Tribunal limits disallowance to 5% of dividend income for expenses. Appeal partly granted.

The Tribunal partially allowed the appeal, directing the Assessing Officer to limit the disallowance to 5% of the dividend income for estimating other expenses related to earning dividend income. The second ground of the appeal was dismissed as it was not pursued by the assessee. In conclusion, the appeal was partly granted in favor of the assessee.

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Issues involved: Appeal against disallowance of expenses u/s. 14A r.w. rule 8D of Income Tax Act for A.Y. 2007-08.

Issue 1 - Disallowance u/s. 14A:
The appeal challenged the disallowance of expenses amounting to Rs. 40,51,537 u/s. 14A r.w. rule 8D. The appellant sought deletion of the addition. The Tribunal considered the arguments and case laws cited, noting that the CIT(A) had followed the Special bench's order in a specific case. However, the Jurisdictional High Court reversed the decision, stating that Rule 8D can be applied only prospectively. Consequently, the Tribunal reversed the CIT(A)'s order in this regard.

Issue 2 - Utilization of interest-free funds for investments:
The second argument raised by the assessee was regarding the availability of interest-free funds and the utilization of borrowings for investments. Citing various case laws, the assessee contended that if there are sufficient interest-free funds, the presumption is that investments would have been made from such funds. The Tribunal noted the shareholder funds of the assessee and the investments made, concluding that the investments were likely made from interest-free funds. Given the facts, the Tribunal held that no disallowance could be made u/s. 14A in this case.

Conclusion:
The Tribunal allowed the appeal in part, directing the Assessing Officer to restrict the disallowance to 5% of the dividend income for reasonable estimate of other expenses incurred for earning dividend income. The second ground of the appeal was dismissed as it was not pressed by the assessee. Overall, the appeal was partly allowed in favor of the assessee.

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