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2016 (2) TMI 230 - ITAT CHENNAI

2016 (2) TMI 230 - ITAT CHENNAI - TMI - Disallowance u/s 14A - Held that:- Disallowance u/s.14A r.w. Rule 8D should not exceed the exempt income. The Mumbai Bench in its order sustained the disallowance on applicability of provisions of sec.14A r.w. Rule 8D. However, the alternative claim of the assessee was that disallowance if at all should be made, it should be restricted to exempt income earned and not beyond that. Accordingly, the AO is directed to look at this issue on this angle and decid .....

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ital base of a company is directly related to the capital expenditure incurred by the company and although incidentally that would certainly help in profit making, it still retains the character of capital expenditure since the expenditure is directly related to the expansion of the capital base of the company. Following the above judgment of the Supreme Court, we dismiss the ground raised by the assessee.- Decided against assessee

Retention money payable - Held that:- The provision f .....

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rual basis and not on actual payment basis. With these observations, we remit this issue to the file of the Assessing Officer for quantification.

Disallowance u/s 37(1) of the Act towards payment of trade licence fee - Held that:- This issue came up for consideration before the Tribunal in assessee’s own case for assessment year 2006-07 decided the issue in favour of the assessee by observing that the payment made to M/s Samruddhi Holdings is an allowable expenditure u/s 37 of the Act .....

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the case of CIT vs VTM Ltd, [2009 (9) TMI 35 - MADRAS HIGH COURT ], wherein held that the assessee which was a manufacturer of textile goods when set up a windmill was entitled to additional depreciation. - Decided in favour of assessee

Disallowance of purchase of auto cad - CIT(A) deleted the addition - Held that:- As seen from the order of the CIT(A), the Autocad software is an application software. It helps in speeding up the process and to conduct the part of a business in a more .....

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he facts of this case and the expenditure incurred on application software is only a revenue expenditure and it is to be allowed. Being so, we confirm the order of the CIT(A)- Decided in favour of assessee

Corporate finance, industry research, preparing corporate strategy - Treatment to expenditure as capital expenditure or revenue - Held that:- In the present case, the assessee incurred expenditure towards corporate finance, industry research, preparing corporate strategy and growth .....

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hat the Assessing Officer is justified in treating the expenditure as capital expenditure - Decided against assessee

Disallowance u/s 14A - Held that:- Assessing Officer is directed to disallow 2% of the dividend income as expenditure - I.T.A.Nos. 1824/Mds/2011, 875, 701, 702/Mds/2014, I.T.A.Nos. 592, 593, 594/Mds/2014 - Dated:- 6-1-2016 - SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI DUVVURU RL REDDY, JUDICIAL MEMBER For The Assessee : Shri S. Sridhar, Advocate For The Department .....

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the assessee are time barred by 6 days. The assessee filed condonation petitions stating that in Form No.36, at Column No.9, Date of communication of the order appealed against was mentioned as 3.1.2014 instead of 31.1.2014 and the appeals were actually filed within the stipulated time. Since it is a typographical mistake, the assessee prayed for admission of the appeals. After going through the records, we find that it is a typographical mistake committed by the assessee s counsel, and therefo .....

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s ₹ 11.23 crores. The assessee has huge investment portfolio to the extent of ₹ 80.74 crores. Not satisfied with the amount of expenditure disclosed u/s 14A and not satisfied with the explanation given during the course of assessment proceedings, the Assessing Officer proceeded to work out the disallowance u/s 14A r.w. Rule 8D and by relying on the decisions in the cases of CIT vs Reliance Utilities & Powers Ltd, 313 ITR 340 (Bom) and Godrej & Boyce Mfg Co. Ltd 328 ITR 81. Wh .....

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hat the items classified in (a), (b), (d) to (f) did not result in profits or gains which are under the purview of taxation and even if they do, the same remains exempt. Hence the corresponding investments are under the ambit of computation of disallowance u/s 14A. From the above, the Assessing Officer observed that a portion of the interest expenditure pertains to tax free investment. He found from the nature of transaction in the form of investments, being dormant in category (a) to (e), the a .....

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l investments other than in overseas subsidiary and that of the third limb only to the investments in mutual funds which exhibits volatility during the year. In case of mutual funds by the very nature of its operations, it is clear that a portion of managerial and administrative cost ought to have indirectly incurred by the assessee in its operations and maintenance. Following the judgment of Bombay High Court in the case of M/s Godrej & Boyce Ltd, the Assessing Officer disallowed ₹ 1, .....

