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TMI Blog2011 (12) TMI 615X X X X Extracts X X X X X X X X Extracts X X X X ..... making Investments income from which is exempt from tax. 2. The Assessing Officer on a perusal of the balance sheet found that the assessee has invested a sum of ₹ 21.49 lakhs in the share capital of a company with the intention to earn dividend income which is exempt from tax. As the assessee is borrowing funds on interest for business purposes, he disallowed pro rata interest of ₹ 3,21,900/- as the interest attributable to the investment made for earning dividend income is not allowable from business profits. Considering an average interest rate of 15% the notional interest on the assessee's investment of ₹ 21.46 lakhs works out to ₹ 3,21,000/- which was disallowed. 3. On appeal before the CIT(A), with regard to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment in shares for the purpose of earning exempted dividend income had not been made out of borrowed funds, in the light of the decision of Hon'ble Kerala High Court in the case of CIT vs VI Baby & Co., (supra) it can be said that had the appellant not used its business funds to that extent in making investment in shares, it would not have been required to make borrowings to that extent. Hon'ble Kerala High Court have opined that in such cases, the borrowals are to be considered as made for supplementing the funds which have been diverted for non business purpose. Hon'ble Madras Bench of the ITAT also in the case of MGM Diamond Beach Resorts P. Ltd vs DCIT (2008 TIOL 463 ITAT Mad) have opined that interest expenses would not be allowable, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s having been made out of internal accruals and no part of the borrowals can be said to have been utilized for the purpose of investment. Unless the assessing officer proves that the borrowed fund have been actually been utilized for the purpose of making investment in shares, no adhoc disallowance can be made under Section 14A. The decision of the Punjab and Hariyana High Court in the case of Hero Cycles Ltd reported in 323 ITR 518 supports this view.
7. In the circumstances we delete the addition of ₹ 321000/- made under Section 14A towards notional interest on the quantum of investment made in shares.
8. In the result the appeal of the assessee is allowed.
Order pronounced in the open Court 14.12.2011 X X X X Extracts X X X X X X X X Extracts X X X X
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