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2012 (4) TMI 242 - AT - Income TaxExpenses incurred for earning tax exempt dividend of Rule 8D - Section 14A - Held that - The elaborate formulae which has been adopted for making the disallowance is precisely what rule 8 D mandates- something directly contrary to the decision of Hon ble Bombay High Court in Godrej & Boyce Mfg. Co. Ltd s case (2010 -TMI - 78448 - BOMBAY HIGH COURT) - The very approach adopted by the CIT(A) is unreasonable, contrary to legal position, and without regard to the specific facts of the case - there are no direct costs involved in funding the investments - The assessee has disallowance direct costs in earning the dividend, an as for indirect costs, the assessee has suo motu made a disallowance of by computing the at 0.5% of average investments - disalownace offered by the assessee is fair and reasonable and the CIT(A) ought to have accepted the same.
Issues Involved:
1. Disallowance under Section 14A read with Rule 8D. 2. Disallowance of motor car expenses, motor car depreciation, and telephone expenses. Issue-wise Detailed Analysis: 1. Disallowance under Section 14A read with Rule 8D: The primary grievance of the assessee pertains to the disallowance of Rs. 19,87,230 under Section 14A of the Income Tax Act, 1961, read with Rule 8D. The CIT(A) directed the Assessing Officer (AO) to rework the disallowance despite acknowledging that Rule 8D was inapplicable for the assessment year 2007-08, as held by the Bombay High Court in the case of Godrej and Boyce Manufacturing Co. Ltd. v. DCIT (328 ITR 81). The assessee argued that the investments were made from partners' own capital and not from borrowed funds, invoking the principle laid down in Reliance Utilities & Power Ltd (313 ITR 340). The CIT(A) nevertheless applied a formula similar to Rule 8D, justifying a 0.5% disallowance of the average value of investments to account for variable expenses related to exempt income. The Tribunal found the CIT(A)'s approach unreasonable and contrary to the legal position established by the Bombay High Court in Godrej & Boyce Mfg. Co. Ltd.'s case. The High Court had mandated that for assessment years prior to 2008-09, disallowance under Section 14A should be on a reasonable basis, considering all relevant facts and circumstances. The Tribunal noted that the CIT(A) effectively applied Rule 8D, which was not applicable for the assessment year in question. Furthermore, it was undisputed that the partners' own capital exceeded the average investment, implying no direct costs from borrowed funds. The assessee had already disallowed Rs. 3,148 as direct costs and Rs. 87,253 as indirect costs, which the AO and CIT(A) did not dispute. Consequently, the Tribunal upheld the assessee's disallowance of Rs. 1,00,401 as fair and reasonable, allowing the related grounds of appeal. 2. Disallowance of Motor Car Expenses, Motor Car Depreciation, and Telephone Expenses: The assessee also contested the partial confirmation by the CIT(A) of a 5% disallowance of motor car expenses, motor car depreciation, and telephone expenses, as opposed to the AO's 20% disallowance. The assessee argued that the introduction of fringe benefit tax (FBT) already accounted for personal and non-business use of such expenses, and further disallowance would result in double taxation. However, since no specific arguments were addressed regarding this grievance during the hearing, the Tribunal dismissed this ground as not pressed. Conclusion: The appeal was partly allowed, with the Tribunal upholding the assessee's grievance regarding the disallowance under Section 14A but dismissing the grievance related to motor car and telephone expenses due to lack of specific arguments.
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