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TMI Blog2017 (3) TMI 1325X X X X Extracts X X X X X X X X Extracts X X X X ..... hich were utilised in the business of assessee and no part of amount was diverted for investment in the shares. It was further submitted that there is no income during the year and accordingly, provisions of Section 14A are not applicable. Ld.CIT(A) however, confirmed the order of the AO by elaborately discussing the provisions and case law. Assessee is aggrieved and raised the grounds. 4. It was the submission of Ld. Counsel that the finance charges and interest claim are directly related to the business of trading in trucks and AO as well as CIT(A) ought not have disallowed interest of Rs. 6,67,992/- invoking rule 8D(2)(ii) of IT Rules. It was further submitted that in the absence of any income being claimed as exempt or included in total income, disallowance u/s. 14A is not warranted. Ld. Counsel referred to the Balance Sheet placed on record to submit that all the funds were borrowed in earlier years and there was no disallowance in any of the earlier years u/s. 14A. He also referred to Schedule-10 to inform that about Rs. 2.55 Crores was invested as on 31-03-2011 and during the year, the investment has gone upto Rs. 3.22 Crores, mostly out of assessee's funds. It was further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned AR that provisions of section 14A is not attracted and it has not incurred any expenditure towards earning of exempt income and further contention that dividend income cannot be considered as exempt income as it is subjected to dividend distribution Tax u/s 115J and 115-O of the Act, in our view, it is not acceptable simply because of the fact that the assessee itself recognizing the fact that it has incurred expenditure towards earning of exempt income has disallowed expenditure to the tune of Rs. 35,65,860/- u/s 14A read with Rule 8D(2) of the Act. Therefore, assessee's challenge with regard to applicability of section 14A read with Rule 8D (2) cannot be sustained. However, so far as assessee's contention with regard to mode of computation of disallowance under Rule 8D(2), in our view, requires consideration. As can be seen, at the stage of assessment proceeding itself assessee has stated that disallowance under Rule 8D(2)(i) should be only in relation to the investment, which has yielded any exempt income in the relevant FY. Expenditure cannot be in relation to the total investment irrespective of the fact whether any income is earned or not during the year. Before going in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mponents would constitute expenditure in relation to exempt income and would be disallowed u/s 14A of the Act. Therefore, if we examine the facts of the present case in the context of the aforesaid statutory provision, it is quite clear that AO while working out disallowance under rule 8D(2)(i) has taken the total investment irrespective of the fact whether they have yielded income or not during the assessment year under consideration. The reasoning of the AO in this regard is actual earning or receipt of income will not be a condition for disallowance of such expenditure under the provisions of section 14A as it speaks about expenditure in relation to income which does not form part of the total income. He was of the view that even if no income was received, expenditure incurred can be disallowed u/s 14A. However, Rule 8D(2)(i) speaks of expenditure directly relating to income which does not form part of "total income". The term total income has not been defined either u/s 14A or under Rule 8D. Therefore, one has to look to the definition of 'total income' as appearing in section 2(45) of the Act, which reads as under: "total income" means the total amount of income referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... referred to in rule 8D(2)(i) cannot be in abstract. It must relate to a previous year income of which is sought to be assessed. Therefore, as a natural corollary it follows that only expenditure directly relating to income which is earned either on receipt basis or on accrual basis and which does not form part of total income of a particular assessment year can be disallowed under clause (i) of Rule 8D(2). Rule 8D(2)(i) does not refer to the investment made by the assessee. On a conjoint reading of clause (i) and clause (iii) of Rule 8D(2), the difference between them is clearly discernible. While clause (i) speaks of disallowance of expenditure directly relating to income which does not form part of total income, clause (iii) provides for disallowance of expenditure of the average value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee on first day and last day of the previous year. Therefore, while disallowance of expenditure under clause (i) is related to income earned which does not form part of total income, clause (iii) relates to the average of the value of investment appearing in the balan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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