TMI Blog2016 (4) TMI 219X X X X Extracts X X X X X X X X Extracts X X X X ..... e Utilities & Power Ltd.(2009 (1) TMI 4 - BOMBAY HIGH COURT ) has held that where the interest free funds far exceed the value of investments, it should be considered that investments have been made out of interest free funds and no disallowance u/s. 14A towards any interest expenditure can be made. This view was again confirmed by the Hon'ble Bombay High Court in CIT v. HDFC Bank Ltd [2014 (8) TMI 119 - BOMBAY HIGH COURT ] wherein it was held that when investments are made out of common pool of funds and non-interest bearing funds were more than the investments in tax free securities, no disallowance of interest expenditure u/s. 14A can be made. - Income Tax Appeal No. 471/2015 - - - Dated:- 11-3-2016 - Jayant Patel And B. V. Nagarathna, JJ. For the Appellants : Sri K V Aravind, Adv JUDGMENT The appellant has preferred the present appeal by raising two main substantial questions of law, which are as under: i) Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in setting aside the computation made by the assessing authority in respect of claim for deduction under Section 35(2AB) of I.T.Act even when the assessing authori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (given above in bold letters), which in our opinion, is very material. The above guideline only means that in the process of carrying out the R D work, if the assessee acquires any assets or products that should not be disposed of without the approval of Secretary, DSIR. If such assets are sold, the sales realization arising therefrom are to be setoff against the R D expenditure of the R D centre which is claimed as decuction u/s. 35(2AB). It is evident from the above guideline that it is only sales realization arising out of the assets sold that should be offset against R D expenditure. In respect of sale of products acquired emanating out of R D work done in an approved facility, the sale proceeds need not be reduced from the R D expenditure. In our view, the reason for not including sales realization arising out of products emanating out of R D work done and sold is because such sales would be reflected as receipts by the assessee in its books of account and income from business would be computed treating such sale as part of business receipts. The receipts arising out of sale of products will not go to reduce the expenditure on R D, whereas the assets acquired in the process of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the dossier. However, MICRO LABS (the Assessee) shall notify the person acquiring the dossier of the transfer or sale of the Dossier to such third party and shall undertake that such third party respect the terms and conditions of the agreement with the other third party who buys dossier from the Assessee. 16. DSIR guidelines no. vii has specifically provided that assets acquired if any out of R D work shall be disposed with approval of DSIR. The assessee has been submitting yearly audit reports accounts of approved R D sanction to DSIR. The R D accounts have been separately maintained and separate P L Account prepared and the dossier sales have been credited to P L Account of R D because these sales are part of normal sales. 17. It is clear from the sample copy of the license and supply agreement filed before us that the product development charges received by the assessee will not be covered under clause 5(vii) of the DSIR guidelines. As we have already seen, these receipts are credited to profit loss account are part of normal sales. They are, therefore, not to be reduced from the expenditure incurred by the assessee on carrying out scientific research ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hown investment to the tune of ₹ 28,45,29,937 in shares mutual funds of various companies. He was of the view that such investments cannot be made routinely. No prudent businessman would make any investment without applying the resources wisely. Obviously this entails expenditure, direct as well as indirect. He thereafter proceeded to make disallowance u/s. 14A of the Act, which is given as annexure to the assessment order and enclosed as ANNEXURE-II to this order. 36. Aggrieved by the assessment order, the assessee preferred appeal before the CIT(Appeals). 37. Before CIT(A), the assessee submitted that interest bearing loans were borrowed for specific purposes and not for investment purposes and in support of the above contention, the Assessee filed copies of balance sheets as on 31.03.2003 upto 31.03.2009 to show that the various loans availed from banks were all taken for specific purposes and could not have been utilized for making any investments out of which exempt income was earned. These loans include short term loans from IDBI Bank, Exim Bank, Barclays Bank and Standard Chartered Bank in respect of which it was explained that the loans could not have been u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paperbook and the same is enclosed as ANNEXURE-III to this order. It is clear from the said statement that the availability of profit, share capital and reserves surplus was much more than investments made by the assessee which could yield tax free income. 41. The Hon'ble Bombay High Court in Reliance Utilities Power Ltd. 313 ITR 340 (Bom) has held that where the interest free funds far exceed the value of investments, it should be considered that investments have been made out of interest free funds and no disallowance u/s. 14A towards any interest expenditure can be made. This view was again confirmed by the Hon'ble Bombay High Court in CIT v. HDFC Bank Ltd., ITA No.330 of 2012, judgment dated 23.7.14, wherein it was held that when investments are made out of common pool of funds and non-interest bearing funds were more than the investments in tax free securities, no disallowance of interest expenditure u/s. 14A can be made. 42. In the light of above said decisions, we are of the view that disallowance of interest expenses in the present case of ₹ 49,42,473 made under Rule 8D(2)(ii) of the I.T. Rules should be deleted. We order accordingly. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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