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TMI Blog2012 (7) TMI 626X X X X Extracts X X X X X X X X Extracts X X X X ..... se was selected for scrutiny. Order u/s. 143(3) was passed on 28-3-2002 and the total loss was assessed at Rs. 2,93,38,925/-.Thereafter, the assessment was reopened by issuing notice u/s. 148 of the Act on 8-3-2002. In response to the said notice the assessee filed its return of income on 19-4-2004 declaring loss of Rs. 3,03,11,589/-.The assessment order u/s. 143(3) r.w.s. 147 of the Act was passed by the A.O. vide order dated 22-3-2005. As against total loss of Rs. 3,03,11,589/- returned by assessee in response to notice u/s.148, the A.O. assessed loss at Rs. 1,82,05,206/- by making disallowance u/s.14A. He disallowed Rs. 18,38,000/- u/s.14A and towards software expenses disallowance was to the extent of Rs. 10,94,242/-. Being dissatisfied with the order of the A.O. the assessee carried the matter before the CIT (A). 5. CIT (A) vide his order dated 1-8-2006 partly allowed the appeal of the assessee. 6. Aggrieved by the order of CIT (A), now the Revenue is in appeal before us. With respect to section 14A. 7. During the course of re-assessment proceedings, the A.O. observed that the assessee has claimed dividend income to the tune of Rs. 15,68,330/- being exempt from tax. A.O. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... He therefore, disallowed Rs. 1,20,000/- out of total administrative expenses towards earning dividend income. Therefore, the total disallowance u/s. 14A was to the tune of Rs. 18,38,000/-. (Rs. 17,18,000 + 1,20,000) 8. Aggrieved by the action of A.O., the assessee carried the matter in appeal before the CIT (A). Before CIT (A) it was contended by the assessee that it was having sufficient interest free funds and the investments were made out of the interest free funds. It was further stated that the investment in K Gilt Unit Scheme of Rs. 400 lacs during the year 31-3-1997 was out of Rs. 1446.30 lacs received from Hitachi Ltd., Tokyo towards allotment of equity shares on preferential basis. Thus it was contended that the investment made in K. Gilt Unit Scheme was out of the funds received from Hitachi Ltd. Assessee also relied on the decision of ACIT vs. Eicher Ltd.(2006)101 TTJ (Del) 369. Thus according to the assessee the disallowance on proportionate basis was arbitrary and without any basis. 9. The CIT(A) held that on the basis of statement of facts and the accountant's statement, the appellant had interest free funds much larger compared to the investments yielding exempted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.Y. 2008-09 because rule 8D has not been accepted as having retrospective effect. He further pointed out that only those expenses which have direct nexus with the exempted income can be disallowed. He placed reliance on the decision of co-ordinate Bench in the case of Sagar Drugs & Pharmaceuticals Pvt. Ltd. vs. Addl. CIT in ITA No.3179/Ahd/09 dated 3-6-2011 where it has been held that disallowance of administrative expenses cannot be made prior to A.Y. 2007-08 unless there is a direct nexus established by the A.O. Since in the present case, no finding of the fact with respect to direct nexus has been established, no disallowance can be made under 14A.He also relied on the decision of ITA 1241/A/2006 in the case of ACIT vs. G.M.M. Pfaulder Ltd. order dated 11- 2-2011 where after relying on various decisions it was held that disallowance can be made only if there is nexus between the exempted income and the investment i.e. if revenue is able to show that interest bearing capital has been invested in shares but when no nexus is established, the question of determining any disallowance does not arise. 12. We have heard rival contentions perused the material available on records. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision taken by CIT (A) in A.Y. 1996-97 (page 151-159 of the paper book). Against the aforesaid order of CIT (A), the Revenue's appeal was also dismissed by Hon'ble ITAT (ITA No.1216/Ahd/2003) vide order dated 22-12-2006 (page 161 to 163 of Paper book). The assessee's case was reopened for the reason that the provision for bad and doubtful debts of Rs. 63,30,000/- debited in Profit and loss account was not disallowed in the return of income in view of the amended tax laws u/s. 36(1)(vii) of the Act. A.O. further made additional additions on account of disallowance u/s. 14A of Rs. 18,38,000/- and disallowance of software expenses of Rs. 10,94,242/- and disallowance for technical know-how of Rs. 28,44,141/-. 15. Aggrieved by the decision of A.O. in making the disallowance while framing assessment u/s. 143(3) r.w.s. 147 the assessee took up the matter before the CIT (A). CIT (A) vide order dated 1-8-2006 deleted the additions for the reasons stated as under:- "I have gone through the relevant portion of the assessment order and considered the arguments of the appellant in this regard. Obviously, the issue was decided by the CIT (A) earlier and the Assessing Officer re-agitated th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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