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2011 (5) TMI 489 - AT - Income TaxExpenses in relation to income not forming part of total income - In view of Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT (2010 (8) TMI 77 - BOMBAY HIGH COURT) and it has been held that Rule 8D is prospective in nature, which is applicable from A.Y. 2008-09. The assessment year involved in the case of the assessee before us being 2004-05, Rule 8D, in view of above decision is not applicable to the case of the assessee.
Issues Involved:
1. Deletion of addition of Rs. 2,66,35,000/- for license fees paid to RPG Enterprises Ltd. 2. Deletion of addition of Rs. 12,27,000/- for retainership fees paid to Sreebala (P) Ltd. 3. Deletion of addition of Rs. 13,22,883/- for guest house expenses. 4. Deletion of addition of Rs. 1,56,550/- for entrance fees paid to clubs. 5. Enhancement of disallowance on account of expenses related to earning exempt income by resorting to Rule 8D. Issue-wise Detailed Analysis: 1. Deletion of Addition of Rs. 2,66,35,000/- for License Fees Paid to RPG Enterprises Ltd.: The Revenue appealed against the deletion of the addition of Rs. 2,66,35,000/- made by the Assessing Officer (A.O.) on account of license fees paid to RPG Enterprises Ltd. The A.O. disallowed the payment due to the absence of evidence of services rendered. However, the Commissioner of Income Tax (Appeals) [C.I.T.(A)] followed the Tribunal's previous orders for earlier assessment years (1997-98 to 2003-04) and allowed the payment as a business expenditure. The Tribunal upheld the C.I.T.(A)'s order, noting that the issue was covered by the Tribunal's earlier decisions in favor of the assessee. 2. Deletion of Addition of Rs. 12,27,000/- for Retainership Fees Paid to Sreebala (P) Ltd.: The Revenue contested the deletion of the addition of Rs. 12,27,000/- made by the A.O. for retainership fees paid to Sreebala (P) Ltd. The A.O. disallowed the expenditure due to lack of evidence of services rendered. The C.I.T.(A) deleted the addition, referencing the Tribunal's orders for earlier assessment years (1996-97 to 1999-2000 & 2003-04), which accepted the assessee's claim. The Tribunal upheld the C.I.T.(A)'s order, noting no change in facts and circumstances from the earlier years. 3. Deletion of Addition of Rs. 13,22,883/- for Guest House Expenses: The A.O. disallowed 25% of the guest house expenses amounting to Rs. 13,22,883/-, questioning the business purpose of the entire expenditure. The C.I.T.(A) deleted the disallowance, following the Tribunal's order for A.Y. 2000-01 and the C.I.T.(A)'s order for A.Y. 2003-04 in the assessee's own case. The Tribunal upheld the C.I.T.(A)'s order, noting that the department did not appeal on this issue for A.Y. 2003-04 and followed the Tribunal's earlier decision. 4. Deletion of Addition of Rs. 1,56,550/- for Entrance Fees Paid to Clubs: The A.O. disallowed the entrance fees paid to clubs, treating it as capital expenditure. The C.I.T.(A) allowed the expenditure as a business expense, referencing the Gujarat High Court's decision in Gujarat State Export Corpn. Ltd. v. CIT and the Tribunal's decision in Off-Shore India Ltd. The Tribunal upheld the C.I.T.(A)'s order, noting that similar expenditures were allowed in earlier years and the department did not appeal against those decisions. 5. Enhancement of Disallowance on Account of Expenses Related to Earning Exempt Income by Resorting to Rule 8D: The A.O. disallowed Rs. 42,130/- (1% of the exempt income) as expenses related to earning exempt income. The C.I.T.(A) enhanced the disallowance to Rs. 10,28,900/- by applying Rule 8D. The Tribunal, referencing the Bombay High Court's decision in Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT, held that Rule 8D is prospective from A.Y. 2008-09 and not applicable for A.Y. 2004-05. The Judicial Member proposed an ad hoc disallowance of Rs. 2,00,000/-, while the Accountant Member upheld the A.O.'s disallowance of 1% of the exempt income. The Third Member concurred with the Accountant Member, resulting in the disallowance being set at 1% of the exempt income (Rs. 42,130/-). Conclusion: The Tribunal dismissed the Revenue's appeal and partly allowed the assessee's cross-objection, modifying the disallowance related to exempt income to 1% of the total exempt income, aligning with the A.O.'s original assessment.
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