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2010 (12) TMI 822 - AT - Income TaxDisallowance - Expenditure u/S 14A - Expenditure on earning of dividend income which was exempt from tax - As per the Hon ble High Court of Mumbai recently in case of Godrej and Boyce Manufacturing Co. Ltd. (2010 -TMI - 78448 - BOMBAY HIGH COURT) have held that Rule 8D would apply only from assessment year 2008-09 - Hon ble High Court also held that in respect of the earlier years disallowance of expenditure whether direct or indirect has to be computed on a reasonable basis after allowing opportunity of hearing to the assessee - The assessment years involved in the present appeals are A.Y. 2005-06 and 2006-07 - Therefore rule 8D cannot be applied - Therefore set aside the order of CIT(A) and restore the matter to the file of AO for passing a fresh order after necessary examination and after allowing opportunity of hearing to the assessee. Transaction charges - The issue raised is therefore covered in case of Kotak Securities Ltd. vs Addl. CIT (2011 -TMI - 206641 - Bombay High Court) and respectfully following the same we hold that the transaction charges paid were not for any technical services and therefore provisions of section 194J were not applicable and no tax was required to be deducted and no disallowance under section 40(a)(ia) is called for - Decided in favour of assessee. Depository charges paid to the Stock Holding Corporation of India - Held that - the transaction charges are not the fees for technical services and therefore on this ground also the depository charges cannot be considered as payment for technical services - The provisions of section 194J will not therefore be applicable in respect of such payments and no disallowances can be made u/s 40(a)(ia) for failure to deduct tax at source - Decided in favour of assessee.
Issues: Disallowance of expenditure under section 14A of the Income-tax Act, Disallowance of transaction charges, Disallowance of depository charges
Issue 1: Disallowance of expenditure under section 14A The assessee's appeals were against orders of CIT(A) for assessment years 2005-06 and 2006-07 related to disallowance of expenditure under section 14A of the Income-tax Act. The AO disallowed sums for both years based on estimated expenditure incurred for earning dividend income. CIT(A) directed re-computation as per Rule 8D, which the assessee appealed. The tribunal noted the retrospective application of Rule 8D and cited the judgment of the Hon'ble High Court of Mumbai in a similar case, setting aside CIT(A)'s order for fresh examination in light of the judgment. Issue 2: Disallowance of transaction charges For the assessment year 2005-06, the dispute involved disallowance of transaction charges under section 40(a)(ia) of the Income-tax Act. The AO disallowed the charges, considering them as fees for technical services, leading to an appeal by the assessee. The tribunal considered whether the charges were for technical services or for use of facilities provided by the stock exchange. Relying on a previous tribunal decision, it held that the transaction charges were not for technical services, thus allowing the assessee's claim. Issue 3: Disallowance of depository charges The third dispute, also for the assessment year 2005-06, concerned disallowance of depository charges paid by the assessee. The AO disallowed the charges without specific reasons, similar to the treatment of transaction charges. The CIT(A) upheld the disallowance, considering the charges akin to transactional charges. The tribunal, however, analyzed the nature of depository services and concluded that the charges were not for technical services but for maintaining demat accounts and conducting share transactions. Following the decision on transaction charges, the tribunal allowed the assessee's claim regarding depository charges as well. In conclusion, the tribunal partly allowed both appeals of the assessee, setting aside the disallowances of transaction charges and depository charges, and ordering a fresh examination of the disallowance of expenditure under section 14A in light of the judgment regarding Rule 8D.
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