The Kolkata bench of the Income Tax Appellate Tribunal, in a recent ruling held that Rule 8D notified by the Board on 24-03-2008 did not have retrospective application and therefore, the expenses at 1% of the total exempt income is reasonable since it is disallowable under section 14A of the Income Tax Act, 1961. The facts of the case are briefly stated below.
The assessee-company is engaged in the business of manufacture and sale of carbon black and generation and sale of power. The assessee, filed its return of income for the relevant assessment year, declaring loss. Further, the assessee claimed deduction in respect of dividend income and interest on tax free bonds etc under section 10 of the Income Tax Act. The assessee in its computation of income has stated that no expenses were incurred for earning the exempt income and submitted no deduction shall be allowed in respect of any expenditure incurred by the assessee in relation to earning income, which was not form part of the total income. The Assessing Officer rejected all the contentions of the assessee by holding that Rule 8D in all proceedings pending on the date of notification. Accordingly, he has completed the assessment by determining the amount of disallowance of expenditure based on Rule 8D.
On appeal, the Commissioner of Income Tax (Appeals) set aside the impugned order by relying upon the decision of the Bombay High Court in Boyce Mfg. Co. Ltd Vs. CIT, in which the Court held that “Rule 8D notified by the Board on 24-03-2008 did not have retrospective application but the Rule was applicable only prospectively and therefore applicable from A.Y 2008-09.” The CIT(A) further directed the AO to restrict the same u/s. 14A to 1% holding that disallowances of interest of Rs.110.56 lacs made under Rule 8D(2)(ii) and expenses of Rs.12.35 lacs made under Rule 8D(2)(iii) was arbitrary and bad and is liable to be deleted. The Revenue challenged the said order before the Appellate Tribunal.
The Appellate Tribunal held that there is no infirmity in the order of the Commissioner of Income Tax (Appeals). Following the above referred decisions, the Tribunal observed that the expenses at 1% of the total exempt income are reasonable as disallowable u/s. I4A of the Act.
Read the full text of the order below.
