ITAT: No Disallowance u/s 14A of IT Act By Retrospective Invocation of Provisions of Rule 8D

ITAT: No Disallowance u/s 14A of IT Act By Retrospective Invocation of Provisions of Rule 8D

The Income Tax Appellate Tribunal (ITAT), New Delhi Bench, while providing relief to Hero Motocorp ruled that no disallowance under Section 14A of the Income Tax Act, 1961 (IT Act) can be made by invoking provisions of Rule 8D retrospectively.

The ITAT coram comprising of O.P. Kant (Accountant Member) and Sudhanshu Shrivastava (Judicial Member) held that the Assessing Officer (AO) has made disallowance under Section 14A by invoking provisions of Rule 8D of the Income Tax Rules, 1962 (IT Rules). It further ruled that as Rule 8D is not retrospective, the same is not applicable in the present assessment year.

The factual background of the case is that the assessee raised the issue in respect of the disallowance under Section 14A of the IT Act read with Rule 8D of the IT Rules amounting to Rs 3,26,03,500.

It was urged that in the return of income, the assessee had shown to have earned exempt dividend income of Rs 14,41,51,497 from investments held in shares and mutual funds.

The assessee said that the Commissioner of Income Tax (Appeals) [CIT(A)] confirmed the disallowance made by the AO under Section 14A of the IT Act to the extent of Rs 3,26,03,500 being 0.5% of the total investments on the assumption that certain administrative expenses must have been incurred to earn exempt income.

It was pointed out that further, the CIT (A) remanded the disallowance to the extent of Rs 78,55,100/- on account of interest expenditure to the AO who deleted the disallowance made under Section 14A of the Act to the extent of Rs 78,55,100/-.

The assessee submitted that the disallowance of Rs 3,26,03,500/- which was sustained by the Commissioner of Income Tax (Appeals) [CIT(A)] deserves to be deleted at the threshold itself since disallowance under Section 14A of the Act cannot be made by applying the provisions of Rule 8D since the provisions of said Rule are prospective in nature and are, thus, applicable from the assessment year 2008-09 onwards and were not applicable during the relevant assessment year 2005-06.

The Tribunal restored the matter back to the file of the AO to compute disallowance on the same basis in the year under consideration after taking requisite details from the assessee and giving the opportunity of hearing by following the principle of natural justice.

It held that the AO has made disallowance under Section 14A by invoking provisions of Rule 8D of the IT Rules. Since Rule 8D is not retrospective, the same is not applicable in the present assessment year, and accordingly, we hold that the assessing order erred in invoking the provisions of Rule 8D of the Rules.