In the judgment of Hon’ble Karnataka High Court rendered in the case of CCI Ltd. (supra) it was held that if the assessee is a dealer of shares and securities then it cannot be said that such purchases of shares and holding of shares were for the purpose of earning of dividend income and hence, [...]

In our humble understanding, the provisions of Section 14A are indeed attracted whether or not the shares are held as stock in trade or as investments, even though the provisions of rule 8D(2)(ii) and (iii) cannot be invoked in such a case, and even though the provisions of rule 8 D(2)(i) are much narrower in [...]

Disallowance u/s 14A required a finding of incurring of expenditure and where it was found that for earning exempted income, no expenditure had been incurred, disallowance u/s 14A could not stand. In the present case, as seen, the AO has not established any nexus whatsoever between the borrowed funds and the investment made. Therefore, Hero Cycles (supra), is applicable.

The correct sequence, in our considered opinion, for making any disallowance u/s. 14A is to, firstly, examine the assessee’s claim of having incurred some expenditure or no expenditure in relation to exempt income. If the AO gets satisfied with the same, then there is no need to compute disallowance as per Rule 8D. It is only when the AO is not satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure having been incurred in relation to exempt income, that the mandate of Rule 8D will operate.

Disallowance under section 14A has to be made in accordance with the principle laid down by the Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg.Co.Ltd. Mumbai. Vs. Dy. Commissioner of Income . Rule 8D should not be applied and the AO has to adopt a reasonable basis or method consistent with all relevant facts and circumstances and after affording reasonable opportunity to the assessee to place all germane material on the record.

The matter came up in appeal before ITAT in the assessee’s own case and other cases in ITAs No. 453,454,456/M/2010 & 458 & 455/M/2010. During the continuance of these appeals, Hon’ble Bombay High Court came up with the decision in Godrej & Boyce Manufacturing Co. Ltd. V/s DCIT, reported in 328 ITR 81 (Bom), wherein the Hon’ble Bombay High Court held that the operation of Rule 8D shall only be from 2008-09 onwards, and not being retrospective.

Kama Holding Ltd. Vs. ACIT (ITAT Delhi) – Rule 8D has been held to be retrospective in nature and the disallowance has been worked out by applying Rule 8D. Hon’ble Bombay High Court in subsequent judgment in the case of Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT & Another (2010) 234 CTR (Bom) 1 has held Rule 8D to be prospective in nature. Thus, Rule 8D would not be applicable to the assessment year in question i.e. 2007-08. The Hon’ble High Court, however, has directed that indirect expenses which may be attributable on a reasonably proper basis can only be disallowed.

Since the assessment year involved in this appeal is 2005-06 Rule 8D of the IT Rules is not applicable in the present case keeping in view of the decision of the Hon’ble Bombay High Court in the case of Godrej and Boyce Mfg. Pvt. Ltd. In this case the ld. CIT-Admn has issued jurisdiction u/s 263 of the IT Act based on the order of the ITAT, Special Bench, which has been subsequently over ruled by Hon’ble Bombay High Court (supra). Therefore we are of the view that invoking of provision of section 263 of the IT Act is not justifiable in the facts and circumstances of the case. Hence we squash the order of ld. CIT-Admn and allow the appeal of assessee.

Maxopp Investment Ltd vs. CIT (Delhi High Court) – Even for the pre-Rule8D period, whenever the issue of section 14A arises before an Assessing Officer, he has, first of all, to ascertain the correctness of the claim of the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income under the said Act. Even where the assessee claims that no expenditure has been incuured in relation to income which does not form part of total income, the assessing officer will have to verify the correcteness of such claim.

Mitsutor Shipping Agency Pvt Ltd Vs DCIT (ITAT Mumbai) – The assessee was owner of the premises in which it was carrying on business. The assessee paid maintenance charges to the society of Apartment Owners. According to the AO the assessee ought to have deducted tax at source on the payment of maintenance charges to the society as the payment by the assessee to the society was in the nature of contract and, therefore, the provisions of section 194C was applicable.