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2016 (11) TMI 747 - AT - Income TaxDisallowance u/s 14A - assessee has raised the issue that the disallowance as under Rule 8D2(iii) could be made by the Assessing Officer only after establishing/specifying the nexus of the expenditure with the earning of the exempt income - Held that:- The assessee itself has accepted the fact of nexus of expenditure with the earning of the exempt income by disallowing a portion of the expenses suo motu, though not under Rule 8D, but albeit by adopting a different method, which the assessee thought to be reasonable. In such circumstances, in our opinion, no further action is required on the part of the Assessing Officer to establish the nexus of expenditure with the exempt income, when he has invoked the Rule 8D of the Income Tax Rules. We direct the Assessing Officer to compute the disallowance under Rule 8D(iii) of the Income-tax Rules at the rate of 0.5% of the investment which actually have resulted in exempt dividend income rather than 0.5% of the average of total investment. Thus, the ground of the assessee is partly allowed. Direct attributable expenses in respect of tax free dividend income - Held that:- We find that the assessee has successfully demonstrated complete flow of funds from its borrowing at a lower interest rate to the destination to different corporate entities at a slightly higher rate of interest and, therefore, the nexus of the interest expenses with activity of financing has been substantiated by the assessee and there is not a single amount of interest-bearing borrowings has been found to be related to the investment, which yielded tax free dividend income. The Assessing Officer has failed to establish any nexus between the interest-bearing borrowed funds and the investment in assets yielding tax-free income. In our opinion, the findings of the learned Commissioner of Income Tax (Appeals) on the issue in dispute is well reasoned and no interference is required on our side. Further, the Assessing Officer in the assessment year 2009-10, has also accepted the fact of having no nexus between the borrowed funds and the investment in assets yielding tax-free income and accordingly has not made any disallowance under Rule 8D2(ii) of the Act. Thus, the rule of consistency also demand that no disallowance under section Rule 8D2(ii) of the Act can be made in the year under consideration. In view of above, we uphold the findings of the learned Commissioner of Income-tax (Appeals) on the issue in dispute and the ground of the appeal of the Revenue is dismissed.
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