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w as this decision is reversed by the Delhi High Court in the case of Cheminvest Ltd vs CIT in I.T.A.No. 749/2014 dated 2.9.2015 wherein held that no disallowance u/s 14A can be made in a year in which no exempt income has been earned or received by the assessee. Sec. 14A also does not apply to shares bought for strategic purposes. Being so, in our opinion, applicability of decision of Special Bench is not proper. Further, the ld. AR relied on the judgment of the Cochin Bench of the Tribunal in .....

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whether any expenditure was incurred for earning the exempt income or not. The Assessing Officer shall consider the above decisions and also the decision of Mumbai Bench in the case of M/s Daga Global Chemicals Pvt. Ltd vs ACIT in I.T.A.No.5592/Mum/2012, dated 1.1.2015 and the judgment of the Delhi High Court in the case of Joint Investments Pvt. Ltd vs CIT, 372 ITR 694 wherein it was observed as under: 6. Heard both the parties. On a perusal of the order of Mumbai Bench of the Tribunal in the c .....

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d by the assessee for earning exempt income and further the investment in shares was made in earlier years out of own funds and not out of borrowed funds, therefore, no disallowance u/s 14A r.w. Rule 8D is to be made. 2.1. On the other hand, Shri Akhilendra Yadav stronglydefended the conclusion arrived at by the ld. Commissioner of Income tax (Appeals) by contending that a well reasoned order has been passed by the ld. First Appellate Authority as apportionment of expenditure for earning the div .....

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vidend income of ₹ 1,82,262/- in its profit and loss account. The Assessing Officer while framing the assessment invoke section 14A r.w. Rule 8D by contending that assessee claimed various expenses which are related to exempt income in its profit & loss account and disallowed ₹ 14,58,412/-. On appeal, before the ld. Commissioner of Income tax (Appeals) broadly the stand taken in the assessment order was affirmed against which the assessee is in further appeal before this Tribunal .....

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record. It was also explained by the ld. counsel for the assessee that on identical fact in earlier years, no disallowance was made. In the present assessment year also, no borrowed funds were invested by the assessee for making investment in shares or for earning dividend income . At best, if any disallowance could be made that can be restricted to ₹ 1,485/- which were claimed as demat charges. Disallowance u/s 14A r.w. Rule 8D cannot exceed the exempt income. In view of this fact, we fi .....

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ncome earned and not beyond that. Accordingly, the AO is directed to look at this issue on this angle and decide it afresh in the light of the above decision of the Mumbai Bench of the Tribunal. 6. The next ground in assessee s appeal is with regard to disallowance of payment of ₹ 1,50,200/- made to Registrar of Companies. 7. We have heard both the parties and perused the material available on record. By placing reliance on the judgment of Supreme Court in the case of Punjab State Industri .....

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ismiss the ground raised by the assessee. 8. The next ground in assessee s appeal is with regard to retention money payable at ₹ 13,28,86,446/-. 9. The facts of the issue are that the Assessing Officer disallowed the retention money held back by the assessee and claimed as expenses which related to contract money payable to the contractors/sub-contractors/special agencies. The Assessing Officer has disallowed this retention money by stating that the liability is contingent in nature and un .....

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. The Assessing Officer has put this situation succinctly saying that what is applicable to goose should also apply to gander and disallowed the claim of the assessee. The CIT(A) confirmed the same. 10. The ld.AR of the assessee submitted that expenses are meticulously estimated which has to be incurred upto the stage of completion of the contract and this was based on consistent accounting policy and the same was claimed as expenditure. According to him, as per Accounting Standard (AS)-7 - acco .....

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ed to the profit and loss account, and (iii) additionally, anticipated costs till completion are also debited to the Profit & Loss Account, to determine the profit/loss on the particular work. It is claimed that the aforesaid method of accounting is consistently and regularly followed by the assessee and accepted by the Department. According to him, though the Assessing Officer accepted the method of accounting followed by the assessee, he did not allow the aforesaid expenses on the ground t .....

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for determining the profits and gains of the business, sec. 145 of the Act provided the method of accounting, as per which such profits or gains are computed in cash or mercantile system of accounting regularly employed by the assessee. In this case, the assessee followed completed contract method in terms of AS-7, issued by the ICAI and the Assessing Officer was satisfied with the correctness and completeness of the accounts of the assessee and also with regard to the method of accounting regul .....

