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2010 (10) TMI 1068 - HC - Income TaxDisallowance u/s 14A - expenditure incurred for earning the tax free income - In present case, The assessees are all Scheduled Banks engaged in the banking business and in the course of banking business they are also engaged in the business of investment in bonds, securities and in shares which earn the assessees interest from such securities and bonds and also dividend on investments in shares of companies and from units of U.T.I. etc., which are tax free. Section 14A was introduced to the Income-tax Act by Finance Act, 2001 with retrospective effect from 1-4-1962. This provision provide for disallowance of expenditure incurred by the assessee in relation to income which does not form part of the total income. HELD THAT:- Since we find that the rational adopted by the AO to estimate the expenditure for the purpose of disallowance u/s 14A is not tenable, we feel the matter should be restored to the AO for making disallowance u/s 14A by reasonably estimating as nearly as possible the expenditure incurred for earning the tax free income. This should be done after giving opportunity to the assessee-Banks to suggest their own formula with reference to accounts for the purpose of arriving at the actual amount or near actual amount. The disallowance on estimated basis has to be done as above until rule 8D was framed and thereafter it is for the AO to make disallowance by following sub-section (2) of section 14A and rule 8D of the Income-tax Rules. Regard to disallowance of administrative expenditure - HELD THAT:- considering the fact that there is no precise formula for proportionate disallowance, no disallowance is called for, for proportionate administrative cost attributable to earning of tax free income until rule 8D came into force. We, therefore, dispose of the appeals by setting aside the orders of the Tribunal and that of the first appellate authority on this issue and remand all the assessments back to the AO for reworking disallowance u/s 14A in the case of each assessee for each assessment year. The proportionate disallowance u/s 14A should be limited to only interest liability and not overheads or administrative expenditure; which should be considered for disallowance under rule 8D from 2007-08 onwards.
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