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2011 (6) TMI 774 - AT - Income TaxDisallowance u/s 014A - deduction of interest earned on tax free bonds/dividend income - HELD THAT:- In the case in hand, undisputedly, the assessee's own funds and non- interest bearing funds are more than the investment in the tax free securities then there is no basis for deeming that the assessee has used the borrowed funds for investment in tax free securities. Accordingly, on this factual aspect, we do not find any merit in the contention of the ld DR. Further, it is to be noted that it is not the case of investment in tax free securities every year; but the investment in the earlier years has been carried forward as it is evident from the particulars where the balance at the end of the year shows that the investment is appearing in all the earlier years. Therefore, we do not find any error or illegibility in the order of the CIT(A), qua, the issue of disallowance of interest u/s 14A. disallowance of administrative expenditure u/s 014A - that the assessee is maintaining the treasury department which looks after the day to day investment portfolio of the bank including tax free investments. Having regard to the said factual proposition, the administrative expenses relatable to the income not forming part of the total income can be attributable to the expenditure of special treasury department maintained by the assessee; but it seems the assessee has not filed the exact detail of the operating expenses. Therefore, the CIT(A) is justified in restricting the said disallowance to 1%. Accordingly, the ground raised by the revenue as well as the assessee in the respective appeal and cross objection are liable to be dismissed. deleting the disallowance of the claim for payment of broken period interest - this issue is covered in favour of the assessee and against the revenue by the decision of the Jurisdiction High Court in the case of American Express International Banking Corpn Ltd vs CIT [2002 (9) TMI 96 - BOMBAY HIGH COURT]. disallowance of deduction claimed u/s 036(1)(viia) - the sub-clause (a) of clause (viia) of sub-section (1) of section 036 and proviso to said clause, it is clear that under sub-clause (a), while computing the business income of a Scheduled Bank (not being a foreign bank) or a non Scheduled Bank, deduction is allowable in respect of any provision for bad and doubtful debts to the extent of an aggregate amount not exceeding 7.5% of the total income and 10% of the aggregate average advances made by its rural branches. Thus, the option under the proviso is only an alternative to sub-clause (a). Therefore, the proviso does not provide a deduction in addition to deduction allowable under sub-clause (a) of clause (viia). disallowance is u/s 040(a)(ia) - that the income received or accrued to an individual being a Sikkimese on account of dividend or interest is exempted then no disallowance can be made u/s 040(a)(ia) for non deduction of TDS. We further find that for invoking the provisions of sec. 040(a)(ia), it is necessary precondition that tax is deductible at source under Chapter XIIB in relation to the payment of interest, commission or brokerage and such tax has not been deducted or after deduction has not been paid before the due date. Therefore, when the income of interest in the hands of the recipient is exempted then no tax is deductible under Chapter XVII-B and consequently no disallowance is called for u/s 040(a)(ia).
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