2012 (11) TMI 218

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....hat the assessee claimed exemption in respect of dividend income received during the previous year relevant to the assessment year under consideration, without offering any disallowance u/s 14A of the Act. On being called upon to state the reasons for not offering any such disallowance, the assessee submitted that it had not incurred any costs for earning such income. The AO observed that dividend income was earned during the year on investment done in mutual funds made during the current year only. He computed disallowance u/s 14A as per rule 8D amounting to Rs. 52.15 lakh by allocating 'Interest cost' to exempt income at Rs. 41.90 lakh and 'Other expenses' at half percent of average investment amounting to Rs. 10.24 lakh. For the purposes....

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.... fetching exempt dividend income. In view of this precedent it is obvious that up to assessment year 2006-2007, the assessee did not make any investment in shares etc. yielding exempt income, out of interest bearing funds. However it is important to note from the assessment order that the dividend income earned by the assessee in the current year was earned from investments made in the current year alone in the units of mutual funds. In that view of the matter the decision taken by the Tribunal in the preceding year, based on the facts as prevailing in that year alone, cannot be straightway applied. It is required to be examined as to whether any interest bearing funds were utilized for making investments in the current year for purchasing ....

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....dealing with assessment year 2007-2008, in such a situation there can be no question of computing disallowance u/s 14A by invoking Rule 8D. Accordingly we direct the A.O. to determine expenditure disallowable u/s 14A on some reasonable basis as per the prescription of the judgment of the Hon'ble jurisdictional High Court, ignoring rule 8D. 5. Before parting with this issue we will like to clarify that the Assessing Officer has taken note of total investments made by the assessee by considering not only the investment giving exempt income but also investment in SEZ. This exercise has been done by him while applying rule 8D. It is apparent that rule 8D cannot be applied in the relevant previous year under consideration and we have directed....