tribunal, Delhi comprising Yogesh Kumar U.S., Judicial Member and M. Balaganesh, Accountant Member, after considering the submissions made by either parties observed that the Assessment Year 2010-11 under consideration, is prior to the introduction of Rule 8D of the Income Tax Rules, 1962 which provides the Method To Determine Expenditure Incurred Towards Exempt Income.
The Bench noted that the financials of the year under consideration, being prior to the introduction of 8D cannot be attributed to the computation mechanism provided in Rule 8D of the Rules. ITAT referred to the decision of the Calcutta High Court in CIT vs M/s R.R.Sen & Brothers P Ltd (2014), where the Delhi Bench observed that “The assessee did not show any expenditure incurred by him for the purpose of earning the money which is exempted under income tax.”
In light of the precedential nature of the Delhi High Court decision, ITAT directed the AO to disallow 1% of the dividend income as expenditure under Section 14A of the Income Tax Act, 1961.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
