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2012 (7) TMI 401 - AT - Income TaxDisallowance of expenses by applying Rule 8D - assessee contention that no borrowed capital was utilized for making the investment and the dividend income received was directly remitted to the bank account - Held that - As decided in Godrej and Boyce Mfg. Co. Ltd. v. Dy. CIT (2010 (8) TMI 77 (HC))that Rule 8D applies only prospectively with effect from assessment year 2008-09 and also that though the said rule was not applicable for the earlier years, AO was duty bound to compute the disallowance by applying reasonable method - Since the disallowances were made applying a rule which was not applicable for the impugned assessment years the matter requires a re-visit by the Assessing Officer - in favour of assessee by way of remand. DTAA between India and Sri Lanka - taxing capital gains arising out of sale of certain shares held by the assessee-company in a company incorporated in Sri Lanka - Notification No. 90 of 2008 (supra) relied on by the learned D.R - exclusion method or the Tax Credit Method ?- Held that - Case of the assessee falls under clause 4 which says that gains from alienation of shares may be taxed in the State of issue - when the term may be taxed is used in a treaty, there is an automatic exclusion of other State - power cannot be expanded or interpreted in such a way that it would include a power to define terms in a DTAA between countries as well. When a notification is issued exercising the powers conferred under sub-section (3) of Section 90A it can have effect only on those types of agreement mentioned in sub-section (1) thereof. If such a notification goes beyond that mandate, it will have to be ignored to the extent it goes overboard. Even if the term may be taxed has been given a meaning by the Government through a Notification No. 90A(3) so as to extend such meaning to terms used in DTAA, it will have to be ignored and the said Section 90A cannot come to the aid of the Revenue in any manner at all - Exclusion Method was the appropriate one and this was rightly used by the CIT(A). The capital gains arising on account of transfer of share in Sri Lanka would not exigible to tax in India in the given circumstances - in favour of assessee.
Issues Involved:
1. Disallowance under Section 14A of the Income-tax Act, 1961. 2. Taxation of capital gains arising from the sale of shares held in a Sri Lankan company under the Double Taxation Avoidance Agreement (DTAA) between India and Sri Lanka. Issue-wise Detailed Analysis: 1. Disallowance under Section 14A of the Income-tax Act, 1961: - Facts and Arguments: The assessee received dividends exempt under Section 10(34) of the Act and claimed no expenditure was incurred to earn such income. The Assessing Officer (A.O.) disagreed, citing routine expenditures and interest expenses, and applied Rule 8D of the Income-tax Rules, 1962, to disallow Rs. 4,29,50,325/- and Rs. 6,46,48,754/- for the respective years. - CIT (Appeals) Decision: The CIT (Appeals) found that no fresh borrowings were made and the assessee's own funds exceeded the investments. However, he still applied Rule 8D, restricting disallowances to Rs. 1,05,07,198/- and Rs. 1,63,78,457/-. - Tribunal's Findings: The Tribunal noted that Rule 8D was applicable prospectively from the assessment year 2008-09, as held by the Hon'ble Bombay High Court in Godrej and Boyce Mfg. Co. Ltd. v. Dy. CIT. Therefore, the disallowance for the impugned years was not valid under Rule 8D. The Tribunal remitted the matter back to the A.O. to compute disallowance using a reasonable method. - Conclusion: The Tribunal set aside the orders of the lower authorities and remitted the matter back to the A.O. for fresh consideration in line with the law, allowing the appeals for statistical purposes. 2. Taxation of Capital Gains under DTAA: - Facts and Arguments: The assessee sold shares of a Sri Lankan company, resulting in a profit of Rs. 32,50,68,449/-. The assessee claimed this was exempt under the DTAA between India and Sri Lanka, specifically under Article 13(4), which states such gains "may be taxed" in the country of issue. The A.O. argued that the gains should be taxed in India, with a tax credit for any tax paid in Sri Lanka. - CIT (Appeals) Decision: The CIT (Appeals) sided with the assessee, stating that the DTAA granted exclusive taxing rights to Sri Lanka. He noted that the share transaction levy in Sri Lanka exempted the gains from tax there, and thus, the gains should not be taxed in India. - Tribunal's Findings: The Tribunal agreed with the CIT (Appeals), interpreting "may be taxed" to mean exclusive taxing rights for Sri Lanka. They referenced the Hon'ble Apex Court's decision in P.V.A.L. Kulandagan Chettiar and other relevant cases, concluding that the gains were not taxable in India. The Tribunal also dismissed the applicability of Notification No. 90 of 2008 under Section 90A of the Act, as it pertained to agreements between specified associations, not DTAAs between countries. - Conclusion: The Tribunal upheld the CIT (Appeals)'s decision, confirming that the capital gains from the sale of shares in Sri Lanka were not taxable in India, dismissing the Revenue's appeal. Summary of Results: - The appeals of the assessee for assessment years 2006-07 and 2007-08 are allowed for statistical purposes. - The appeal of the Revenue for assessment year 2006-07 is allowed for statistical purposes. - The appeal of the Revenue for assessment year 2007-08 is partly allowed for statistical purposes.
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