TMI Blog2013 (9) TMI 156X X X X Extracts X X X X X X X X Extracts X X X X ..... on that issue. This satisfaction cannot be a plain satisfaction or a simple note. It is to be done with regard to accounts of the assessee - Following decision of Balarampur Chini Mills Ltd. 2011 (7) TMI 1150 - ITAT KOLKATA - Decided in favour of assessee. If an assessee has invested in shares, which could get dividend or there is investment which generates dividend income or exempt income as also investment which does not generate exempt income, it is only such investments in respect of which the dividend income or exempted income has been earned which can be considered when computing the disallowance under section 14A read with rule 8D - if there is any interest expenditure, which is directly relatable to any particular income or receipt, such interest expenditure is not to be considered under rule 8D(2)(ii). In the assessee’s case here the interest has been paid by the assessee on the loans taken from the banks for its business purpose. There is no allegation from the banks nor the AO that the loan funds have been diverted for making the investment in shares or for non-business purposes. Further rule 8D(2)(ii) clearly is worded in the negative with the words “not directly att ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wn funds of the assessee without considering that the linkage between the funds borrowed and the investments, the income of which is exempt, was not established by the assessee. 2. That in the facts and circumstances of the case, the Ld. CIT(A) has erred in law in deleting the disallowance of ₹ 3,77,27,610/- in respect of interest made u/s.14A r/w Rule 8D of the Act, in view of the decision of the Hon ble Kolkata High Court in the case of Dhanukha Sons Vs- CIT (Central)-I, Kolkata reported in 201 Taxman 105 (Kol) (Mag), wherein it has been held that in the absence of any material disclosing the source of acquisition of shares which is within the special knowledge of the assessee, the assessing authority can make proportionate disallowance. 3. That the Department craves leave to add, modify or alter any of the above ground(s) of appeal and/or adduce additional evidence at the time of hearing of the case. 4. At the time of hearing, it was submitted by the ld. D.R. that the assessee is a company which is doing the business of rice processing, power generation and retail sale. It was a submission that during the year, the assessee had received dividend inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rted in 201 Taxman 105 (Kol), it was for the assessee to show the source of acquisition of the shares by production of the materials that those were acquired from funds available in the hands of the assessee at the relevant point of time without taking benefit of any loan. The assessee having not shown such availability of funds, the disallowance was liable to be upheld. 4.1 He also relied upon the decision of the Hon ble Kerala High Court in the case of Leena Ramchandran reported in 339 ITR 296. It was a submission that the order of the ld. CIT(A) was liable to be reversed to the extent that he has reduced the disallowance. 5. In reply, the ld. A.R. submitted that as per the provisions of section 14A(2), the AO was to determine the amount of expenditure incurred in relation to such income which does not form part of the total income, in accordance with such method as may be prescribed. It was a further submission that there was also supposed to be satisfaction to the correctness of the claim of the assessee. It was a submission that at the outset, the AO has not shown that the claim of the assessee that there is no amount disallowable was wrong nor is there any satisfact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,27,282/-. It was a submission that it is out of the shares of this investment of ₹ 58,27,282/-, the assessee had received the dividend income and not on the investment of ₹ 103 crores. The ld. A.R. further drew our attention to page 362 of the paper book, which was the copy of the loan sanction document from the State Bank of Bikaner and Jaipur dated 22.12.2007 for letter of credit of ₹ 175 crores. It was a submission that this was on the security of the stock available with the assessee. He further drew our attention to page 370 of the paper book, which was the letter from Allahabad Bank for reviewing and enhancing the limits for working capital from the existing ₹ 250 crores to ₹ 500 crores. It was a submission that this was also enhanced working capital limit, which was to be released only after the tie-up of the entire limit of ₹ 1800 crores from the Consortium. This was also for the Letter of Credit purpose. He further drew our attention to pages 372, 374 and 381, which were all credit sanction advices given by the various banks, being United Bank of India, Indian Overseas Bank. It was a submission that all these were for L.C. only. It was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roposes to invoke the section 14A, he is to record a satisfaction on that issue. This satisfaction cannot be a plain satisfaction or a simple note. It is to be done with regard to accounts of the assessee. In the present case, there is no satisfaction by the AO and consequently, in view of the decision of the Coordinate bench of this Tribunal in the case of Balarampur Chini Mills Ltd. referred to supra, no disallowance under section 14A can be made. 7. Now coming to the merits of the issue. A perusal of the provision of section 14A(1) clearly shows the wordings, in relation to the income which does not form part of the total income under this Act . In the present case, this income, which does not form part of the total income under the Act, is the dividend income of ₹ 1,32,638/-. Therefore, if any disallowance is to be made in respect of expenditure incurred, it should be in relation to this dividend income of ₹ 1,32,638/-. If an assessee has invested in shares, which could get dividend or there is investment which generates dividend income or exempt income as also investment which does not generate exempt income, it is only such investments in respect of which th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is noticed that after considering these facts that the assessee had not used any of its borrowings for purchasing the shares, has deleted the disallowance. On this ground itself, the deletion as made by the ld. CIT(A) is liable to be confirmed and we do so. 7.1 In any case, the working of the disallowance under sub-part (ii) of sub-clause (2) of rule 8D as made by the AO also suffers from a substantial error in so far as in the said rule in regard to the numerator B, the words used are the average value of the investment, income from which does not form or shall not form part of the total income as appearing in the balance-sheet as on the first day and in the last day of the previous year. Here the AO has taken into consideration the investment of ₹ 103 crores made this year, which has not earned any dividend or exempt income. It is only the average of the value of the investment from which the income has been earned which is not falling within the part of the total income that is to be considered. This is why the question of satisfaction is provided in section 14A and rule 8D(1), that relates to the accounts of the assessee. Thus, it is not the total investment at the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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