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2013 (8) TMI 828 - AT - Income TaxDisallowance u/s 14A - Expenditure towards the earning of dividend income - CIT confirmed addition - Held that - some expenditure out of the administrative expenses is always incurred and, therefore, it is a matter of method of quantifying such attributable expenditure to the exempt income. It is a judicially finalized position in law that the provisions of Rule-8D read with section 14A cannot be invoked for the assessment years prior to AY 2008-2009 - Decided in favour of assessee. Quantification of such expenditure - Held that - restricting the disallowance to 2% of the dividend income for this also must bring the peace between the parties for this AY 2005-2006 - Assessee is 100% Export Oriented Unit, invoking the provisions of section 14A of the Act has no tax implication. If any expenditure is disallowed under the said provisions, equalant amount needs to be reduced from the expenditure claimed in the P & L Account - Decided partly in favour of assessee. Deduction u/s 10A - Reduction of insurance and communication expenses from Export Turnover - Held that - export turnover means consideration in respect of the export received by the assessee in convertible foreign exchange. But it does not include freight telecommunication charges or insurance attributable to the delivery of the stocks outside India or expenses incurred in foreign exchange in providing technical services outside India. Thus, the expenses incurred in local currency in India on account of telecommunications and insurance are outside the scope of the above said definition given in clause-(iv). It is not the case of the assessee that such expenses on account of telecommunication insurance are incurred outside India. In fact, it is an admitted position that the said expenditure was incurred in local currency in connection with different location within India - Decided in favour of assessee.
Issues Involved:
1. Applicability of Section 14A read with Rule 8D of the Income Tax Rules. 2. Computation of deduction under Section 10A of the Income Tax Act concerning insurance and telecommunication expenses. Issue-Wise Detailed Analysis: 1. Applicability of Section 14A read with Rule 8D of the Income Tax Rules: ITA No. 4538/M/2010 (AY 2005-2006) - Assessee's Appeal: The assessee challenged the disallowance of Rs. 2,12,899/- under Section 14A for earning dividend income by applying Rule 8D retrospectively. The Tribunal noted that Rule 8D cannot be applied retrospectively for AY 2005-2006 based on the Bombay High Court's decision in Godrej & Boyce Mfg. Co. Ltd. It was observed that some expenditure is always incurred for earning exempt income, and a reasonable method for quantification is necessary. The Tribunal directed the AO to restrict the disallowance to 2% of the dividend income, aligning with the assessee's case for AY 2007-2008. ITA No. 5839/M/2010 (AY 2006-2007) - Assessee's Appeal: The issues were similar to AY 2005-2006. The Tribunal reiterated that Rule 8D should not be applied retrospectively and directed the AO to restrict the disallowance to 2% of the exempt income. ITA No. 6194/M/2011 (AY 2007-2008) - Revenue's Appeal: The Tribunal upheld that Rule 8D should not apply for AYs before 2008-2009 and maintained the disallowance at 2% of the exempt income, consistent with earlier years. 2. Computation of deduction under Section 10A of the Income Tax Act concerning insurance and telecommunication expenses: ITA No. 4932/M/2010 (AY 2005-2006) - Revenue's Appeal: The Revenue contested the exclusion of insurance and telecommunication expenses from the Export Turnover (ETO) for computing deduction under Section 10A. The Tribunal found that these expenses were incurred in local currency within India and were not attributable to delivery outside India. Therefore, the CIT(A)'s decision to not adjust the ETO was upheld. ITA No. 6003/M/2010 (AY 2006-2007) - Revenue's Appeal: The Tribunal found the issue identical to AY 2005-2006 and dismissed the Revenue's appeal, reaffirming that local expenses should not adjust the ETO. CO No. 123/M/2011 (AY 2006-2007) - Assessee's Cross Objection: The assessee argued that if adjustments are made to the ETO, similar adjustments should be made to the total turnover. Given the Tribunal's decision to not adjust the ETO, this issue was deemed academic and dismissed. ITA No. 6194/M/2011 (AY 2007-2008) - Revenue's Appeal: The Tribunal found the issues identical to earlier years and dismissed the Revenue's appeal, maintaining the CIT(A)'s decision. CO No. 178/M/2012 (AY 2007-2008) - Assessee's Cross Objection: Similar to AY 2006-2007, the issue was deemed academic and dismissed. Conclusion: - The Tribunal consistently held that Rule 8D cannot be applied retrospectively for AYs before 2008-2009 and restricted the disallowance under Section 14A to 2% of the exempt income. - For the computation of deduction under Section 10A, insurance and telecommunication expenses incurred in local currency within India should not be excluded from the Export Turnover. The Tribunal upheld the CIT(A)'s decisions on these grounds across the relevant assessment years. Final Order: - Revenue's appeals ITA No. 4932/M/2010 (2005-2006) and ITA No. 6003/M/2010 (AY 2006-2007) are dismissed. - Revenue's appeal ITA No. 6194/M/2011 (2007-2008) is partly allowed. - Assessee's appeals ITA No. 4538/M/2010 (AY 2005-2006) and ITA No. 5839/M/2010 (AY 2006-2007) are partly allowed. - Assessee's Cross Objections CO No. 123/M/2011 (2006-2007) and CO No. 178/M/2012 (AY 2007-2008) are dismissed.
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