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2013 (8) TMI 825 - AT - Income TaxDisallowance u/s 14A - CIT deleted disallowance - Held that - assessee made an investment in shares, which yielded dividend income and interest income - It is an admitted fact that assessee offered itself average cost of investment - it is the case where the assessee disallows the cost of investment applying the rate of 0.5% of the average cost of the investment in accordance with the Rule 8D(2)(iii) of the Income tax Rules 1962 but not out of the administrative expenditure as per the provisions of clause (i) and (ii) of the said Rule 8D(2) - where the accounts for exempt and taxable income are maintained commonly, it cannot be denied that some administrative expenditure was definitely attributable towards the earning of the dividend income - Assessee is engaged in the banking activity and it is an admitted fact the current balance is the source of investment in shares and assessee has not demonstrated how the interest bearing funds are lying in the current accounts of the assessee, a banking company. Normally, every amount lying in the current accounts is interest bearing ones, therefore, the provisions of clause-(iii) of Rule-8D(2) is rightly applicable - Once rule become applicable and the same has to be applied fully - Decided in favour of Revenue.
Issues Involved:
1. Disallowance under Section 14A read with Rule 8D of the Income Tax Act. 2. Applicability of Rule 8D for Assessment Year 2008-09. 3. Satisfaction of the Assessing Officer (AO) regarding the correctness of the assessee's claim. 4. Apportionment of administrative expenses related to earning exempt income. Detailed Analysis: 1. Disallowance under Section 14A read with Rule 8D of the Income Tax Act: The primary issue revolves around the disallowance made by the AO under Section 14A read with Rule 8D. The AO disallowed Rs. 1,93,74,441/- as expenses related to earning exempt income, while the assessee had offered Rs. 20,25,559/- based on 0.5% of the average value of investment. The AO's computation included administrative expenses, which the assessee contested, arguing that investments were made from internal accruals and not borrowed funds. 2. Applicability of Rule 8D for Assessment Year 2008-09: The AO applied Rule 8D for the assessment year 2008-09, asserting its mandatory nature as per the Bombay High Court's decision in Godrej & Boyce Mfg. Co. Ltd. vs. DCIT. The assessee contended that Rule 8D's application should not be automatic and should only be invoked if the AO is dissatisfied with the assessee's method of determining disallowable expenditure. 3. Satisfaction of the Assessing Officer (AO) regarding the correctness of the assessee's claim: The AO expressed dissatisfaction with the assessee's method of determining disallowable expenditure, citing that the assessee did not maintain separate accounts for exempt income. The AO relied on various judicial precedents, including the Punjab & Haryana High Court's decision in Haryana Land Reclamation & Development Corporation vs. CIT, which emphasized the necessity for the AO's satisfaction regarding the correctness of the assessee's claim. 4. Apportionment of administrative expenses related to earning exempt income: The AO argued that some administrative expenses were definitely attributable to earning exempt income, referencing the ITAT's decision in M/s. Gherzi Eastern Limited and the Supreme Court's judgment in Distributors (Baroda) Pvt. Ltd. The CIT (A) accepted the assessee's offer of 1% of the gross dividend income as disallowable expenditure, but the Tribunal found this approach improper, emphasizing that the entire Rule 8D should be applied once invoked. Tribunal's Decision: The Tribunal reversed the CIT (A)'s decision, upholding the AO's application of Rule 8D in full. It emphasized that partial application of Rule 8D is not sustainable and that the AO's dissatisfaction with the assessee's method was justified. Consequently, the Tribunal allowed the Revenue's appeal, confirming the disallowance of Rs. 1,93,74,441/-. Result: - The Revenue's appeal (ITA No. 3655/M/2012) was allowed. - The assessee's cross-objection (C.O. No. 115/M/2013) was dismissed. Order Pronouncement: The order was pronounced in the open court on 3.7.2013.
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