TaxTMI 
TaxTMI 
2010 (12) TMI 912
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....see had received Tax Free income of Rs.13,80,61,476/- during the year. Assessing Officer found that assessee had allocated expenditure of Rs.7,12,094/- out of the total expenditure of Rs.1,14,17,833/- towards tax free income. Assessing Officer on the other hand was not satisfied with the allocation made by the assessee. He proceeded to compute the disallowance as under:- "Expenses to be apportioned on different heads of receipt Rs. 1,14,17,833/- Total turnover as declared by the assessee Rs. 2,21,36,99,011 Less:- sale of investment Rs. 74,49,92,651 Less:- sale of security Rs. 1,33,01,54,367 Net turnover Rs. 13,85,51,993 Tax Free income = Rs. 13,80,61,476 99.64% Total expenditure 1,14,17,833 x 9.40% 1,13,76,728 Disallowance u/s 14A therefore comes to Rs. 1,13,76,728/-." 5. Upon assessee's appeal Ld. Commissioner of Income Tax (Appeals) elaborately considered the issue and held as under:- "4.3 I have carefully considered the submissions made by the appellant. It is found that the turnover considered by the Assessing Officer for the purpose of proportionate allocation of expenses ....
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....ares) will not give correct proportionate allocation. If at all sale proceeds of shares and securities is to be compared, it should be done to the gross investment (Rs.133,12,21,063 as on 31.3.2004) on which dividend and interest is received. On the other hand since the sale of investment may result in either profit or loss, comparing direct income (dividend and interest) with profit on sale of investment will again not give correct allocation of expenses for different sources of income. The expenses taken for allocation are the general expenses of IIPL. From the P and L A/c of IIPL it is noted that major part of expenditure of Rs.1,14,17,833 was towards salaries, rent, director's travel, legal and professional charges which together make up Rs.65,09,271. Remaining expenses are also of general nature. Obviously these expenses have been incurred for composite activity of managing the investment. For an investment company it can not be said that dividend income is automatic without any effort after initial investment. This is because the investment of fund has to be continuously monitored to safeguard the funds and maximize returns. The investment portfolio is changed on regular basi....
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....ce, he has opined that 1/3rd of the total expenses on management of investment may be treated as attributable to earning of dividend and tax free interest. 7.2 As per the latest law with regard to disallowance u/s 14A allocation of expenses has to be done as per Rule 8D. The Hon'ble Mumbai High Court in the case of Godrej Boyce Mfg. Co. Ltd. vs. DCIT in ITA No. 626 of 2010 = 234 CTR 1 has held that Rule 8 D has been notified on 24.3.2008 and will be applicable only from Assessment year 2008-09. 7.3 Under the circumstances, we find that reasonable estimate has to been done for the concerned assessment year. We find that Ld. Commissioner of Income Tax (Appeals) had elaborately considered the issue and made a reasonable disallowance. Under the circumstance, we do not find any infirmity in the order of the Ld. Commissioner of Income Tax (Appeals), hence, we uphold the same. 7.4 The above adjudication also applies for Revenue's appeal for the assessment year 2005-06. 8. Another issue raised in ITA No. 1184 is that Ld. Commissioner of Income Tax (Appeals) erred in holding that provisions of section 79 are not applicable in this case and therefore, the asse....
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....olding need not fall within the provision of section 79. In closely held company 51% share holding is considered to be the requirement for retaining control and management over the company. Therefore, the basic intent of the section as discussed by the Hon'ble Apex Court was that when the share holding changes for acquiring control over a company which incurred losses with a view to avoiding reducing tax liability, section 79 comes into play because that was the result which it was designed to prevent. Thereafter, Ld. Commissioner of Income Tax (Appeals) has as under:- "5.5 In the present case it may be noted that IIPL was holding 98% of the shares of the appellant company. On the other hand 100% shares of IIPL were held by four persons of the family who were having the control and management of the IIPL as well as of the appellant company. Because of the merger of IIPL into the appellant company, the former came to an end as a result of which the shares of amalgamated company were allotted to the share holders of IIPL. Therefore, it may be seen that there was no change in the management of the Co. which remained with the same family (set of persons) who was earlier exercis....
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....ompany to some other group of persons acquiring its control and management merely for tax benefit. In the peculiar facts of this case section 79 is not to be applied and the losses of earlier years are eligible to be set off with the profit in this previous year. In the result the appeal is partly allowed." 11. Against this order the revenue is in appeal before us. 12. Ld. counsel of the assessee vehemently contended that section 79 is not applicable here. He said that this is a case of reverse merger. He claimed that there is no change in beneficiary share holding. He further claimed that section 79 is not at all applicable. 13. Ld. Departmental Representative on the other hand relied upon the order of the Assessing Officer. 14. We have heard both the counsel and perused the records. We can gainfully refer the provisions of section 79:- "Notwithstanding anything contained in this Chapter, where a change in shareholding has taken place in a previous year in the case of a company, not being a company in which the public are substantially interested, no loss incurred in any year prior to the previous year shall be carried forward and se....