TMI Blog2012 (9) TMI 551X X X X Extracts X X X X X X X X Extracts X X X X ..... umption that investments were made out of borrowed funds disallowance under Section 36(1)(iii) was not warranted - against revenue. Disallowance u/s 14A - investments made by the assessee were not out of any surplus funds - CIT(A) deleted the addition - Held that:- There is no dispute that during these two years, Rule 8D of Income-tax Rules, 1962, was not applicable in view of the decision of Hon’ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd [2010 (8) TMI 77 - BOMBAY HIGH COURT] as Rule 8D applicable from Assessment Year 2008-09 and assessment years in question is 2006-07 and 2007- 08 thus the matter requires a re-visit by the A.O as disallowance for earlier period to be determined on reasonable basis - in favour of revenue for statistical purposes. Disallowance u/s 14A - CIT(A) partially deleted the disallowance to third limb of Rule 8D, i.e. 5% on the average value of investments - Held that:- As D.R. fairly admitted that Rule 8D was applicable from impugned assessment year and therefore, the A.O. was obliged to compute the deduction in accordance with the said rule & had not applied Rule 8D for making disallowance under Section 14A the matter has to go b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee by 4.4.2003. Assessing Officer sought explanation from the assessee as to why a disallowance of interest should not be made for loans taken by the assessee since such loans were used for the above mentioned investments. Reply of the assessee was that the investment made in UTI Money Market Fund was out of idle funds available with it and not from any borrowed funds. As for the acquisition of shares in MPIPL, reply of the assessee was that the said company was also engaged in a business of security services in Mumbai and the acquisition was done as a part of the expansion programme of business of the assessee. As per the assessee, it was in the same line of business. However, the A.O. was not impressed. According to him, the investment in UTI Money Market Fund was done from funds lying in a bank account of the assessee with M/s UTI Bank and such bank account had in it both borrowed funds as well as business surplus. As per the A.O., assessee could not discharge the onus lying on it to prove that investments were out of own funds. Reliance was placed by the Assessing Officer on the decision of Hon ble jurisdictional High Court in the case of CIT v. Coimbatore Salem Transp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee had sufficient interest free funds available with it. As for the case of Hon ble jurisdictional High Court in the case of K. Somasundaram Bros. (supra), CIT(Appeals) was of the opinion that in the said case, borrowed funds were advanced to partners and therefore, facts were entirely different. Further, as per the CIT(Appeals), a disallowance under Section 14A was not sustainable since funds for the investments had gone out of a common kitty and therefore, could not be stated that any borrowed funds were used for the purpose of such investments. He, therefore, deleted the disallowance made by the Assessing Officer for all these years. 6. Now before us, learned D.R. strongly assailing the orders of CIT(Appeals), submitted that the resource and surplus available with assessee were all used for funding the sundry debtors. Assessee could not establish a one-to-one match between own funds and investments in shares as well as UTI Money Market Fund. According to learned D.R., the disallowances were made by the Assessing Officer under Section 36(1)(iii) of the Act since it was not for the purpose of business of the assessee and the A.O. had not relied on Section 14A for making th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es Surplus : ₹ 6,39,95,610/- Depreciation reserves : ₹ 1,61,00,191/- Total interest free fund : ₹ 8,13,45,801/- Total investments made by the assessee if we consider both UTI Money Market Fund and MPIPL, came to only ₹ 48 lakhs. When viewed against the substantial reserves and surplus available with assessee, we cannot say for definite that any loan funds were utilized for the purpose of investments. There is a clear finding by the A.O. himself that borrowed funds as well as business surplus formed a composite fund and investments were made out of such funds. No doubt, assessee was unable to show a one-to-one matching between the investments and surplus funds. However, the Assessing Officer has also not been able to bring out any link between borrowed funds and investments. Share purchased by the assessee in M/s MPIPL was for having controlling interest therein. Assessing Officer himself has noted that assessee had purchased 1216 out 2200 shares from the promoters of the said company. It is also not disputed that the said company was engaged in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... As per the Revenue, investments made by the assessee, which earned it dividends, were not out of any surplus funds or any interest free funds and CIT(Appeals) gave relief to the assessee without studying the liquidity position at the time of making such investments. 13. Facts apropos are that for the above two assessment years, assessee had claimed finance charges of ₹ 3,57,000/- and ₹ 2,52,869/- and interest payment of ₹ 8,28,000/- and ₹ 11,41,323/- respectively in its Profit Loss account. Based on his finding for preceding assessment years 2004-05 and 2005-06, Assessing Officer came to a conclusion that assessee had made such investments out of borrowed funds. As per the A.O., dividends received from M/s MPIPL were exempt and therefore, a disallowance under Section 14A of the Act was called for. He disallowed the finance charges and interest payments for these years, relying on Section 14A of the Act. In other words, for these years, he chose to make the disallowance under Section 14A, rather than Section 36(1)(iii) he applied for the earlier years. 14. Assessee moved in appeal for both the years. Argument of the assessee was that it had interest f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determination of the amount of expenditure incurred in relation to exempt income. The expression used is - such method as may be prescribed . We have already mentioned above that by virtue of Notification No.45 of 2008 dt. 24th March, 2008, the CBDT introduced r. 8D in the said Rules. The said r. 8D also makes it clear that where the A.O., having regard to the accounts of the assessee of a previous year, is not satisfied with (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act for such previous year, the A.O. shall determine the amount of the expenditure in relation to such income in accordance with the provisions of sub-r. (2) of r. 8D. We may observe that r. 8D(1) places the provisions of s. 14A(2) and (3) in the correct perspective. As we have already seen, while discussing the provisions of sub-ss. (2) and (3) of s. 14A, the condition precedent for the A.O. to himself determine the amount of expenditure is that he must record his dissatisfaction with the correctness of the claim of expenditure made b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue of the investment, income from which does not or shall not form part of the total income, is taken. We are of the opinion that in view of various judicial pronouncements with regard to disallowance under Section 14A of the Act, the matter requires a re-visit by the A.O. We, therefore, set aside the orders of authorities below and remit the issue back to the file of the A.O. for consideration afresh in accordance with law. 19. Appeals of the Revenue for assessment years 2006-07 and 2007- 08 are treated as allowed for statistical purposes. 20. This leaves with last appeal of the Revenue, which is for assessment year 2008-09. 21. In this appeal, Revenue is aggrieved that CIT(Appeals) partially deleted the disallowance made by the A.O. under Section 14A of the Act. As per the Revenue, CIT(Appeals) ought not have restricted the disallowance to third limb of Rule 8D, i.e. 5% on the average value of investments. 22. Facts giving rise to the disallowance for impugned assessment year are also similar to that of preceding assessment years, namely, assessment years 2006-07 and 2007-08. A.O. had for the impugned assessment year also made a disallowance under Section 14A of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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