AI Drafter 
TaxTMI 
TaxTMI 
2010 (9) TMI 1192
X X X X Extracts X X X X
X X X X Extracts X X X X
....4,85,604/-. 03. Because the orders of the authorities below are contrary to facts, erroneous, misconceived, the addition of Rs. 4,85,604/- be deleted. 04. Because the case laws applied by the CIT (Appeals), i.e., Daga Capital and Cheminvest are not applicable to the facts of the case, and as suich, the CIT (Appeals) has erred in law in arbitrarily upholding the addition of Rs. 4,85,604/-. 05. Because in any case and in all circumstances of the case, the addition made is bad in law, arbitrary and be deleted." 2.1 From the aforesaid grounds, it would be clear that the only grievance of the assessee relates to the confirmation of the disallowance of Rs. 4,85,604 made by the AO by applying the provisions of Section 14A of the Income-tax Act,1961. 3. The facts of the case, in brief, are that the assessee carried on the business of advancing interest bearing loans as also investment in shares and securities. For the year under consideration, the return of income was filed on 30.10.2006 declaring an income of Rs. 6,89,470, which was processed under section 143(1) on 21.8.2007. Later on, the case was selected for scrutiny. During the course of assessment proceedings, the AO ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nting to Rs. 4,85,604/- were held to be not for the purpose of earning taxable income but it was relatable to the earning of tax free income by way of dividend and long term capital gains. The explanation given by the assessee that the funds were used wholly and exclusively for earning taxable income is rejected in view of facts mentioned above and also looking to the fact that at many instances the loans raised were invested in purchase of shares, debentures and mutual funds. In view of provisions of section 14A of I.T. Act, the deduction on a/c of payment of interest of Rs. 4,85,604/- is disallowed and added to the total income of the assessee. (Disallowance of interest: Rs. 4,85,604/- on a/c of investment made in non earning activities out of interest bearing funds)" "2.4 In support of above disallowances, reliance is placed on the various decisions of Hon'ble Courts which are discussed as under:- i) Shree Synthetics Ltd. Vs. CIT (2006)-205 CTR (MP) 786, wherein it has been held by Hon'ble High Court that where the assessee took loan and made investment in units of the UTI and tax free segments, provisions of section 14A would apply against the assessee in so far as cla....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... are not applicable in the assessee's case since the said provisions are applicable only for the assessment year 2008-09, while the assessee's case relates to assessment year 2006-07. He, therefore, requested to delete the addition made by the AO and confirmed by the ld.CIT(A). Reliance was placed on the judgment of the Hon'ble Bombay High Court in the case of Godrej &Boyce Mfg. Co. Ltd. vs. Dy.CIT (2010) 234 CTR (Bom.)1. 8. In his rival submissions, the ld.D.R. strongly supported the orders of the authorities below and further submitted that the AO had taken a reasonable view and rightly made the addition. Therefore, the ld.CIT(A) was justified in confirming the addition made by the AO. 9. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, the AO invoked the provisions of Section 14A of the Income-tax Act, 1961. The said provision reads as under : "14A. (1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....39;ble Bombay High Court, while interpreting the provisions of Section 14A of the Act and Rule 8D of the Income-tax Rules, 1962, observed at paras 66 & 67 of the aforesaid referred to order (Head Note) as under : "The first point to be noted about the provisions of s. 14A and r. 8D is that different dates have been provided in these provisions for their enforcement: (i) Sub-sec. (1) of s. 14A was inserted by the Finance Act of 2001 with retrospective effect from 1st April, 1962; (ii) Sub-ss. (2) and (3) were inserted in s. 14A by the Finance Act of 2006 w.e.f. 1st April, 2007; (iii) The proviso was inserted by the Finance Act of 2002 with retrospective effect from 11th May, 2001; (iv) Rule 8D was inserted by the IT (Fifth Amendment) Rules, 2008 by publication in the Gazette dt. 24th March, 2008. Sub-r. (2) of r.1 stipulates that the rules shall come into force from the date of their publication in the Official Gazette. This by itself is not conclusive. Secondly, prior to the insertion of s. 14A by the Finance Act of 2001 the Supreme Court had held in its decisions in CIT vs. Indian Bank Ltd. AIR 1965 SC 1473, CIT vs. Maharashtra Sugar Mills Ltd. 1973 CTR (SC) 489: (1971) 82 ITR ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of 2006 and in the circular of the CBDT dt. 28th Dec., 2006 can be regarded as a reasonable interpretation of the provision. The fourth aspect of the matter which would merit emphasis, is the principle of law that in determining as to whether a rule in a piece of subordinate legislation is to be regarded as prospective or retrospective, an important aspect is as to whether the rule embodies what is essentially a well known, a well settled or well accepted method. As a matter of fact in the present case there can be no doubt about the position that r. 8D has essentially put into place an artificial method of estimating the expenditure that can be regarded as being relatable to income that does not form part of the total income under the Act. Before the insertion of s. 14A, there was no specific method of determining the expenditure incurred in relation to nontaxable income. Looking at the totality of the circumstances, the measure of 0.5 per cent provided in r. 8D(2)(iii) is reasonable. Hence, while the method of computation provided in r. 8D is fair and reasonable to pass muster under Art. 14, the method must take effect prospectively. Finally, sub-sec. (4) of S. 295 empowers the r....