After extensive hearing spread over several days, the Bombay High Court today (4.8.2010) reserved judgement in Godrej & Boyce vs. DCIT, the lead matter challenging the judgement of the Special Bench of the Tribunal in ITO vs. Daga Capital 117 ITD 169 on the applicability of s. 14A & Rule 8D.
The core arguments, inter alia, of the assessee were the following:
(a) That s. 14A does not apply to shares and units because (i) the income there from is not “tax-free” in view of the ‘dividend distribution tax’ paid by the payer & (ii) the potentiality of taxable income arising on sale thereof;
(b) Rule 8D is not retrospective because (i) s. 14A (2) was enacted w.e.f. 1.4.2007 and (ii) it is substantive law and not procedural law;
(c) If Rule 8D is not retrospective, then for the earlier years, the term “expenditure in relation to” in s.14A has to be confined to expenditure which has a nexus / proximate connection with the tax-free income and not all expenditure;
(d) The application of Rule 8D is not automatic. It can be invoked only where the AO shows that he is not satisfied with the correctness of the assessee’s claim and the reasons for his non-satisfaction cannot be addressed by an adjustment in figures;
(e) Rule 8D is unconstitutional as it makes an arbitrary and unreasonable disallowance and imposes undue burden on the assessee.
The assessee was represented by S/Shri. S. E. Dastur & P. J. Pardiwalla, Sr. Advocates and S/Shri. Nitesh Joshi & A. K. Jasani, Advocates while the department was represented by S/Shri. Darius Khambatta, ASG & J. S. Saluja, Advocate.