Before the assessment year 2008-09 provision of sec 14A(1) should apply instead of Rule 8D

Court :
Income Tax Appeallate Tribunal

Brief :
The facts, in brief, are that in the assessment order the AO had noted that assessee had shown dividend income of Rs. 98,59,980/-, which is exempt. However, the assessee had not disallowed any expenditure for earning exempt income. The AO, therefore, had made the disallowance u/s 14A of the Act, read with Rule 8D, of Rs. 11,99,438/- being the expenses directly and indirectly relatable to the exempted income of Rs. 98,59,980/-. Aggrieved, the assessee carried the matter in appeal before the CIT(A). Before the CIT(A), the assessee contended that the AO was not justified in disallowing a sum of Rs. 11,99,438/-, as according to him Rule 8D is not retrospective as held by the Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd., Vs. DCIT. After considering the submissions of the assessee, held as under:- “4. I have duly considered the submissions of the authorized representative and I find that the AO has made the disallowance following Rule 8D which was held as retrospective in nature by Bombay ITAT (Special Bennch) in the case of Daga Capital Management P. Ltd. However, the Bombay High Court has held in the case of Godrej & Boyce Manufacturing Co. ltd. that rule 8D is not retrospective. However, the Bombay high Court has ruled that a reasonable disallowance should be made by the AO u/s 14A. Following the decision of Hon.Bombay High Court I would hold that disallowance of 0.5% of average investments which yields the exempt income would meet the ends of justice. Accordingly, I direct the Ao to restrict the disallowance u/s 14A to 0.5% of the average investment of R. 21,91,41,761/- at Rs. 10,95,708/- as reasonable disallowance u/s 14A. To my mind some disallowance is called for earning exempt income. The Hon. Bombay High Court has directed that a reasonable disallowance should be made. The Hon. High Court has not struck down the Rule 8D. Hence, the method prescribed in Rule 8D would give a proper disallowance for earning exempt income. Since the assessee has used its own funds no direct interest expenditure is disallowable. Disallowance of only 0.5% of average investment would give proper disallowance in respect of section 14A. Accordingly this ground of appeal is allowed.” The assessee is in appeal before us challenging the action of the CIT(A) in partially upholding the action of the AO of making disallowance u/s 14A of the Act

Citation :
Abbott Healthcare P. Ltd., … Appellant Unit 4, Corporate Park,Sion – Trombay Road, Chembur,Mumbai – 400 071.(PAN - AAACK3935D) Vs.Addl. Commissioner of Income-tax – 2(1), …Respondent Aayakar Bhavan, M.K. Road,Mumbai – 400 020.