Before rule 8D come into existence it is the duty of the AO to determine the expenditure related to exempted income not forming part of taxable income

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH : G : NEW DELHI

BEFORE SHRI I.P. BANSAL, JUDICIAL MEMBER

AND

SHRI B.K. HALDAR, ACCOUNTANT MEMBER

ITA No.3001/Del/2011

Assessment Year : 2007-08

Shri Ram Global Enterprises Ltd.,

UGF, NBC Place,

Bishma Pitamah Marg,

Lodhi Road,

New Delhi.

PAN: AAACD6846Q

(Appellant)

Vs.

 JCIT, Range-8, CR Building,

New Delhi.

 (Respondent)

Assessee by: Shri Rajneesh Aggarwal, CA

Revenue by: Mrs. Anusha Khurana, Sr.DR

ORDER

PER I.P. BANSAL, JUDICIAL MEMBER

This is an appeal filed by the assessee. It is directed against the order passed by the CIT (A) dated 5th April, 2011 for Assessment Year 2007-08.

2. The grievance of the assessee in the present appeal is regarding sustained disallowance of Rs. 12,71,622/- being 10% of the dividend income of Rs. 1,27,16,222/- under the provisions of Section 14A of the Act.

3. The ld. Assessing Officer has resorted to Rule 8D while calculating the disallowance u/s 14A in respect of exempted dividend income of Rs. 1,27,16,222/- at a sum of Rs. 16,02,548/-. Aggrieved, the  assessee filed an appeal before the CIT (A) where it was contended that disallowance could not be made with reference to Rule 8D as Rule 8D could not be applied with respect to Assessment Year 2007-08. Reference was made to the various decisions of the Tribunal and also the decision of Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Pvt. Ltd. reported in 43 DTR 171. Considering these submissions of the assessee learned CIT (A) has held that though Rule 8D could not be invoked before Assessment Year 2008-09, but, he observed that the assessee has incurred expenditure for earning such exempted income and by observing the facts of the case, he has expressed the opinion that it will meet the end of justice if the disallowance is restricted to 10% of the dividend income and, in this manner, learned CIT (A) has sustained the disallowance to the extent of Rs. 12,71,622/- by giving the relief to the assessee of a sum of Rs. 3,30,926/-. The assessee is still aggrieved and has raised various grounds of appeal agitating the aforesaid sustained addition of Rs. 12,71,622/-.

4. At the time of hearing, after narrating the facts, it is the case of the learned AR that learned CIT (A) has committed an error in restricting the disallowance to 10% of the dividend income which is merely on the basis of estimate. He, however, submitted that now jurisdictional High Court in the case of Max Opp Investment Ltd. vs. CIT 203 Taxman 364 (Del), has held that for pre-Rule 8D 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 the income which does not form part of the total income under the Act and if he is satisfied on an objective analysis and for cogent reasons that amount of such expenditure as claimed by the assessee is not correct, he is required to determine the amount of such expenditure on the basis of a reasonable and acceptable method of apportionment. He, therefore, submitted that it would be proper if the matter is restored back to the file of Assessing Officer to re-adjudicate the disallowance in the light of the aforementioned decision of Hon’ble Delhi High Court in the case Max Opp Investment Ltd. vs. CIT (supra).

5. On the other hand, the learned DR, relying upon the order of CIT (A), pleaded that the disallowance has rightly been sustained by learned CIT (A) to the extent of 10% of the dividend income and his order should be upheld.

6. We have carefully considered the rival submissions in the light of the material placed before us. Now, since the Hon’ble jurisdictional High Court has decided this issue in the case of Max Opp Investment Ltd. vs. CIT 203 Taxman 364 (Del), the matter requires reconsideration at the level of Assessing Officer to be decided in accordance with the observations of their lordships in the said decision. In the said decision, it has been held that even for the pre- Rule 8D 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 Act. Even where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income, the Assessing Officer will have to verify the correctness of such claim. In case the Assessing Officer is satisfied with the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, the Assessing Officer is to ascertain the claim of the assessee in so far as the quantum of disallowance under Section 14A is concerned. In such eventuality, the Assessing Officer cannot embark upon a determination of the amount of expenditure for the purposes of Section 14A(1). In case, the Assessing Officer is not, on the basis of objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Having done so, the Assessing Officer will have to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the Act. He is required to do so on the basis of reasonable and acceptable method of apportionment. Therefore, we restore this issue to the file of Assessing Officer to redetermine the disallowance as per the aforementioned decision of Hon’ble jurisdictional High Court.

7. In the result, for statistical purposes the appeal filed by the assessee is treated to be allowed in the manner aforesaid.

The order pronounced in the open court on 07.02.2012.

                                                        Sd/-                                     Sd/-

                                            [B.K. HALDAR]                  [I.P. BANSAL]

                                    ACCOUNTANT MEMBER    JUDICIAL MEMBER

Dated, 07.02.2012.

dk

Copy forwarded to: -

1. Appellant

2. Respondent

3. CIT

4. CIT(A)

5. DR, ITAT

                                                                                                                            By Order,

Deputy Registrar,

ITAT, Delhi Benches