TaxTMI 
TaxTMI 
TaxTMI 
2010 (12) TMI 1234
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....over the amount invested in shares. The learned CIT(A) erred in not upholding the ratio of the decisions cited and relied upon by the Appellant for the same. 3.1. Facts in brief as emerged from the corresponding assessment order passed u/s.143(3) of the I.T. Act, 1961 dated 30/03/2005 were that the assessee-company is engaged in manufacturing and marketing of chemicals, intermediates required for pesticides, pharmaceuticals, dyes, etc. During the year under consideration, assessee has received dividend of ₹ 4,36,085/- which was claimed as exempt u/s.10(33) of the I.T.Act. It has also been noted by the Assessing Officer that the amount of investment at the start of the year as opening balance was at ₹ 1,49,65,160/- and that investment had gone down to ₹ 69,79,999/- at the close of the year. The Assessing Officer has also computed the average of own funds and the borrowed funds out of the total funds available to the assessee during the year. It has also been noted that the own funds and borrowed funds were intricately merged with each other. On that basis he has remarked that though the assessee had sufficient own funds but it could not be presumed that those own....
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.... afresh as per the guidelines of the Hon'ble High Court. For ready reference, we hereby cite one of our decision pronounced in the case of Aditya Medisales Ltd. vs. Dy.CIT bearing ITA No.2143/Ahd/2005 for Assessment Year 2002-03 and ITA No.1117/Ahd/2005 for Assessment Year 2001-02, dated 26/11/2010 as follows:- "5. With this brief background, we have examined the facts of the case as also the law pronounced in this regard. 6. As far as the Assessing Officer's action is concerned, the disallowance has been made on the basis of a calculation of the proportionate interest alleged to be attributable to the investment earning exempted dividend income. It is also to be noted that while doing so for the years under consideration the A.O. has not followed the past method of calculation of the disallowance. As per AO it was seen that the working of disallowance was wrong because while calculating the proportionate interest attributable to dividend income the ratio of dividend income and total sales have been taken though there was no direct relation between the two. The Assessing Officer had thus made the calculation after taking into account the proportion of the interest on the ra....
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....o to section 14A of the Act was effective from 2001-02. The Hon'ble Court has also pointed out the importance of Rule 8D of the I.T.Rules, 1962. It was made clear that sub-section (1) to section 14A was inserted with retrospective effect from 01/04/1962, however, sub-sections (2) & (3) were made applicable with effect from 01/04/2007. The proviso was inserted with retrospective effect from 11/05/2001 , however Rule 8D was inserted by the Income Tax (Fifth Amendment), Rules, 2008 by publication in the Gazette dated 24/03/2008; reproduced below:- "a) The ITAT had recorded a finding in the earlier assessments that the investments in shares and mutual funds have been made out of own funds and not out of borrowed funds and that there is no nexus between the investments and the borrowings. However, in none of those decisions was the disallowability of expenses incurred in relation to exempt income earned out of investments made out of own funds considered. Moreover, under Section 14A, expenditure incurred in relation to exempt income can be disallowed only if the assessing officer is not satisfied with the correctness of the expenditure claimed by the assessee. In the present case,....
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.... which does not form part of the total income under the Act, by virtue of the provisions of Section 14A(1); ii) The payment by a domestic company under Section 115O(1) of additional income tax on profits declared, distributed or paid is a charge on a component of the profits of the company. The company is chargeable to tax on its profits as a distinct taxable entity and it pays tax in discharge of its own liability and not on behalf of or as an agent for its shareholders. In the hands of the shareholder as the recipient of dividend, income by way of dividend does not form part of the total income by virtue of the provisions of Section 10(33). Income from mutual funds stands on the same basis; iii) The provisions of sub sections (2) and (3) of Section 14A of the Income Tax Act 1961 are constitutionally valid; iv) The provisions of Rule 8D of the Income Tax Rules as inserted by the Income Tax (Fifth Amendment) Rules 2008 are not ultra vires the provisions of Section 14A, more particularly sub section (2) and do not offend Article 14 of the Constitution; v) The provisions of Rule 8D of the Income Tax Rules which have been notified with effect from 24 March 2008 shall apply wit....
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....penditure or deemed expenditure. Therefore confirming the decision of the respected Special Bench { 96 TTJ 673(SB)(Mum.)} an observation was made that there was no merit in the contention that the loss arising from the transaction was liable to be treated as an expenditure incurred for earning the tax free income and hence disallowable under section 14A. Admittedly, no expenditure was incurred in purchasing the dividend bearing units. The Tribunal was justified in holding that the loss arising from the transaction was liable to be set off against the other taxable income of the assessee. While upholding the decision of Hon'ble High Court, the Hon'ble Supreme Court{ CIT vs Walfort Share & Stock Brokers 326 ITR pg.1(SC) } has also said that for attracting section 14A of the Act there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income, relevant para from the held portion is as follows :- "Section 14A of the Income-tax Act, 1961, clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the a may be relatable partly to ....
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....available at that time, hence, the Assessing Officer's assessment order was devoid of merits as also applicable law. Now we have got certain guidelines, though can not be said to be exhaustive or complete, but on these lines, the Assessing Officer is expected henceforth to compute the correct disallowance, needless to say after providing an adequate opportunity of hearing to the assessee. 7. In the result both the appeals of the assessee for Assessment Year 2001-02 and 2002-03 being restored for re-adjudications hence to be treated as allowed but for statistical purposes." 7. Therefore after a long discussion it was decided by the respected co-ordinate bench to refer the issue back to assessment stage to decide as per the guidelines of the Hon'ble Courts therefore on the same lines we hereby restore the matter back to the file of Assessing Officer. Resultantly,this ground of the assessee is allowed only for statistical purposes. 8. Ground No.3 read as under:- Re: Part Disallowance of administrative expenses u/s.14A of ₹ 21,500/- 3.1. On the facts and in the circumstances of the case and in law, the learned CIT(A) grossly erred in upholding a part of the disallowance of a....
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....material was placed on record to demonstrate the correctness of the claim supported by documentary evidence. For some repair work an advance was alleged to have been made which had no documentary evidence even to establish that it was wholly and exclusively for the purposes of the business, hence for us difficult to accept an uncorroborated claim. As noted above, even the authorities below have not allowed the claim due to lack of evidence. Totality of the facts of the case, thus, warrants to affirm the findings of the authorities below. This ground is dismissed. 11. Ground No.5 reads as under: 5. Re: Disallowance of Staff Welfare Expenses of ₹ 35,000/-. 5.1. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in upholding the disallowance made b yt he Assessing Officer with regard to payments made to a trade union agency for negotiations with its workers. 11.1. A sum of ₹ 35,000/- was debited under the head "Staff Welfare Expenses" to Gujarat Kamdar Panchayat. It was explained that the amount was paid to the said Panchayat for settlement between the workers and the management, hence, the expenditure was business expenses. Th....