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2012 (10) TMI 199 - AT - Income TaxDisallowance u/s 14A - investments in shares of companies and units of mutual funds - It is mentioned that the investments have been made with a view to earn dividend - investments have been made in this year from interest-free funds available with the assessee - no dividend had been received from various companies – Held that:- No evidence on record to suggest that any investment in shares or units has been made in this year out of borrowed funds on which interest is payable by the assessee - payment of interest is in respect of income other than dividend income. In such a situation, the interest cannot be said to be a kind of general expenditure incurred for earning of various kinds of incomes. Therefore, the provision contained in Rule 8D(2)(ii) is not applicable - AO has to examine the expenditure and its nexus with the earning of tax-free income, as provided in sub-section (2) of section 14A. If there is no such nexus, the disallowance cannot be made - no interest expenditure had been incurred for earning tax-free income - provision contained in Rule 8D(2)(ii) cannot be invoked Disallowance of misuse charges - assessee constructed commercial space in the basement which was not permissible as per master plan - misuse charges were paid in respect of the aforesaid space – Held that:- Misuse charges were also paid for illegally using the space for a period of time till the infraction was noticed by the DDA and it ordered the removal of the infraction - nature of interest on misuse charges is the same as misuse charges - Explanation-1 to section 37(1) provides inter-alia that any expenditure incurred for any purpose which is prohibited by law shall not be deemed to have been incurred for the purpose of business and no deduction or allowance shall be made in respect of such expenditure - this provision is clearly applicable to the case of the assessee – in favor of revenue
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