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tified accounting standards. According to him, AS-1 provides that the fundamental accounting assumptions relating to going concern consistency and accrual must be followed in preparation of the financial statements. Further, it provides that the selection and application of accounting policy must be governed, inter alia, by prudence , which has been explained that the provision should be made for all known liabilities and losses even though the amount cannot be determined with certainty and repr .....

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ere yet to be incurred, the liability thereof could not be said to have accrued so as to be allowed under the mercantile system of accounting as it was not a liability in praesenti but the anticipated expenses which cannot be determined with certainty cannot be allowed. He relied on the orders of the lower authorities. 12. We have heard both the parties and perused the material on record. Generally, the expenditure which is actually incurred or is incurred in a relevant year would be allowed as .....

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be justified more so when the assessee had recognized gain as well on such project during the assessment year under consideration. This appears to be in consonance with the principle of matching cost and revenue as well. The reason given by the Department is that the retention money which is receivable was not recognized as income as such, retention payment also cannot be allowed as deduction while computing the income of the assessee. As rightly argued by the assessee, both these are governed .....

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bility of expenditure. Considering that the assessee- company is assessed at uniform rate of tax, the entire exercise of seeking to disturb the year of allowability of expenditure is, in any case, revenue neutral. We are reminded of the classic observation made by the Bombay High Court in the case of CIT vs Nagri Mills Co. Ltd, 33 ITR 681 which reads as under: We have often wondered why the income-tax authorities, in a matter such as this where the deduction is obviously a permissible deduction .....

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is in the assessment year 1953-54, should be a matter of no consequence to the Department; and one should have thought that the Department would not fritter away its energies in fighting matters of this kind. But, obviously, judging from the references that come up to us every now and then, the Department appears to delight in raising points of this character which do not affect the taxability of the assessee or the tax that the Department is likely to collect from him whether in one year or the .....

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bility had crystallized. It appears that there was no change in the rate of tax for the assessment year 1983-84 with which we are concerned. The question, therefore, is only with regard to the year of deduction and it is a pity that all of us have to expand so much time and energy only to determine the year of taxability of the amount." 12.2 Further, in our opinion, the provision for accrued liability which has to be discharged at a future date by the assessee is an allowable expenditure. I .....

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e of Bharat Earth Movers vs CIT, 245 ITR 428, the Supreme Court held that where the assessee has incurred expenditure which is more than the provision for warranty obligation made in the books of account, it cannot be said that the provision made by the assessee is not capable of being estimated with the reasonable certainty though actual quantification was not possible and therefore, the Tribunal was justified in allowing the deduction. The Delhi High Court in the case of CIT vs Ericssion Commu .....

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xpenditure. Same view was taken by the jurisdictional High Court in the case of Kone Elevator India Pvt. Ltd vs ACIT, 340 ITR 46. Further, the Supreme Court in the case of Calcutta Co. Ltd vs CIT, 37 ITR 1, held that where the assessee was following the mercantile system of accounting is entitled for deduction of the expenditure which is incidental to the business on accrual basis though it was not actually incurred during the relevant accounting year. The Kerala High Court in the case of CIT vs .....

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basis of actuarial valuation in respect of machines sold during the year could not be precluded from revising this provision after taking into consideration that warranty period of the goods sold under warranty was exceeding and provision already provided in a particular year is falling short of the expected claim that may be received. Such a provision is based on scientific study and actuarial basis and to be allowed as a business expenditure. Hence, in our opinion, the provision for payment m .....

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nd not on actual payment basis. With these observations, we remit this issue to the file of the Assessing Officer for quantification. This ground is partly allowed. 13. In the result, the appeal of the assessee I.T.A.No. 594/Mds/2014 is a partly allowed for statistical purposes. 14. Now coming to Revenue s appeal I.T.A.No.702/Mds/2014 for assessment year 2009-10, the first issue is with regard to restricting the disallowance u/s 14A r.w Rule 8D to only 3rd limb of Rule 8D(2). 15. Since we have r .....

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he assessee was paid for usage of name and logo that belonged to that firm. The Assessing Officer has observed that the transaction involving the payment of ₹ 2 crores would be covered by the provisions of Section 40A(2)(b) of the Act wherein the cost of obtaining the rights for usage of brand name and logo namely, 'CCC', Triple C' and 'UGA' by the appellant company from their associate concern M/s. Samruddhi Holdings was found to be unreasonably high. It was observed f .....

