Nestle India Ltd., N... v. Dcit, Large Tax Paye...

PER R.P. TOLANI, J.M: This is an assessees appeal against the order of CIT(A)-LTU, New Delhi dated 26-07-2010 relating to A.Y. 2006-07. Various grounds are raised challenging disallowance of an amount of Rs. 34,26,728/- alleged to have been incurred for earning dividend income of Rs. 6,47,36,219/-, under Rule 8-D by invoking the provisions of sec. 14-A of the I.T. Act.

2. Learned counsel for the assessee contends that lower authorities have disallowed the above expenses relying on the order of ITAT Special Bench Mumbai in the case of ITO Vs. Daga Capital Management 26 SOT 603. It was pleaded that Rule 8-D has been held to be prospective in nature, in view ITA 4127/Del/10 Nestle India Ltd. thereof, the AO can only disallow some indirect expenses, which may be attributable to the earning of interest income. In this case the assessee has received tax-free dividend income of Rs. 6,47,36,219/-28/-, on account of investment in earlier year out of interest free funds available to assessee, which have been reflected in personal balance sheet and marginal disallowance may be retained.

3. Learned DR, on the other hand, contends that Honble Mumbai High Court in the case of Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT & Anr. (2010)

234 CTR 1, has not held that Rule 8-D is unreasonable. Only its application has been held to be prospective. Disallowance of indirect expenses on a reasonable basis has not been disapproved by the Honble Mumbai High Court. Since Rule 8-D has not been held to be unreasonable in this case, , it can be applied to earlier year also.

4. We have heard rival contentions and have gone through the entire material available on record. Honble Mumbai High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra), has held Rule 8-D to be applicable from prospective effect and what can be disallowed u/s14A is direct/ indirect expenses which may be attributable to earning of tax free income. Assessee has earned above amount as tax-free income by way of dividend, on which indirect expenses ought to be worked out by AO. We are unable to accept ITA 4127/Del/10 Nestle India Ltd. learned DRs contention that the same working of disallowance u/r 8-D should be upheld, in view thereof we set aside the matter to the file of AO to decide the issue of ascertaining indirect expenses qua the tax free income after giving the assessee an opportunity of being heard and estimate the same on a rational and scientific basis. We order accordingly.

5. In the result, assessees appeal is allowed for statistical purposes only. Order pronounced in open court on 04-11-2010. Sd/- Sd/- (K.D. RANJAN ) ( R.P. TOLANI ) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 04-11-2010. Copy to :

1. Assessee

2. AO

3. CIT

4. CIT(A)

5. DR