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2020 (11) TMI 339 - ITAT CHENNAIDisallowances u/s.14A - Addition of interest expenditure on the ground that the assessee is having interest free funds being equity share capital and free reserves which is far less than the interest free funds available with the assessee and therefore no disallowance of interest expenditure is called for - HELD THAT:- In this case, the assessee has made out a case with necessary evidence that it has interest income free funds being share capital and surplus reserve in excess of investments which yield exempt income. AO as well as CIT(A) have erred in disallowing interest expenditure under Rule 8D(2) of Income Tax Rules, 1962. Accordingly, we direct the AO to delete interest disallowances under rule 8D(2)(ii) of IT Rules 1962. Disallowance of expenditure @ 0.5% average value of investment under 3rd limb of Rule 8D(2)(iii) - AO has taken value of investments in partnership firm as on 31.03.2012 on the basis of amount disclosed in the financial statements, whereas the assessee claimed that original investment was at ₹ 1.5 crores only and remaining balance was out of accrued profit of the firm which needs to be excluded while computing average value of investments. This aspect needs verification from the AO because the facts are not clear as the Assessing Officer stated that investments in partnership firm is at ₹ 7.35 crores, whereas the assessee claimed investment in partnership firm is ₹ 1.5 crores. As regards investments in mutual funds we have given our thoughtful consideration to arguments of the assessee in light of provisions of section 14A - what is to be considered in exempt income in form of dividend received by an assessee, but not capital gain derived on transfer of such investments to decide applicability of disallowances of expenditure. If dividend from mutual fund is exempt from tax, then certainly expenditure relatable to such exempt income needs to be disallowed. In this case, there is no clarity whether any exempt income is received from such investments from mutual funds. Receipt of exempt income is a precondition for including investments in average value of investments, because investments which do not generate exempt income for the year cannot be included in average value of investments. In this case, the fact with regard to nature of investments and whether any exempt income was earned from investment is not clear from the orders of the lower authorities. Therefore, to ascertain correct facts with regard to nature of investments, the issue needs to be go back to the file of the Assessing Officer. Therefore, we remit issue relatable to computation of disallowances under 3rd limb of Rule 8D regarding 0.5% of average value of investments to the file of the AO to reconsider the issue. AO is therefore, directed to consider the investments made in partnership firm as well as mutual funds while computing average value of investments in accordance with law. - Appeal filed by the assessee is partly allowed for statistical purposes.
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