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formed in the market to earn a brand image for itself and not M/s. Samruddhi Holdings. The Assessing Officer further held that this transaction is a device to shift the profits of the company to the Directors indirectly, since the share of profits from the firm is exempt u/s 10(2A). The Assessing Officer has also put forth another reasoning to show that the amount paid is excessive and attracts the provisions of sec.40A(2)(b) stating that the assessee would not have paid so much amount as licenc .....

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A) has observed as under: 6.2 I have gone through the facts and circumstances of the case and submissions made by the Id. AR . From the facts of the case, it is noticed that M/s.Samruddhi Holdings, a partnership firm floated by four individuals on 31.5.1997 has created the appellant company on 11.7.1997. Even though the time gap is only 41 days and the Samruddhi Holdings has not earned any image which should earn licence fee, but the fact remains that the logo and the brand name of Triple C is t .....

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o scope to suspect the payments attracting provisions holding that the appellant could not have paid that much amount to an out sider, that too when the whole amount paid by the company was subjected to TDS. The company has subjected the amount to TDS and remitted the same as per the provisions of the Act. 6.2.1 From the point of view of Samruddhi Holdings, the Id. AR has submitted that the same have been subjected to taxation at Maximum Marginal Rate on the entire sums received from the company .....

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d maintaining its account on mercantile basis. It is noticed that all the amounts received were offered for taxation over a period of time upto and including A.Y 2012-13. Therefore, there is no revenue loss from the point of view of recipient also. The observations of the AO that the incomes of the partners in the firm are exempt u/s.10(2A) should not become an issue, since it is an exemption available to any partners of the firm. 6.2.2 In view of the above discussions that there is an obligatio .....

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CIT(A), the Revenue is in appeal before us. 18. We have heard both the parties and perused the material available on record. This issue came up for consideration before the Tribunal in assessee s own case for assessment year 2006-07 in I.T.A.No. 2146/Mds/2010 and the Tribunal vide order dated 24.5.2011 decided the issue in favour of the assessee by observing that the payment made to M/s Samruddhi Holdings is an allowable expenditure u/s 37 of the Act and thereby annulled the revisional order of .....

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#8377; 56,00,907/- after adjusting such additional depreciation claimed for A.Ys 07-08 and 08-09 which will have a cascading effect on the written down value of the present assessment year (75,19,652 - 19,18,675) . The Assessing Officer has observed that the company is covered under para 3(ii)(c) of Part 11 to Schedule VI to Companies Act, 1956 and recognized as a "Service Industry" and not as an "Industrial Undertaking". The asessee company is a large scale construction cont .....

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tivity. Further, it was held that the installation of the plants was admittedly in the places of contractees and accordingly it was further held that the plants under consideration were not installed in the sites owned by the assessee. Therefore, the assessee is not eligible for additional depreciation u/s.32(iia) amounting to ₹ 56,00,907/- and hence disallowed. The Assessing Officer has placed his reliance on the decision of the Supreme Court in the following cases: N.G.Budharaja & Co .....

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eported in (146 Taxman 31). On appeal, the CIT(A) allowed the claim of the assessee against which the Revenue is in appeal. 21. We have heard both the parties and perused the material on record. The assessee is engaged in the business of ready-mix concrete and shown the income from ready-mix concrete sales separately and claimed that the assessee is engaged in the business of manufacture and production of new article and for that purpose it has acquired new machinery and plant. Accordingly, addi .....

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ot sustainable in view of the judgment of the jurisdictional High Court in the case of CIT vs VTM Ltd, 319 ITR 336, wherein held that the assessee which was a manufacturer of textile goods when set up a windmill was entitled to additional depreciation. Same view was taken by the co-ordinate Bench in the case of Sheela Clinic in I.T.A.No. 481/Mds/2011 dated 30.5.2011, by observing that generation of electricity is an independent activity though originally the assessee is engaged in the business o .....

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sessing Officer was of the opinion that purchase cost of the software is a capital expenditure and the benefit is available for more than one year. However, the CIT(A), placing reliance on the judgment of the jurisdictional High Court in the cae of CIT vs Southern Roadways Ltd, 304 ITR 84, decided the issue in favour of the assessee. Against this, the Revenue is in appeal before us. 24. We have considered the rival submissions on either side and also perused the material on record. As seen from .....

