[2020] 116 taxmann.

com 325 (Bombay)[20-08-2019]

[2020] 116 taxmann.com 325 (Bombay)

HIGH COURT OF BOMBAY
Principal Commissioner of Income-tax-7
v.
Mazagaon Dock Ltd.*
M.S. SANKLECHA AND NITIN JAMDAR, JJ.
IT APPEAL NO. 737 OF 2017
AUGUST 20, 2019

I. Section 14A of the Income-tax Act, 1961, read with Rule 8D of the Income-tax Rules, 1962 -
Expenditure incurred in relation to income not includible in total income (applicability of
Rule 8D) - Assessment year 2004-05 - During relevant year assessee received dividend
income from a company namely 'GSL' - Assessing Officer invoked section 14A, read with
Rule 8D of 1962 Rules and disallowed expenditure claimed by assessee on earning said
divided income - Commissioner (Appeals) held that disallowance of 5 per cent of dividend
income on test of reasonable basis would be an appropriate disallowance under section
14A - Tribunal opined that rule 8D of 1962 Rules would not be applicable prior to
assessment year 2008-09 - Thus, Tribunal upheld reasonable basis for disallowance of
expenditure to earn exempted income at 5 per cent of investment as held by Commissioner
(Appeals) - Whether, on facts, no substantial question of law arose from Tribunal's order -
Held, yes [Para 3] [In favour of assessee]

II. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of (Prior
period expenses) - Assessment year 2004-05 - Assessee had prior period income and prior
period expenses - Assessee set off two and offered only net amount of expenses for
disallowance - However, both Assessing Officer and Commissioner (Appeals) did not accept
that method of setting off of prior period income with prior period expenses as claimed by
assessee - Tribunal, however, held that assessee was justified in computing disallowance
after setting off prior period income against prior period expenses - Whether, on facts, view
taken by Tribunal was reasonable particularly when revenue authorities for subsequent
period accepted said practice of set off, which resulted in income and subjected it to tax -
Held, yes - Whether, therefore, no substantial question of law arose from Tribunal's order -
Held, yes [Para 4] [In favour of assessee]

CASE REVIEW

Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 194 Taxman 203/328 ITR 81 (Bom.) (para 3) followed.
CASES REFERRED TO

Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 194 Taxman 203/328 ITR 81 (Bom.) (para 3).

Suresh Kumar, for the Appellant.

ORDER

1 This Appeal under Section 260-A of the Income Tax Act, 1961 (the Act), challenges the order
dated 1st February, 2016 passed by the Income Tax Appellate Tribunal (the Tribunal). The
impugned order dated 1st February, 2016 is in respect of Assessment Year 2004-05.

2 Revenue urges the following questions of law, for our consideration:

"(a) Whether on the facts and in the circumstances of the case and in law, the Tribunal was
justified in directing the AO to recompute the disallowance u/s. 14A on a reasonable
basis relying on the judgment of this Court in the case of Godrej & Boyce Manufacturing
Company Ltd., v. DCIT (2010), 328 ITR 81?

(b) Whether on the facts and in the circumstances of the case and in law, the Tribunal is
correct in allowing the netting off the prior period income against the prior period
expenditure without ascertaining the nexus between income and expenditure?"
3 Re. Question (a):-

(i) The Respondent had made investment in a Company called M/s. Goa Shipyard Ltd.,
(GSL). The Respondent received dividend income from M/s. GSL. The Assessing Officer
invoked Section 14A of the Act read with Rule 8D of the Rules and disallowed the
expenditure claimed by the Respondent on earning dividend income. In appeal, the
Commissioner of Income Tax (Appeals) allowed the Respondent's appeal and held that
disallowance of 5% of the dividend income on the test of reasonable basis would be an
appropriate disallowance under Section 14A of the Act;

(ii) Being aggrieved, the Revenue carried the issue in appeal to the Tribunal. The Tribunal
noted the fact that Rule 8D of the Rules would not be applicable prior to the
Assessment Year 2008-09, as held by this Court in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT
[2010] 194 Taxman 203/328 ITR 81 (Bom.). In the above view, the Tribunal upheld the
reasonable basis for disallowance of expenditure to earn exempted income at 5% of the
investment as held by the Commissioner of Income Tax (Appeals). Thus, dismissed the
Revenue's appeal ro the Assessment Year 2004-05.

(iii) We note that the decision of the Tribunal is in accord with the view of this Court, as
approved by the Hon'ble Supreme Court. Therefore, the question as framed does not
give rise to any substantial question of law. Thus, not entertained.
4 Re. Question (b):-

(i) The Respondent had prior period income and prior period expenses. The Respondent
had set off the two and offered only the net amount of expenses for disallowance.
 However, both the Assessing Officer and the Commissioner of Income Tax (Appeals) did
not accept that the method setting off of prior period income with prior period
expenses as claimed by the Respondent while disallowing the expenditure.

(ii) However, in further appeal, the Tribunal held that the Respondent was justified in
computing the disallowance after setting off prior period income against the prior
period expenses. In fact, the Tribunal noted the fact that for the Assessment Year 2007-
08, the Revenue had accepted the net income offered after set off of prior period
income with prior period expenses. This is in that year, where expenses of prior period
were less than prior period income.

(iii) We find that the view taken by the Tribunal on the facts cannot be found fault with. This,
particularly, as the Revenue for a subsequent period accepted this practice of set off,
which resulted in income and subjected it to tax. The basis/ principles for allowing the
set off of prior period income with prior period expenses, has to be consistent for
years. Therefore, the view taken by the Tribunal cannot be found faulted with.

(iv) In view of the above, the question as framed does not give rise to any substantial
question of law. Thus, not entertained.
5 Accordingly, Appeal dismissed.

■■

*In favour of assessee.