TMI Blog2012 (10) TMI 247X X X X Extracts X X X X X X X X Extracts X X X X ..... s made out of own funds or out of borrowed funds. U/s 14A, expenditure incurred in relation to exempted income is to be disallowed only if the Assessing Officer is satisfied with the expenditure claimed by the assessee pertaining to the said exempt income. Court has made very specific that in case, no such exercise was carried out by the Assessing Officer then the matter is to be remanded back for afresh investigation and provisions of Rule 8D shall apply w.e.f. AY 2008-09; Since Assessing Officer had not enquired the issue in the light of the above legal pronouncement. Specially the pronouncement of the High Court was not available at that time, hence, the Assessing Officer’s assessment order was devoid of merits as also the law applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of section 14A of the I.T.Act. The explanation of the assessee was that the over-draft facility from the bank was availed against the bank FDRs. The amount was used towards investment in shares on which the assessee has shown gain and offered to tax. However, the Assessing Officer has held that as per the provisions of section 14A of the I.T.Act, no expenditure was to be allowed against the exempted income, hence the impugned addition was made as per the following observation:- Further, taxable income also includes, Salary income and income from Capital gains. The question of expenditure to earn the income and that to not forming part of Income cannot be accepted. As mentioned earlier, assessee has claimed interest expens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee has failed to establish such a nexus, the action of the Assessing Officer is disallowing interest expenses is correct, and is upheld. 4. Having heard the submissions of both the sides, we have noticed that although the assessee has claimed before the Revenue Authorities that the over-draft facility was used to earn the taxable income but even on demand the nexus was not proved. The assessee was asked to establish the nexus the availability of interest bearing funds and those utilization towards taxable income. As against that the assessee s contention was simply that sufficient funds were available to make invest to earn taxable interest income. 4.1. In any case, the applicability of the provisions of section 14A of the I.T. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Amendment), Rules, 2008 by publication in the Gazette dated 24/03/2008, relevant findings are reproduced below:- a) The ITAT had recorded a finding in the earlier assessments that the investments in shares and mutual funds have been made out of own funds and not out of borrowed funds and that there is no nexus between the investments and the borrowings. However, in none of those decisions was the disallowability of expenses incurred in relation to exempt income earned out of investments made out of own funds considered. Moreover, under Section 14A, expenditure incurred in relation to exempt income can be disallowed only if the assessing officer is not satisfied with the correctness of the expenditure claimed by the assessee. In the pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce. The Assessing Officer would have to arrive at his determination after furnishing an opportunity to the assessee to produce its accounts and to place on the record all relevant material in support of the circumstances which are considered to be relevant and germane. For this purpose and in light of our observations made earlier in this section of the judgment, we deem it appropriate and proper to remand the proceedings back to the Assessing Officer for a fresh determination. Conclusion : 74. Our conclusions in this judgment are as follows ; i) Dividend income and income from mutual funds falling within the ambit of Section 10(33) of the Income Tax Act 1961, as was applicable for Assessment Year 2002-03 is not includible in comput ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has to enforce the provisions of sub section (1) of Section 14A. For that purpose, the Assessing Officer is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The Assessing Officer must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record; vii) The proceedings for Assessment Year 2002-03 shall stand remanded back to the Assessing Officer. The Assessing Officer shall determine as to whether the assessee has incurred any expenditure (direct or indirect) in relation to dividend income / income from mutual fund ..... X X X X Extracts X X X X X X X X Extracts X X X X
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