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2015 (11) TMI 1631 - KARNATAKA HIGH COURTDisallowance u/s 14A - Method for determining amount of expenditure in relation to income not includible in total income - Held that:- AO computed the disallowance purportedly under Rule 8(2)(ii), the amount so worked out was admittedly more than the exempt income. Therefore, the Assessing Officer has proceeded to make disallowance at 5% of the total indirect interest expenditure. It is not specified by the Assessing Officer as to why 5% was adopted and has failed to justify that the same is appropriate estimation. As the disallowance was made on an ad hoc percentage without any basis or assigning any reason whatsoever, the disallowance was rightly set aside by the Appellate Authorities. As per the provisions of Section 14A of the Act, the Assessing Officer shall determine the amount of expenditure incurred in relation to exempt income which does not form part of the total income, if he was not satisfied with the correctness of the claim of the assessee in respect of such expenditure. It is settled principle of law that the Assessing Officer is required to record the non-satisfaction of the correctness of the claim. In the absence of such recording of non-satisfaction, the disallowance is untenable. In the case on hand, we do not find any such finding given by the Assessing Officer in the order of assessment for the assessment year 2009-10. As regards the interest referred to in the second limb of Rule 8D of the Rules, the assessee contends that the amounts of investment in such securities in the period under consideration is much less than the amount of capital and surplus funds available with the Company and no portion of the borrowed funds were utilized to make such investments. It is now well settled principle that the disallowance towards interest is not tenable if the investments are made out of own funds or non-interest bearing funds and it is necessary to establish a nexus between the interest bearing funds in investments made. Therefore, the Appellate Authorities have rightly set aside the order passed by the Assessing Officer, which does not establish nexus between the investments and interest bearing funds. Disallowance towards provision of gratuity - Held that:- The authorities, on the basis of the settled principles of law, as declared by the Courts' of law have held that, the estimation of outflow is based on actuarial valuation. Since the estimation of outflow is based on actuarial valuation, the authorities are justified in setting aside the order passed by the Assessing Officer, who has held contrary to the aforementioned settled principle of law.
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