Deputy Commissioner ... v. M/S. Reliance Petro ..., Income Tax Appellate Tribunal, Judgment, Law, casemine.com

Citation Codes

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Case Number

I.T.A No. 3948.AHD./2008, Assessment Year: 2005-2006

Attorney(S)

Appellant by: Shri K. Madhusudan, Sr. D.R
Respondent by: Shri J.T Shah

Judges

G.D Agrawal
V.P AZ
T.K Sharma, J.M

Acts

provisions of sub-section (1) of section 14A of the Income Tax Act, 1961.
section 10(33) of the Income Tax Act, 1961.
INCOME TAX ACT 1961
section 10(33) of the Income Tax Act

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Smart Summary

Factual and Procedural Background

The assessee, a company engaged in investment and securities business, filed its return for the assessment year 2005-2006 declaring a loss. The Assessing Officer framed the assessment and disallowed an interest expenditure of Rs. 8,45,562 under section 14A of the Income Tax Act, 1961, relating to dividend income exempt under section 10(33). This disallowance was based on the assessee funding investments in shares through interest-bearing funds. Earlier assessments had also involved similar disallowances, which were upheld by appellate authorities. The Learned Commissioner of Income Tax (Appeals) later deleted this addition, reasoning that the assessee’s business involved strategic investments that could yield taxable income. The Revenue filed an appeal against this deletion before the Tribunal.

Legal Issues Presented

Whether the disallowance of interest expenditure under section 14A of the Income Tax Act, 1961 is justified when the assessee’s investments are made from own capital or for purposes other than earning exempt income.
Whether the Assessing Officer is required to apply the provisions of Rule 8D for disallowance of expenditure under section 14A for the assessment year 2005-2006, which is prior to the effective date of Rule 8D.
The appropriate method for determining disallowance under section 14A prior to the applicability of Rule 8D.

Arguments of the Parties

Revenue's Arguments

Relied on the judgment of the Hon'ble Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. v. Deputy Commissioner of Income Tax ([2010] 328 ITR 81 (Bom)) to support the contention that the Learned Commissioner of Income Tax (Appeals) erred in deleting the disallowance.

Assessee's Arguments

Interest income was only Rs. 1,450, exempt under section 10(33), and thus disallowance could not exceed the exempt income.
Investments in shares of Reliance Capital Ltd. were made from own capital, and investments in India Polyfibres Ltd. were for a sick company, not for earning exempt income.
No interest-bearing funds were used for these investments; hence, no disallowance under section 14A was warranted.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Godrej & Boyce Mfg. Co. Ltd. v. Deputy Commissioner of Income Tax [2010] 328 ITR 81 (Bom)	Clarification that Rule 8D applies from assessment year 2008-2009 onwards; prior to that, Assessing Officer must determine expenditure under section 14A(1) on a reasonable basis after furnishing opportunity to the assessee.	The court relied on this judgment to set aside the appellate order and remand the matter to the Assessing Officer to rework the disallowance under section 14A following the principles laid down therein.

Court's Reasoning and Analysis

The court examined the orders of the lower authorities and the legal position as clarified by the Hon'ble Bombay High Court in the Godrej & Boyce case. It noted that Rule 8D, which provides a formulaic approach for disallowance under section 14A, applies only from assessment year 2008-2009. For the year in question (2005-2006), the Assessing Officer must determine the disallowance based on a reasonable basis consistent with the facts and circumstances, after giving the assessee a reasonable opportunity to present relevant material. The court observed that the appellate order deleting the addition did not have the benefit of this judgment. Therefore, it directed the matter to be re-examined by the Assessing Officer applying the correct legal principles and after considering all relevant facts and case laws.

Holding and Implications

The appeal filed by the Revenue is allowed for statistical purposes.

The court set aside the order of the Learned Commissioner of Income Tax (Appeals) and remanded the issue to the Assessing Officer to rework the disallowance under section 14A in accordance with the principles established by the Hon'ble Bombay High Court in the Godrej & Boyce case or any other relevant judgments. The Assessing Officer is to afford the assessee a reasonable opportunity to present its case. This decision affects only the parties before the court and does not establish new precedent beyond applying existing judicial guidance.

