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2016 (1) TMI 979 - AT - Income TaxDisallowance u/s 14A - satisfaction formed by the Assessing Officer before working out the disallowance - Held that:- Working of disallowance as per Rule 8D of the Rules was furnished along with letter dated 09.10.2011. In view of the above said findings of the Assessing Officer, wherein the Assessing Officer had noted that the assessee had declared Nil amount as the amount to be disallowed in terms of section 14A of the Act and thereafter, issued show cause notice to the assessee to explain as to why no disallowance should be made under section 14A of the Act establishes the case of the Department that the Assessing Officer had recorded implicit satisfaction before working out the disallowance under section 14A of the Act. In terms of section 14A(2), we find merit in the claim of the Revenue in this regard and dismiss the contention of the assessee that no satisfaction was formed by the Assessing Officer before working out the disallowance under section 14A of the Act. In view of the business funds available with the assessee and the business assets created by the assessee, we find no merit in the claim of assessee that the amount due to the Sundry Creditors was the interest free funds available with the assessee for making the investments and hence, no disallowance could be made out of interest expenditure. Admittedly, the funds available with the assessee were out of common pool i.e. on account of capital investment by the partners, on which the assessee firm was paying interest and other business funds in the form of Sundry Creditors and advances from customers since the investment was made out of common pool of investments, then the provisions of section 14A of the Act were clearly attracted and the disallowance made under Rule 8D(2)(ii) of the Rules is to be upheld. The said disallowance is to be made in line with the formula provided under the said sub-rule. However, claim of the assessee before us that in view of the ratio laid down by the Hon’ble High Court of Karnataka in Canara Bank Vs. ACIT (2014 (6) TMI 929 - KARNATAKA HIGH COURT), where the assessee has not incurred any expenditure since the dividend was re-invested in the mutual funds itself, no expenditure was attributable to earn the said income. Admittedly, the assessee has not incurred any direct expenses for making the aforesaid investments. However, some part of the administrative expenses is attributable for making the aforesaid investments in funds, income from which is not includable in the total income of the assessee. The dividend earned by the assessee may have been reinvested by the fund manager itself. However, the expenditure relatable to making the investment and taking steps for its redemption and reinvestment involved an element of expenditure and in view of the provisions of Rule 8D(2)(iii) of the Rules, such expenditure is disallowable in the hands of the assessee. - Decided against assessee.
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