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TMI Blog2011 (10) TMI 676X X X X Extracts X X X X X X X X Extracts X X X X ..... lly owned subsidiary company of Power Gen Plc, a UK based company. The said UK based company had applied to the Ministry of Industries, Government of India to establish a Company India i.e. the assessee-company. An approval was granted and thereupon 100% foreign equity participation was allowed. A monetary limit of ₹ 1,500 crores was fixed as paid up capital to be contributed by Power Gen, UK in its subsidiary. After the said formation, the assessee-company was required to fulfill its objective to make investment in India in electricity sector. Therefore, to fulfill the said objection the assessee-company has purchased 33,73,40,000 equity shares of M/s.Gujarat Torrent Energy Ltd. (GTEL). The AO has thereafter noted that the assessee has earned a profit of ₹ 142.66 crores, which included dividend income of ₹ 137.20 crores. The said dividend was received from Gujarat Phaguthan Corporation Pvt.Ltd. (GPEC Ltd.) , old name M/s.Gujarat Torrent Energy Ltd. (GTEL, supra). The controversy as raked up by the Revenue was that on one hand the entire dividend income of ₹ 137.20 crores was claimed as exempt u/s.10(23G) of I.T.Act. But on the other hand, expenses incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs.2,50,69,164/- Rs.3,14,09,021/- 2.3. Finally, it was held that out of the said alleged common expenditure, 1/4th was to be disallowed by invoking the provisions of section 14A being incurred for earning non-taxable income. The AO has therefore calculated the disallowance of ₹ 78,52,555/- and taxed in the hands of the assessee as per the concluding paragraph No.4.3; reproduced below:- 4.3. Thus in the light of the facts and circumstances as mentioned above, one can say that a fair part of administrative and other expenses must have been incurred in relation to earning of dividend income covered u/s.10(23G). Therefore, as proposed in para No.6 of show cause notice dt.6.1.2006 an amount of ₹ 78,52,255/- is hereby disallowed u/s.14A of the IT Act. [ Disallowance of ₹ 78,52,255/-] 2.4. The matter was carried before the first appellate authority. 3. The CIT(A) has discussed the factual as well as legal aspect in detail and thereafter held as under:- 4. I have carefully considered the submissions made. It is a case where the assessee company had invested in shares o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses on foreign travel. It is also noticed that employees salary are basically for the other income of the assessee regarding its operation and maintenance fees etc. It also cannot be said that any rent is required to be paid for dividend and at best, some part of bank charges and some part of accountants salary etc can be considered to be related to earning of dividend. Since dividend has been received by a single cheque such charges inclusive of salary will in to case exceed ₹ 15000 to 20000 and therefore it is held that none of the other expenses are related to earning of dividend which was exempt and some of the expenses in the nature of bank charges, accountants salary can be considered to be related to earning and collection of dividend. Such expenses are estimated at ₹ 20,000/-. Since these disallowances has been restricted to ₹ 20,000/-, similar treatment will have to be given in working out book profit as has been discussed by the Assessing Officer. Assessing Officer will accordingly restrict the disallowance to ₹ 20,000/- and work out book profit as well as other income. Being aggrieved, now the Revenue is in appeal. 5. We have heard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case, that there is no precise formula for proportionate disallowance. No disallowance is called for proportionate administrative cost attributable to earning of tax free income until Rule 8D came into force. We, therefore, dispose of the appeals by setting aside the orders of the Tribunal and that of the first appellate authority on this issue and remand all the assessments back to the Assessing Officer for reworking disallowance under section 14A in the case of each assessee for each assessment year. The proportionate disallowance under section 14A should be limited to only interest liability and not overheads or administrative expenditure, which should be considered for disallowance under rule 8D from 2007-08 onwards. Unquote. 5.2. In respect of administrative expenses an another decision has also been cited of Hon ble Kerala High Court pronounced in the case of CIT vs. Catholic Syrian Bank Ltd. Ors. 237 CTR 164 (Ker.), wherein as well the same view has been expressed by the Hon ble Court. In the light of these decisions, we hereby conclude that since the impugned dividend was received by a single cheque and that the administrative expenses in respect of professional cha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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