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TMI Blog2014 (6) TMI 185X X X X Extracts X X X X X X X X Extracts X X X X ..... e disallowance of 1 percent of interest expenditure artificially or on the basis of assumption rightly has not been sustained by the Tribunal – Decided against Revenue. - Tax Appeal No. 603 of 2013 - - - Dated:- 4-2-2014 - AKIL KURESHI AND SONIA GOKANI MS., JJ. JUDGEMENT Ms. Sonia Gokani J.- Challenging the order of the Income-tax Appellate Tribunal, the present tax appeal under section 260A of the Income-tax Act ( the Act hereinafter) preferred by the Revenue proposing the following substantial questions of law for our consideration : (i) Whether, in the facts and in the circumstance of the case, the learned Income-tax Appellate Tribunal has erred in law in allowing the appeal of the assessee by deleting the disallowance made by the Assessing Officer under section 14A of the Income-tax Act as confirmed and enhanced by the Commissioner of Income-tax (Appeals) ? (ii) Whether, in the facts and in the circumstances of the case, the learned Income-tax Appellate Tribunal has erred in law in holding that the provisions of rule 8D were applicable prospectively and not retrospectively ? (iii) Whether the Assessing Officer is empowe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... strative expenses is attributed to the earning of dividend income.' There is various laws, which held accordingly that for such activities, there can be both direct and indirect expenses in the nature of administrative and establishment cost cannot be denied altogether as submitted by appellant. Following the judgment of the Income-tax Appellate Tribunal, Special Bench, Mumbai, in the case of ITO v. Daga Capital Management P. Ltd. [2009] 312 ITR (AT) 1 (Mumbai) [SB] (order dated October 20, 2008) where it examined the background which led to the insertion of section 14A by the Finance Act, 2001, and held the same to be retrospective having effect from April 1, 1962, he held against the assessee thus: It is, therefore, the Assessing Officer is not justified in disallowing the expenditure on proportionate basis. After drawing his satisfaction that the appellant has not disallowed any expenditure under section 14A of the Act but there is indirect cost and other such cost, the Assessing Officer should have computed the disallowance as per rule 8D of the Income-tax Rules. The appellant's two arguments that (a) exempt income of Rs. 6.12 crores is related to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound sustainable. The Tribunal held thus : Considering the totality of facts and more so in view of the fact that the applicability of rule 8D is applicable from the assessment year 2008-09 and, in the present case, since the assessment year involved is 2006-07, we are of the view that no disallowance can be made by applying the provisions of rule 8D. We further find that the Assessing Officer had disallowed 1 per cent. of the interest expenses on ad hoc basis and the same was enhanced by the Commissioner of Income tax (Appeals) by following the method prescribed under rule 8D. The Assessing Officer has not pin pointed any expenditure which the assessee had incurred for earning the exempt income. We also find support to our reasoning by the ratio laid down by the hon'ble Delhi High Court in case of Maxopp Investments Ltd. v. CIT [2012] 347 ITR 272 (Delhi). We, therefore, considering the totality of facts are of the view that the addition needs to be deleted. Thus, this ground of the assessee is allowed. Therefore, the present appeal. We could notice from the record that the assessee was having shareholding funds to the extent of Rs. 2607.18 crores and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... led for in the order of learned Commissioner of Income-tax (Appeals). We hold so because we find that with regard to the investment of Rs. 5907.18 lakhs in foreign subsidiaries, no disallowance can be made under section 14A because dividend income from foreign subsidiaries is taxable in India. Regarding balance investment of Rs. 38 crores approximately in Indian subsidiaries, we find that interest-free own funds of the assessee is many time more than this investment because interestfree funds available with the assessee as on March 31, 2005, as per the balance-sheet as on that date is of Rs. 929.57 crores. There is no finding given by the Assessing Officer regarding any direct nexus between interest bearing borrowed funds and investment in Indian subsidiaries. Hence, in our considered opinion, no disallowance under section 14A can be made out of interest expenditure in the facts of the present case. Accordingly, ground No. 2 and 3 of the Revenue's appeal are rejected.' 3.1 From the above portion, we noticed that the Tribunal has bifurcated the expenditure in two parts-first related to investment of Rs. 5907.18 lakhs in foreign subsidiaries, it was held that the dividend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t accepted. Disallowance under section 14A required finding of incurring of expenditure and where it was found that for earning the exempted income, no expenditure had been incurred, disallowance under section 14A could not stand. Accordingly, such disallowance was not permitted. We notice that this appeal concerns the year 2006-07 and the application of rule 8D of the Income-tax Rules has come into being from 2007-08 which has been held prospective by this court, following the judgment of the Bombay High Court in the case of Godrej and Boyce Mfg. Co. Ltd. v. Deputy CIT reported in [2010] 328 ITR 81 (Bom), where the Bombay High Court has quashed the order and judgment of the Special Bench rendered in Daga Capital (supra), this court in the case of CIT v. Sintex Industries Ltd. reported in [2013] 33 taxmann.com 240 (Guj) ; [2014] 2 ITR-OL 364 (Guj), was considering the issue pertaining to disallowance of part of remuneration paid to the directors. The Assessing Officer noted the fact that the assessee had earned the exempt income under section 10(35) of the Act arising out of mutual fund investment and, therefore, held the opinion that the expenditure incurred for earning the exe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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