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2011 (10) TMI 743

..... Sudhir, JM The assessee has questioned first appellate order on following grounds : "1. On the facts of the case and in law, the Commissioner of Income Tax (Appeals) - I, Pune erred in confirming disallowance of ₹ 33,48,120/- as expenditure incurred by the company in relation to exempt dividend u/s. 14A of the Income Tax Act, 1961 by applying Rule 8 D of the Income Tax Rules while assessing total income as per regular provisions and book profit u/s. 115JB of the Income Tax Act, 1961. 2. The Commissioner of Income Tax (Appeals) - I, Pune erred in not appreciating that there was no dominant and immediate connection between the expenditure incurred and the exempt dividend received by the company and that there cannot be any adhoc disallowance out of general expenses. He erred in not following the ratio of the following decisions : (a) ITO v M/s. Daga Capital Management Pvt. Ltd. (SB-Mum ITAT) (b) CIT v General Insurance Corporation of India (2002) 254 ITR 203 (Bom.) (c) CIT v BSES Ltd. (2008) 113 TTJ 227 (Mum.) (d) Space Financial Services v ACIT (2008) 115 TTJ 165 (Del.) 3. Without prejudice to above, the Commissioner of Income Tax (Appeals) - I, Pune erred in not apprecia .....

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..... , is required to be disallowed in view of the provisions of Section 14A. The A.O also did not accept the contention of the assessee that Rule 8D of the I.T. Rules is applicable from the A.Y. 2008-09 onwards in view of the decision of Special Bench of the Tribunal in the case of I.T.O. Vs. Daga Capital Investment Management Pvt. Ltd. (2009) (Mum) (S.B). According to the A.O, even if the contention of the assessee that no direct expenditure was incurred for earning the dividend income is accepted, disallowance is still warranted in view of procedures prescribed in rule 8D(2)(iii) as per which, such disallowances shall be aggregate of (i) expenditure directly related to such income, (ii) interest expenditure relatable to such income and (iii) an amount equal to 0.5% of the average value of such investments. Accordingly, a disallowance of 0.5% amounting to ₹ 33,48,120/- was made on average value of investment of ₹ 66,96,24,011/-. 4. Before the Ld CIT(A), the assessee again contended that rule 8D is inserted w.e.f. 24.3.2008 as a logical corollary to the introduction of Sub-sections (2) & (3) in Section 14A of the Income Tax Act 1961. It was contended that the amendment .....

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..... nts of para nos. 5.2 and 5.5 of the first appellate order. 7. Having gone through the decisions relied upon by the Ld. A.R., we find that the Hon'ble Bombay High Court in its recent decision dated 11th August 2011 in the case of CIT Vs. K. Raheja Corporation Pvt. Ltd. (Supra) has been pleased to hold that in the absence of any material or basis to hold that the interest expenditure directly or indirectly was attributable for earning the dividend income, the decision of the Tribunal in deleting the disallowance of interest made u/s. 14A of the Act cannot be faulted. In that case, the A.Y. involved was 2000-01. The assessee had earned the dividend income of ₹ 13,35,770/- from the investments of more than ₹ 20 Crores made in equity shares, mutual funds etc., from A.Y. 1994-95 onwards. In the A.Y. 2000-01, the assessee had claimed deduction of interest amounting to ₹ 8.70 Crores on borrowed funds utilized for the business. Out of the said amount of interest, the A.O disallowed interest amounting to ₹ 2.79 Crores on the basis that the said amount was relatable to earning dividend income which are exempt u/s. 10(33) of the Act (as it then stood) and hence disa .....

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..... orm part of the total income under the Act. The A.O must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record. The proceedings for A.Y. 2002-03 (involved therein) was thus remanded to the A.O to determine as to whether the assessee had incurred any expenditure (direct or indirect) in relation to dividend income/income from mutual fund which does not form part of the total income as contemplated u/s. 14A. It was directed that the A.O can adopt a reasonable basis for effecting the apportionment. While making that determination, the A.O should provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case, held the Hon'ble High Court. 9. In support of the alternative contention raised in Ground No. 3 that Rule 8D was introduced as a consequence of and to give effect to Sub-section (2) & (3) of Section 14A introduced w.e.f. 1.4.2009 i.e. A.Y. 2007-08 and consequently Rule 8D could not be applied in the appellant company's case for A .....

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