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2007 (1) TMI 284 - AT - Income TaxExpenditure incurred in relation to income not includible in total income - Disallowance of interest being the expenditure related to earn dividend income and claimed exempt u/s 10(3) of the Act within the meaning of section 14A - HELD THAT:- Keeping in view of provisions of section 14A as also the aforesaid decisions of the co-ordinate Benches of this Tribunal, we hold that all expenses connected with the exempt income have to be disallowed under section 14A regardless of whether they are direct or indirect, fixed or variable and managerial or financial in accordance with law. In this connection, the provisions of sub-section (2)/(3) of section 14A inserted by the Finance Act, 2006 deserve to be noted. The procedure for computation of disallowance has now been provided in sub-sections (2) and (3) of section 14A of the IT Act. It is no longer open to the Assessing Officer to apply his discretion in computing the disallowance or make ad hoc disallowance u/s 14A. Substantive provisions are contained in sub-section (1) of section 14A prohibiting deduction in respect of expenditure incurred in relation to exempt income while procedural provisions regarding computation of the aforesaid disallowance are contained in sub-sections (2) and (3) thereof. Sub-sections (2) and (3) seek to achieve the underlying object of section 14A(1) that any expenditure incurred in relation to exempt income should not be allowed deduction. It is fairly well-settled by a catena of decisions that procedural provisions apply to all pending matters and that the rule against retrospectivity does not hit them. We hold that the provisions for quantification of disallowance as contained in sub-sections (2) and (3) of section 14A are procedural and therefore apply to all pending matters. It is no longer open to the Assessing Officer to make disallowance according to his own discretion or on ad hoc basis. He is statutorily required to compute the disallowance in the manner provided by sub-sections (2) and (3) of section 14A. All these aspects have neither been considered by the Assessing Officer nor the CIT(A) while making the impugned disallowance. Thus, we consider it appropriate to set aside the orders passed by the CIT(A) and the Assessing Officer in this behalf and restore the matter to the Assessing Officer for a fresh decision in the light of the provisions of section 14A including sub-sections (2) and (3) thereof. Ground No. 2 is treated as allowed for statistical purposes. In the result, this appeal of the Department is partly allowed.
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