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Issues Involved:
1. Confirmation of disallowance u/s 14A of the Income-tax Act, 1961. 2. Applicability of Rule 8D of the Income-tax Rules, 1962. Summary: Issue 1: Confirmation of Disallowance u/s 14A of the Income-tax Act, 1961 The assessee's appeal challenges the confirmation of disallowance of Rs. 4,85,604 by the CIT(A) u/s 14A of the Income-tax Act, 1961. The assessee argued that it had sufficient interest-free funds and had not invested interest-bearing funds in tax-free instruments. The AO observed that there was intermingling of funds and invoked Section 14A, disallowing Rs. 4,85,604 as it was related to earning tax-free income. The CIT(A) upheld the AO's decision, referencing the cases of Daga Capital and Cheminvest, and directed the AO to compute the disallowance in accordance with Rule 8D. Issue 2: Applicability of Rule 8D of the Income-tax Rules, 1962The assessee contended that Rule 8D, applied by the AO, is not applicable for the assessment year 2006-07 as it is effective from the assessment year 2008-09. The Tribunal referred to the judgment of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd., which clarified that Rule 8D is applicable prospectively from the assessment year 2008-09. The Tribunal noted that the AO had not established a nexus between the expenditure and the exempted income but had applied Rule 8D incorrectly. Consequently, the Tribunal set aside the order of the CIT(A) and remanded the issue back to the AO for fresh adjudication, directing the AO to follow the guidelines laid down by the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Conclusion:The appeal is allowed for statistical purposes, and the AO is instructed to re-evaluate the applicability of Section 14A and make a fresh decision in accordance with the relevant legal guidelines. The order was pronounced in the open Court on 15.9.2010.
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