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nion, the judgment of the jurisdictional High Court in the case of Southern Roadways Ltd. (supra) is squarely applicable to the facts of this case and the expenditure incurred on application software is only a revenue expenditure and it is to be allowed. Being so, we confirm the order of the CIT(A). This ground of Revenue is dismissed. 25. In the result, the Revenue s appeal I.T.A.No.702/Mds/2014 for assessment year 2009-10 is dismissed. I.T.A.No. 1824/Mds/2011 [Revenue s appeal] -A.Y 2006-07 26 .....

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id to M/s Spark Capital Advisors (India) Pvt. Ltd for rendering professional services to the assessee-company in the field of corporate finance, connected advisory services, industry research, and preparing corporate strategy and growth for bringing out a business plan. The Assessing Officer also observed that another amount of ₹ 25 lakhs was paid to M/s Unit Trust of India venture funds Management Company Pvt. Ltd for raising of share capital. He applied the ratio of Supreme Court in the .....

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e of the profits of the assessee-company for a particular assessment year and the benefit of the expenditure incurred by the assessee is over a period of three years which is to be apportioned. He directed accordingly against which the Revenue is in appeal before us. 28. We have heard both the parties and perused the material available on record. In our opinion, the reliance placed by the CIT(A) in the case of Madras Industrial Investment Corporation Ltd (supra) is misplaced. In that case the ex .....

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ring benefit to the assessee and therefore, the expenditure is not for a particular assessment year as such it cannot be neither a revenue expenditure or deferred revenue expenditure. The benefits of the expenditure are enduring in nature. In our opinion, the judgment of Supreme Court in the case of Brooke Bond India Ltd (supra) is directly applicable to the facts of the case. Accordingly, we have no hesitation to hold that the Assessing Officer is justified in treating the expenditure as capita .....

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Act. 31. The assessee invested in the mutual funds and received dividend income of ₹ 23,33,013/- which is tax free. The Assessing Officer invoked the provisions of sec. 14A and disallowed 5% of this income as expenditure towards earning the exempted income. On appeal, the CIT(A) confirmed the disallowance made by the Assessing Officer against which the assessee is in appeal. 32. We have heard both the parties and perused the material available on record. In our opinion, the judgment of Mad .....

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regard to disallowance of ₹ 1,50,200/- u/s 35D(2)(c)(iii) of the Act. This ground was not pressed at the time of hearing hence, the same is dismissed as not pressed. 34. The next issue is with regard to disallowance of ₹ 6,48,33,901/- being retention money payable while computing the income of the assessee. 35. We have discussed similar issue elaborately in assessee s appeal I.T.A.No.594/Mds/2014 for assessment year 2009-10. In view of our finding in the former part of this order an .....

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- u/s 37(1) of the Act towards payment of trade licence fee. 38. Similar issue came up for consideration in Revenue s appeal I.T.A.No.702/Mds/2011 for assessment year 2009-10 in para 18 and by following the order of the Tribunal in assessee s own case in I.T.A.No. 2146/Mds/2010 dated 24.5.2011, we have decided the issue in favour of the assessee and dismissed the ground raised by the Revenue in the former part of this order. Accordingly, this ground is dismissed. 39. The next issue is with regar .....

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I.T.A.No.701/Mds/ 2014 [Revenue s appeal] - A.Y 2008-09 42. In assessee s appeal I.T.A.No.593/Mds/2014 for assessment year 2008-09, the first issue is with regard to disallowance of expenses u/s 14A of the Act. 43. We have decided similar issue elaborately in assessee s appeal in I.T.A.No.592/Mds/2014 for assessment year 2007-08. Accordingly, the Assessing Officer is directed to disallow 2% of the dividend income as expenditure. This ground is partly allowed. 44. The next issue is with regard to .....

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sessing Officer to quantify the disallowance as directed in assessment year 2009-10. 48. In the result, the appeal of the assessee in I.T.A.No.875/Mds/2014 is partly allowed for statistical purposes. 49. Now coming to Revenue s appeal I.T.A.No.701/Mds/2014 for assessment year 2008-09, the first issue is with regard to deleting the disallowance of ₹ 2 crore towards payment of trade licence fee u/s 37(1) of the Act. 50. We have decided similar issue in Revenue s appeal I.T.A.No. 702/Mds/2014 .....

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