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2015 (12) TMI 501 - ITAT PUNE

2015 (12) TMI 501 - ITAT PUNE - TMI - Disallowance u/s 14A - CIT(A) deleted part disallowance - Held that:- It is an admitted position that no expenses directly attributable to the earning of dividend income has been quantified as per Rule 8D(2)(i) of the Rules. Secondly, proportionate disallowance has been made towards interest expenses attributable to the average investments held by the assessee as per formula laid down in Rule 8D(2)(ii) of the Rules. The plea of the assessee is that non-inter .....

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of making payment. The overall position of interest-free funds, borrowed funds, etc. qua the corresponding investments yielding tax-free income is a relevant factor need to be borne in mind. It is not the case of the Revenue that any direct expenses including interest expenses have been incurred. in the case of CIT vs. HDFC Bank Ltd. reported in (2014 (8) TMI 119 - BOMBAY HIGH COURT), wherein the Hon'ble High Court categorically held that in-principle, if there are funds available both interest .....

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ssee itself has made a disallowance of ₹ 35,007/- being one month salary of its Accountant towards estimated expenses attributable to the tax-free income. Thus, admittedly, certain expenditure is accepted to have been incurred by the assessee. It is the quantum of estimation which is subject matter of dispute. Statutory framework provides that Rule 8D(2)(iii) of the Rules will come into play when essentially there is certain amount of expenditure which can be said to have been incurred by .....

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enditure incurred in earning the taxfree income which remains un-discharged. Accordingly, we decline to interfere with the disallowance sustained by the CIT(A) under Rule 8D(2)(iii) of the Rules

On facts, having regard to the colossal investments and dividend income, no cogent basis for disallowance of one month salary of an Accounts person is discernible. The assessee has failed to establish correctness of disallowance offered by it. The ingredients of prima facie satisfaction conte .....

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elating to assessment year 2009-10 passed under section 143(3) of the Income-tax Act, 1961 (in short "the Act"). 2. The Grounds of Appeal raised by the assessee are as under :- "1. The learned CIT(A)-V, Pune erred in law and on facts, in partially sustaining the disallowance of expenses u/s 14A of the ITA, 1961 made by the learned ACIT, Range-9, Pune. The learned CIT(A)-V, Pune ought not to have sustained disallowance of ₹ 6,35,558/- u/s 14A of the ITA, 1961, considering the .....

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nvestments in various companies are made by the appellant from it's own funds. The learned I-T authorities further erred in law in not following ratio of CIT vs. Reliance Utilities & Power Ltd. - 313 ITR 340 (Bombay) as regards the theory of presumption of investments from own funds. 4. The learned CIT(A)-V, Pune erred in law and on facts in sustaining ad-hoc disallowance of expenses @ 0.50% on average investments of the appellant without appreciating the reasonable disallowance of ͅ .....

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Rules"). 4. In brief, the relevant facts concerning the issue involved are that the assessee company is engaged in the business of manufacturing of Steam Control Instrumentation. During the course of assessment proceedings, the Assessing Officer noticed that the assessee company has, inter-alia, declared tax-free dividend income of ₹ 4,11,66,682/- which was claimed to be exempt. The Assessing Officer further noted that the assessee had made investments in shares, securities and mutual .....

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The breakup of disallowance made by the AO is as under :- (a) in terms of Rule 8D(2)(ii) of the Rules - ₹ 5,82,322/- (b) in terms of Rule 8D(2)(iii) of the Rules - ₹ 5,02,668/- Thus, estimated suo-motu disallowance of ₹ 35,007/- by the assessee was not agreed upon by the Assessing Officer. 6. In appeal before the CIT(A), it was submitted by the assessee that the assessee himself has disallowed ₹ 35,007/- voluntarily being one month salary of the Accounts Officer as reason .....

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, the provisions of section 14A of the Act r.w. Rule 8D of the Rules are clearly applicable. The CIT(A) further observed that adhoc disallowance of ₹ 35,007/- being one month salary of the Account Officer is without any basis and cannot be accepted in view of specific manner provided in Rule 8D of the Rules for working of disallowance. Nonetheless, the CIT(A) agreed to the contention of the assessee that the total investments generating tax-free dividend income also include investments in .....

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llowance of administrative expenses, etc. being 0.5% of average value of investment under Rule 8D(2)(iii) of the Rules worked out to ₹ 3,10,668/-. Accordingly, the disallowance under section 14A of the Act r.w. Rule 8D of the Rules was reduced and revised to ₹ 6,70,565/- as against the aggregate disallowance of ₹ 10,84,990/- computed by the Assessing Officer. 7. Aggrieved by the impugned order of the CIT(A), assessee is in appeal before us. 8. The Ld. Authorized Representative .....

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1. He pointed out that the own funds of the assessee company as on 31.03.2009 stands at ₹ 71.56 crores as against the consolidated investment in shares and securities, debentures and mutual funds, etc. which stands at ₹ 10.53 crores. Therefore, the interest-free own funds available with the assessee far outweigh the total investments by nearly 7 times. Thus, impugned investments can be deemed to be made out of non-interest bearing capital available at the disposal of assessee. Theref .....

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t interest-free funds are available to match corresponding application in its investments yielding exempt income, the disallowance of interest component under Rule 8D(2)(ii) of the Rules is not justified. 9. He further emphasized that disallowance under Rule 8D(2)(iii) of the Rules is also improper. It is so because the dividend is self-generated income for which no administrative costs etc. per se are required to be incurred. However, the assessee itself has offered a reasonable disallowance of .....

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sition, he relied upon the decision of the Kolkata Bench of the Tribunal in the case of Balarampur Chini Mills Ltd. vs. DCIT reported in (2011) 140 TTJ 73 (Kol) (UO). He, therefore, submitted that there is no justification to invoke Rule 8D(2)(iii) to invite estimated disallowances by invoking Rule 8D of the Rules. 10. The Ld. Departmental Representative for the Revenue relied upon the orders of the authorities below and pleaded that no interference with the order of the CIT(A) is called for. 11 .....

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The plea of the assessee is that non-interest bearing own funds as source far exceeds the corresponding application of funds toward investments. In the circumstances, the contention of the assessee that investment in shares cannot be said to be out of borrowed funds on which the interest expenditure has been incurred is well founded and deserves to be accepted. Mere utilization of OD / CC accounts for routing payment towards investment shares by itself has no consequence as such. The payment ou .....

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e are also squarely governed by the direct decision of the Hon'ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd. reported in (2014) 366 ITR 505 (Bom), wherein the Hon'ble High Court categorically held that in-principle, if there are funds available both interest-free and interest bearing, then a presumption would arise that investment would be out of interest-free funds generated or available with the assessee, if the interest-free funds were sufficient to meet the investments. .....

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the tax-free income. Thus, admittedly, certain expenditure is accepted to have been incurred by the assessee. It is the quantum of estimation which is subject matter of dispute. Statutory framework provides that Rule 8D(2)(iii) of the Rules will come into play when essentially there is certain amount of expenditure which can be said to have been incurred by the assessee for which quantification of exacting standards are not possible. Rule 8D(2)((iii) provides statutory formula for computation o .....

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sustained by the CIT(A) under Rule 8D(2)(iii) of the Rules which is quantified at Rs. ₹ 3,10,668/-. Thus, on this count, the plea of the assessee fails. 14. The Assessee has inter alia also taken a legal plea and has objected to authority of Assessing Officer in invoking section 14A of the Act in the absence of requisite 'satisfaction' in this regard. In this context, We find that the Assessing Officer has recorded a finding a finding of fact that the investments have been made ou .....

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