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Deputy Commissioner Of Income Tax, Circle-5, Ahmedabad () v. M/S. Reliance Petro Products Pvt. Ltd., Ahmedabad ().

Shri T.K Sharma, J.M:— This appeal filed by the Revenue is against the order dated 14.10.2008 of Learned Commissioner of Income Tax (Appeals)-XI, Ahmedabad deleting the addition of Rs. 8,45,562/- made by the Assessing Officer on account of disallowance of interest expenditure under section 14A of the Income Tax Act, 1961 for the assessment year 2005-2006.

2. Briefly stated the facts are that the assessee is a Company engaged in the business of investment and securities. For the assessment year under appeal, it filed the return of income declaring loss of Rs. (-)11,46,120/- on 28.10.2005 The Assessing Officer framed the assessment under section 143(30 on 26.09.2007 at total income of Rs. 3,00,558/-. In this return of income, the Assessing Officer disallowed Rs. 8,45,562/- under the head “interest expenditure” under section 14A in respect of dividend income claimed exempt under section 10(33) of the Income Tax Act, 1961. In the assessment order, the Assessing Officer has mentioned that the assessee-company has only interest bearing funds for funding of investment in shares of Reliance Capital Ltd. and India Polyfibres Ltd. The disallowance of interest expenditure on similar ground was made in the assessment year 2002-2003. The Learned Commissioner of Income Tax (Appeals) as well as ITAT have confirmed the disallowance of interest.

3. On appeal in the impugned order, the Learned Commissioner of Income Tax (Appeals) deleted the addition observing that business of the assessee itself is making strategic investments which can earn interest or can earn capital gains, etc. due to appreciation of shares value then the said investment earns taxable income. Aggrieved with the order of Learned Commissioner of Income Tax (Appeals), the Revenue is in appeal before the Tribunal.

4. At the time of hearing before us, on behalf of Revenue Shri K. Madhusudan, ld. Sr. D.R appeared and relying on the judgment of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Deputy Commissioner of Income Tax reported in [2010] 328 ITR 81 (Bom.) contended that the view taken by the Learned Commissioner of Income Tax(Appeals) be cancelled.

5. On the other hand, Shri J.T Shah, ld. counsel appearing on behalf of the assessee vehemently supported the order of Learned Commissioner of Income Tax (Appeals). He pointed out that interest income is only Rs. 1,450/- which is claimed exempt under section 10(33) of the Income Tax Act and the disallowance cannot exceed the exempt income. On this ground alone, the view taken by the Learned Commissioner of Income Tax (Appeals) be upheld. Apart from this, the ld. counsel of the assessee pointed out that investments in shares of Reliance Capital Ltd. were made from assessee's own capital and investment in shares of India Polyfibres Ltd. was made by the assessee because it was a sick company and the purpose of making this investment was not earned the exempt income. It was further contended that no interest-bearing funds were invested in shares and thus there was no excess between the interest bearing funds and the amount invested in shares and, therefore, no disallowance under section 14A is called for.

6. After hearing both the sides, we have carefully gone through the orders of authorities below. Recently the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. Deputy Commissioner of Income Tax reported in [2010] 328 ITR 81 (Bom.) held 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 2008-2009. In this judgment, it is also held that prior to assessment year 2008-2009, when Rule 8D was not applicable, the Assessing Officer had to enforce the provisions of sub-section (1) of section 14A of the Income Tax Act, 1961. For that purpose, the Assessing Officer 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. For this purpose, the Assessing Officer 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. In that judgment, the Hon'ble Bombay High Court directed the Assessing Officer to adopt a reasonable basis for effecting the apportionment. Admittedly, when Learned Commissioner of Income Tax (Appeals) passed the impugned order, the judgment of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. was not available.

7. In view of the foregoing, we set aside the order of Learned Commissioner of Income Tax (Appeals) and restore the issue to the file of Assessing Officer with the direction that he will re-work out the disallowance under Rule 14A as per judgment of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra) or any other judgment which the assessee may rely in this regard. After considering all the facts and circumstances and all the available case laws, he will re-work out the disallowance under section 14A of I.T Act, 1961 after affording reasonable opportunity to the assessee.

8. In the result, for statistical purposes, the appeal filed by the Revenue is treated as allowed.

Deputy Commissioner ... v. M/S. Reliance Petro ...