IN INCOME TAX APPELLATE TRIBUNAL C BENCH, KOLKATA Before Shri M.Balaganesh, Accountant Member, and Shri S.S.Viswanethra Ravi, Judicial Member I.T.A. No. 319/KOL/2014 A.Y: 2006-07 M/s. Modern Fibotex Vs. DCIT,Cir-10, Kolkata India Limited PAN: AABCM 7732P (Appellant) (Respondent) Appearances by: Shri Ashim Choudhury, Advocate, FCA, AR for Assessee Shri Rajat Kumar Kureel, JCIT, Sr. D.R for Revenue Date of hearing : 22-08- 2016 Date of pronouncement :28 -09-2016 ORDER Shri S.S. Viswanethra Ravi, JM This appeal by Assessee directed against order dated 03-12-2013 of Commissioner of Income Tax (Appeals),XII, Kolkata for assessment year 2006-07. 2.In this appeal, assessee has raised following effective ground:- 1. For that Commissioner of Income Tax (Appeals) XII, Kolkata, was not justified in sustaining disallowance of Rs.50,483/- considering 1% of exempted Income (Dividend Income) of Rs.50,48,305/- as indirect expenditure incurred to earn such exempt income and in doing so, AO erred in law as well as on facts. 3.The sole ground raised for our consideration to decide is as to whether CIT-A is justified in confirming disallowance of Rs.50,483/- being 1% as indirect expenditure of Dividend earned in facts and circumstances of case. 4.The facts are that assesse is company involved in business of manufacture and export of textiles and dealers and investors of shares and securities and also derived income from interest and dividend for year under consideration. assessee filed its return of income showing loss of Rs.15,69,781/- on 30-11-2006. Under scrutiny and notices u/s.143(1) and 142(1) of Act were issued. assessee submitted details/documents and filed written submissions. 5.In its return, Assessee claimed dividend of Rs.50,48,305/- as exempt income and Assessing Officer was of view, assesse would have incurred expenditure in earning claimed exempt income and sought explanation why such expenditure should not be disallowed from such exempt income. main contention of assessee amongst other contentions as raised in its written submissions was that Section 14A does not apply as it came into force from 01-04-2007 i.e from A.Y.2007-08. AO not satisfied with contentions of Assessee, made applicable Rules 8D(2)(ii) and 8D(2)(iii) of Rules 1962 and computed sum of Rs.3,77,590/- for purpose of Section 14A of Act and disallowed same and added to total income of Assessee. 6.The Assessee challenged assessment order before CIT-A, contending that it did not invest in shares deriving funds from borrowed loans. Share Capital and Reverses & Surplus of Assessee were more than investments standing as on 31.03.2006. Assessee relied on decision of Honble High Court of Bombay in case of Godrej & Boycee Vs DClT reported in 284 ITR 85. Considering submissions of Assessee, CIT-A did not agree with finding of AO in computing expenditure by applying Rule 8D(2)(ii) and 8D(2)(iii) of Rules 1962, but, however, restricted disallowance to 1% of exempt income by relying on orders of Kolkata Tribunal, wherein, according to CIT-A, held in many cases that 1% may be taken into consideration in determining expenditure that may have incurred in earning exempt income and accordingly, CIT-A disallowed Rs.50,483/- as against Rs.3,77,590/- as made by AO. relevant portion of which is reproduced herein below: I have carefully considered submission put forth on behalf of appellant alongwith supporting details/documents furnished & case laws relied upon, perused facts of case including impugned assessment order and other materials brought on record. I find substantial force in argument advanced on behalf of appellant. I agree with contention of A/R that provisions of Rule 8D of I. T. Rules are not applicable in appellant's case being relevant assessment year 2006-07 as same are applicable from assessment year 2008-09 onwards in view of decision of Hon' ble High Court of Bombay in case of Godrej & Boycee Mfg. Co.(supra). At same time I agree with contention of Assessing Officer that expenses incurred relating to earning of exempt dividend Income are still disallowable u/s.14P, of Act in relevant assessment year. However, I am of view that AO was not justified in applying provisions of Rule 8D of I. T. Rules, 1962 for determining disallowable expenses u/s 14A of Act in relevant AY as same are not applicable in this year. I also find that various Benches of jurisdictional ITAT, Kolkata have held that 1 % of exempt income can reasonably be considered as indirect expenditure incurred to earn such exempt income for assessment years prior to assessment year 2008-09. Under facts & circumstances of case and respectfully following decisions of Hon'ble ITAT,Kolkata, I direct AO to restrict disallowance of indirect expenses incurred u/s 14A of Act to Rs.50,483/- being 1% of dividend income of Rs.50,48,305/- as against Rs. 3,77,590/'disallowed by him. Thus, these grounds of appeal of appellant are partly allowed. 7.Having not satisfied with order of CIT-A, Assessee before us and Ld.AR reiterated submissions as made before AO and CIT-A. Ld.AR relied on order of AO. 8.Heard rival submissions and perused material evidence on record. As rightly pointed by Ld.AR as it could be gathered from written submissions dt:16-122008 as filed before AO and from impugned order of CIT-A, provision of Rule 8D came into force from 0104-2007 relevant to A.Y 2007-08 and impugned order was passed involving return of income filed for A.Y.2006-07 and, therefore, applicability of provisions of Rule 8D therewith, in our opinion, does not apply to year under consideration. But, however, we find that order of CIT-A is justified in respect of restricting disallowance at 1%, as he rightly taken into consideration observations of Kolkata Tribunal in holding that 1% of exempt income is reasonable in computing expenditure in earning dividend income. Honble Jurisdictional High Court of Calcutta in case of CIT vs M/S R.R.Sen & Brothers in GA No.3019/12 in ITAT No.243/2012 upheld decision of Kolkata Tribunal in computing expenditure at 1% of dividend income. relevant portion of which is reproduced herein below: Court:- assessee did not show any expenditure incurred by him for purpose of earning money which is exempted under income tax. Tribunal has computed expenditure at 1 per cent of such dividend income which, according to them, is thumb rule applied consistently. We find no reason to interfere. 9.In light of principle laid down by Honble Jurisdictional High Court of Calcutta and in view of discussion herein above, we are of view order of CIT-A does not require our interference and it is justified, accordingly, sole ground raised by Assessee fails and it is dismissed. 10.The ground no-2 is general and needs no consideration and it is dismissed. 11.In result, appeal filed by Assessee is dismissed. Order Pronounced in Open Court on 28th September,2016 Sd/- Sd/- M.BALAGANESH S.S.VISWANETHRA RAVI ACCOUNTANT MEMBER JUDICIAL MEMBER Dated: 28 /09/2016 Copy of order forwarded to:- 1.The Appellant/Assessee: M/s.Modern Fibotex India Limited 14/1B, Ezra Street, Kol-1. 2.The Respondent/Department: DCIT, Cir-10, Aaykar Bhawan P-7 Chowringhee Square, Kol-69. 3.CIT 4.CIT(A) 5.The Departmental Representative 6.Guard File True Copy By order Assistant Registrar PRADIP SPS Income Tax Appellate Tribunal Kolkata benches, Kolkata M/s. Modern Fibotex India Limited v. DCIT,Cir-10, Kolkata