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2016 (11) TMI 256 - ITAT DELHIDisallowance u/s 14A - whether section 10B is a deduction or an exemption provision? - Held that:- The language of the heading of Chapter III, it is clear that income as contemplated under section 10B is outside the scope of ‘total income’ and has no relevance with the gross total income. It is, therefore, a section which provides for exemption of income and not for deduction. It is further important to note that provisions of section 14A are applicable in relation to “income which does not form part of total income”. This very phrase is the heading for Chapter III under which the section 10B and also section 10(33) lies. This makes it very apparent and conclusive that the provisions of section 14A are clearly applicable to the investment made in a EOU covered under the provisions of section 10B. The claim of the appellant that section 14A is not applicable to investment made in an EOU covered under the provisions of section 10B is, therefore, not accepted. This ground of appeal is, therefore, dismissed Disallowance under Rule 8D(2)(ii) in respect of shares and mutual funds - Held that:- The assessee has demonstrated that the interest paid was to the specific loans utilized towards purchase of car, purchase of machinery, working capital etc. The Assessing Officer has not been able to establish that the interest was towards loans for non-specific purpose, which could be attributed to the investment in shares on proportionate basis. No investment in shares/mutual funds have been made out of the borrowed funds and, therefore, no disallowance under Rule 8D2(ii) of the Rules could be made for interest on proportionate basis towards investment in shares/mutual funds which could earn exempted income. Inclusion of amount of capital of EOU for the purpose of disallowance under section 14A - Held that:- no borrowed funds were utilized for the purpose of EOU. The profits earned by the EOU contributed to the reserves & surplus. Thus, the entire amount of ₹ 15,45,31,633/- as on 31.03.2009 is out of capital and profit earned over the year. The Assessing Officer has in the assessment order not provided any basis to show that the investment in the EOU has been made out of borrowed funds. The Unit has on its own taken some loans on which interst is being paid and is being debited to its Profit & Loss Account for the purpose of computing its profit. The Assessing Officer has not brought anything on record to show that the head office has taken loans for the purpose of investment in the EOU. The Assessing Officer has taken the opening investment in the EOU at ₹ 16,04,07,523/- and the closing investment at ₹ 15,45,31,633/-. The disallowance under Section 14A on the average of this investment is deleted as the funds are out of appellant’s own sources
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