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TMI Blog2015 (10) TMI 393X X X X Extracts X X X X X X X X Extracts X X X X ..... confirmed by the CIT(Appeals) of expenses incurred in earning tax-free income invoking provisions of section 14A of the Income-tax Act, 1961 ["the Act"] r.w. Rule 8D(2) of the Income-tax Rules ["the Rules"] can be sustained. 3. The factual background of the case is as follows. The assessee is a company engaged in the business of manufacture of vaccum systems, pumps, watch crystals, filters and optical counting. It is not in dispute that during the previous year, the assessee earned divided income of Rs. 9,728 which was exempt u/s. 10(35) of the Act. In view of the provisions of section 14A of the Act which provides that any expenses incurred in earning income which does not form part of total income should not be allowed as a deduction, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed interest expense against the business following aspects before CIT(A): i) The Interest debited to profit & loss account of Rs. 2,33,64,542/- which was considered by the assessing officer for disallowance under Rule 8D of the Rules is the interest incurred by the assessee on account of credit facilities and other lease obligations. ii) Term loan period loan granted by banks are with prior conditions and are disbursed by banks to the vendor directly. So question of investing such amount in investment which are likely to yield tax free income, does not arise for consideration at all. iii) Cash credit facilities granted by banks are also with prior conditions that such amounts are utilized for business working capital and not for investme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inancial year Borrowings from banks Compulsorily Convertible Debentures Investment in mutual funds Investment in building Investment in machinery Investment in subsidiary 31/3/2006 118,234,771 - - - - - 31/3/2007 145,515,128 300,000,000 130,240,687 - 62,270,612 - 31/3/2008 328,751,010 300,000,000 110,105,846 - 195,440,732 - 31/3/2009 368,389,285 300,000,000 - - 195,440,732 100,000,000 ix) The Assessee pointed out that from the above table, it would be evident that interest debited to profit & loss account of Rs. 2,33,64,542/- was towards earning of business income only and not towards earning of dividend income. On disallowance under rule 8D(2)(iii) of the Rules: The Assessee also pointed out th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest was paid and its use for the business of the assessee. He also observed that if assessee kept both borrowed funds and own funds in the same bank account and withdrew the same for making investments which would yield tax-free income. According to him, in those circumstances one cannot say with certainty that borrowed funds on which interest had been paid had not been utilised for making investments which are likely to yield tax free income. The CIT(Appeals) followed his own decision rendered in the case of Jupiter Capital Pvt. Ltd. in ITA No.168/AC-11(5)/A-I/10-11 dated 30.11.2011, wherein the CIT(A) had concluded that disallowance under Rule 8D is mandatory on and from AY 2008-09 from which Assessment Year Rule 8D was applicable. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The second aspect is there appears to have been no scrutiny of the accounts by the AO an aspect which is completely unnoticed by the CIT(A) and the ITAT. The third, and in the opinion of this court, important anomaly which we cannot be unmindful is that whereas the entire tax exempt income is Rs. 48,90,000/-, the disallowance ultimately directed works out to nearly 110% of that sum, i.e., Rs. 52,56,197/-. By no stretch of imagination can Section 14A or Rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in Section 14A, and is only to the extent of disallowing expenditure "incurred by the assessee in relation to the tax exempt income". This proportion or portio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T(Appeals) on this issue and remand the question of disallowance of interest expenses under Rule 8D(2)(ii) to the Assessing Officer for fresh consideration with a direction to the assessee to furnish the required details to substantiate its claim as made before the CIT(Appeals). 11. As far as disallowance under Rule 8D(2)(iii) is concerned, the assessee has not shown as to what is the expenditure to be disallowed. The assessee's only plea before the CIT(A) was that weighted average based on time (no. of days) in which investments were made should be considered. As rightly contended by the ld. DR, the above stand of the assessee cannot be sustained in view of the clear mandate of Rule 8D(2)(iii) of the Rules, which refers to only the averag ..... X X X X Extracts X X X X X X X X Extracts X X X X
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