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Dhanlaxmi Cotex Ltd. 285, Princess Street C.J. House, 2nd Floor Mumbai-400 002. VS. Dy. Commissioner of Income tax , Rang
August, 29th 2012


                       ITA No.7742/Mum/2010
                       Assessment Year : 2007-08

Dhanlaxmi Cotex Ltd.                   Dy. Commissioner of Income
285, Princess Street                   tax , Range 4(1)
C.J. House, 2nd Floor                  Mumbai.
Mumbai-400 002.                  Vs.
PAN No. AABCD 2387 H

         (Appellant)                           (Respondent)

                 Assessee by     :     Shri Narayan T. Atal
               Department by     :     Shri Amardeep

        Date of hearing       :         28.8.2012
        Date of Pronouncement :         28.8.2012



     This appeal by the assessee is directed against the order dated

28.10.2010 of CIT(A) for the assessment year 2007-08. The only

dispute raised by the assessee in this appeal is regarding disallowance

of expenses under section 14A of the Income tax Act in relation to

exempt income.

2.   Facts in brief are that the AO during the assessment proceedings

noted that the assessee had earned dividend income of Rs.22,20,978/-
                                    2                        ITA No. 7742/M/10
                                                             A.Y. 07-08

which was exempt from tax. The AO, therefore, disallowed the

expenses under section 14A of the Act under rule 8D which was

computed at Rs.4,37,272/-. The assessee disputed the decision of AO

and submitted before CIT(A) that Rule 8D was applicable only from

assessment year 2008-09 in view of the judgment of the Hon'ble High

Court of Bombay in case of Godrej and Boyce Mfg. Co. vs. DCIT (328

ITR 81). It was also submitted that the assessee had received dividend

from investment in shares and major dividend income was received

from sister concern in which one time investment was made. The

investment made in other companies had not resulted into payment of

dividend. Therefore disallowance of expenses @ 0.5% of average

investment was not tenable. CIT(A), thereafter proceeded to compute

disallowability extent independently. It was observed by him that the

direct expenditure as well as in direct interest expenditure shown by

the assessee was nil which had been accepted by the AO. As regards

the other indirect expenses CIT(A) noted that portfolio managers were

charging @ 2-3% which also included their profit element of 1-1.5%.

In case of the assessee which was doing other business also further

exclusion was required on account of fixed expenses being the

administrative expenses. CIT(A), therefore, held that indirect expenses

relating to use of infrastructure and staff for maintaining huge portfolio

had to be taken at 0.5% of the average investment which is the same
                                      3                          ITA No. 7742/M/10
                                                                 A.Y. 07-08

as per Rule 8D.    He, therefore, confirmed disallowance made by AO

aggrieved by which the assessee is in appeal before the Tribunal.

3.    Before us, ld. AR for the assessee submitted that in terms of

judgment of Hon'ble High Court of Bombay in case of Godrej and

Boyce Mfg. Co. (supra), the assessee was required to be given an

opportunity regarding disallowance of expenses. It was pointed out

that though Rule 8D was not applicable, CIT(A) made disallowance as

per Rule 8D only. It was also submitted that actual expenses incurred

were nominal against which huge disallowance of Rs.4,37,272/- has

been made. It was accordingly urged that the order of CIT(A) should

be set aside. Ld. Departmental Representative placed on the order of


4.    We have perused the records and considered the matter

carefully. The dispute is regarding disallowance of expenses relating to

expenses under section 14A of the Act. In view of the judgment of

the Hon'ble High Court of Bombay in case of Godrej and Boyce Mfg.

Co. (supra), Rule 8D for computation of disallowable expenses is

applicable only from assessment year 2008-09 and in respect of prior

years disallowance has to made on a reasonable basis after hearing

the assessee. In this case AO made disallowance under rule 8D and,

therefore,   had   not   considered       the   issue   on   merit   regarding
                                   4                        ITA No. 7742/M/10
                                                            A.Y. 07-08

reasonableness of expenditure. Though CIT(A) has given reasons for

making disallowance @ 5% of average investment, in fact the

disallowance is same as provided in rule 8D. CIT(A) has not given any

specific opportunity to the assessee regarding basis of disallowance

adopted by him. In our view the matter requires fresh examination at

the level of AO in the light of judgment of Hon'ble High Court of

Bombay in the case of Godrej and Boyce Mfg. Co. (supra). We,

therefore, set aside the order of CIT(A) and restore the matter back to

AO for passing a fresh order after necessary examination in the light of

observations made above and after affording opportunity of hearing to

the assessee.

5.    In the result, appeal of the assessee is allowed for statistical


Order pronounced in the open court on 28.8.2012.

     Sd/-                                    Sd/-
(D. MANMOHAN )                         (RAJENDRA SINGH)

Mumbai, Dated: 28.8.2012.
                                5                      ITA No. 7742/M/10
                                                       A.Y. 07-08

Copy to: The Appellant
         The Respondent
         The CIT, Concerned, Mumbai
         The CIT(A) Concerned, Mumbai
         The DR " " Bench

True Copy
                                         By Order

                      Dy/Asstt. Registrar, ITAT, Mumbai.
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