TMI Blog2016 (11) TMI 747X X X X Extracts X X X X X X X X Extracts X X X X ..... spect of tax free dividend income - Held that:- We find that the assessee has successfully demonstrated complete flow of funds from its borrowing at a lower interest rate to the destination to different corporate entities at a slightly higher rate of interest and, therefore, the nexus of the interest expenses with activity of financing has been substantiated by the assessee and there is not a single amount of interest-bearing borrowings has been found to be related to the investment, which yielded tax free dividend income. The Assessing Officer has failed to establish any nexus between the interest-bearing borrowed funds and the investment in assets yielding tax-free income. In our opinion, the findings of the learned Commissioner of Income Tax (Appeals) on the issue in dispute is well reasoned and no interference is required on our side. Further, the Assessing Officer in the assessment year 2009-10, has also accepted the fact of having no nexus between the borrowed funds and the investment in assets yielding tax-free income and accordingly has not made any disallowance under Rule 8D2(ii) of the Act. Thus, the rule of consistency also demand that no disallowance under section Ru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts of the case and in law in upholding the action of the assessing officer in making aforesaid disallowance without properly appreciating that such disallowance could be made by assessing officer only after establishing/ specifying the nexus of aforesaid expenditure with earning of exempt dividend income. 2. Without prejudice, the CIT(A) erred on facts of the case and in law in upholding the action of the assessing officer in making aforesaid disallowance, without appreciating that the total amount of disallowance under no circumstance can exceed the expenditure of ₹ 37,19,979, actually incurred by the appellant during the relevant assessment year. The appellant craves leave to add, alter, amend or vary from the aforesaid grounds of appeal at or before the time of hearing. 3. The grounds raised by the Revenue in the appeal are as under: 1. On the facts and circumstances of the case, the learned Commissioner of Income Tax (Appeals) erred in allowing assessee s appeal and restricting the addition on account of disallowance u/s 14A of the Income Tax Act, 1961 to 61,80,689/- from ₹ 7,20,91,704/-. 2. The appellant craves to amend, modify, alter, ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laimed in profit and loss account as expenses related directly to financial activity of ₹ 11,03,90,466/- and indirect expenses of ₹ 37,19,979/-. Further, the assessee segregated deployment of funds towards loans and advances (34%) and investments (66%). The assessee applied the ratio 66% over the indirect expenses of ₹ 37,19,979/- and computed disallowance of ₹ 24,55,186/- under section 14A of the Act. The learned Authorised Representative of the assessee further submitted that the Assessing Officer has not recorded satisfaction as to incorrectness of disallowance made by the assessee and made disallowance directly invoking the Rule 8D of the Income Tax Rules, which is not allowed in law as held by the Hon ble Delhi High Court in the case of Maxopp Investment Ltd vs. Commissioner of Income Tax, reported in 347 ITR 272. Further, the learned Authorised Representative objected to the satisfaction recorded by the learned Commissioner of Incometax (Appeals) on the ground of having coterminous power with Assessing Officer. According to the learned Authorised Representative, recording of satisfaction by the Assessing Officer is sine qua none for invoking Rule 8D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other hand, the learned Senior Departmental Representative, as far as the grounds of the assessee s appeal are concerned, relied on the findings of the authorities below and submitted that due satisfaction as to the incorrectness of the assessee s claim of disallowance under section 14A of the Act was made by the Assessing Officer. As regard to the ground No. 2 of the assessee s appeal, she submitted that in the indirect expenses computed, the assessee has not included legal and professional expenses and therefore the claim of the assessee that expenses of ₹ 37,19,979/- were only actually incurred during the year and, therefore, disallowance under Rule 8D2(iii) cannot exceed the said amount, is not tenable. As regard to the grounds raised in the appeal of the Revenue, she relied on the finding of the Assessing Officer on the issue in dispute. 10. We have heard the rival submissions and perused the material on record including the paper book submitted by the assessee. In ground No. 1, the assessee has challenged invoking of Rule 8D on the ground that no satisfaction as to incorrectness of the assessee s claim of disallowance under section 14A of the Act was recorded by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could be made by the Assessing Officer only after establishing/specifying the nexus of the expenditure with the earning of the exempt income. We find that, the assessee itself has accepted the fact of nexus of expenditure with the earning of the exempt income by disallowing a portion of the expenses suo motu, though not under Rule 8D, but albeit by adopting a different method, which the assessee thought to be reasonable. In such circumstances, in our opinion, no further action is required on the part of the Assessing Officer to establish the nexus of expenditure with the exempt income, when he has invoked the Rule 8D of the Income Tax Rules. Thus, the ground No. 1.4 of the appeal is also dismissed. 14. As regard to the ground No. 2 of the assessee s appeal requesting to restrict the disallowance to the expenditure of ₹ 37,19,979/-, we find that the assessee segregated total expenses under the profit and loss account as direct expenses related to finance activity and indirect expenses. The direct expenses of finance activity include expenses on legal and professional charges of ₹ 17,37,225/-. The assessee has not submitted detail of the expenses as how the same are re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the investment which actually have resulted in exempt dividend income rather than 0.5% of the average of total investment. Thus, the ground of the assessee is partly allowed. 16. With regard to the ground of the Revenue s appeal, we find that the learned Commissioner of Income-tax (Appeals) has decided the issue as under: 8.7. Keeping these financial results in mind, now, the AO's computation of disallowance u/s 14A is analyzed, as under: (a) The AO has observed that there are no directly attributable expenses in respect of tax free dividend income. The appellant has also reiterated the same. Therefore, as far as disallowance u/s 14A of the Act read with Rule 8D(2)(i) of the I.T. Rules is concerned, the same has been rightfully accepted as NIL. (b) There has been a difference of opinion regarding the attributability of interest expenses in respect of tax free dividend income. This is the main bone of contention of the appellant company. The AO has attributed interest amounting to ₹ 10,61,78,431/- (entire interest expenses debited in P L Account) as relatable to tax free dividend income of ₹ 7.01 crores shown by the appellant, and following t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 377; 47,33,200/- to ₹ 16,54,531/-, did not establish any such nexus and it was merely observed that this amount related to the investment activity of the assessee company, without clarifying as to how it was found to be so. In appellant's own case for AY 2009-10 also, no such finding was given by the AO, although Rule 8D was applied by the AO. There was no disallowance under Rule 8D(2)(ii) of the I.T. Rules during the preceding year.Therefore, in view of the various decisions as quoted by the appellant in its written submissions and the decision of Hon'ble ITAT in appellant's own case, no disallowance under Rule 8D(2)(ii) of the I.T. Rules is called for. 17. We find that the assessee has successfully demonstrated complete flow of funds from its borrowing at a lower interest rate to the destination to different corporate entities at a slightly higher rate of interest and, therefore, the nexus of the interest expenses with activity of financing has been substantiated by the assessee and there is not a single amount of interest-bearing borrowings has been found to be related to the investment, which yielded tax free dividend income. The Assessing Officer ..... X X X X Extracts X X X X X X X X Extracts X X X X
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