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2017 (6) TMI 827 - ITAT MUMBAI

2017 (6) TMI 827 - ITAT MUMBAI - TMI - Disallowance u/s 14A - Held that:- Since the investment was made out of surplus funds, no further disallowance is required to be made u/s 14A of the Act as section 14A provides for disallowance of expenditure incurred in relation to income which does not form the part of the total income, meaning thereby, there should be direct nexus between the actual expenditure incurred for the purpose of earning tax free income. - The proximity cause of disallowance .....

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fying the basis for calculating the amount disallowable u/s 14A of the Act was submitted by the assessee and the Ld. Assessing Officer without rejecting the report mechanically applied Rule-8D and computed the amount of disallowance, which cannot be said to be justified. At best, the disallowance may be restricted as suo-moto made by the assessee. Thus, no further disallowance was required to be made.- Decided in favour of assessee. - TDS credit - Held that:- Two parties deducted TDS but did .....

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parties, as prayed by the assessee. The ld. Assessing Officer may also send notices to the concerned parties and examine them with respect to deduction of tax at source, if so required. The assessee be given opportunity of being heard with further liberty to furnish evidence, if any, in support of its claim. Thus, this ground of the assessee allowed for statistical purposes. - ITA NO.5732/Mum/2011, And ITA NO.6648/Mum/2011 - Dated:- 12-4-2017 - Shri Joginder Singh, Judicial Member, And Shri Raje .....

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e total tax effect is below prescribed monetary limit of ₹ 10 lakh. The ld. DR, Shri Rejesh Kumar Yadav, did not controvert this factual matrix. 2.1. We have considered the rival submissions and perused the material available on record. In view of the above, it is noted that the tax effect in the present appeal is below prescribed limit of ₹ 10 lakh, therefore, CBDT instruction No.21 of 2015, dated 10/12/2015 (F No.279/Misc./142/ 2007-IT(PT) is applicable, wherein, the Department was .....

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shall take up the appeal of the assessee in ITA No.5732/Mum/2011, wherein, first ground pertains to disallowing an additional sum of ₹ 1,78,69,431/- u/s 14A of the Income Tax Act, 1961 (hereinafter the Act) read with Rule-8D of the Rules. The ld. counsel for the assessee explained that the total exempt income earned by the assessee is ₹ 1.13 crores, whereas, the assessee suo-moto disallowed the interest portion of ₹ 6.36 lakhs and indirect expenses to the tune of ₹ 8.74 .....

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Power Ltd. 313 ITR 340 (Bom.). It was further explained that the assessee is in the business of finance and the interest income is more than interest expenditure. Our attention was invited to page-14 of the paper book and the latest decision from Hon'ble jurisdictional High Court in the case of CIT vs Jubilant Enterprises Pvt. Ltd. (ITA No.1512 of 2014 order dated 28/02/2017 and another decision in the case of Shri Paresh K. Shah (ITA No.8214/Mum/2011), order dated 05/06/2013. It was further .....

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e is higher than the interest expenses, therefore, no disallowance u/s 14A of the Act could have been made. 3.1. We have considered the rival submissions and perused the material available on record. The facts, in brief, are that the assessee company is engaged in retails assets financing, investment and trade finances declared income of ₹ 34,09,05,941/-. Subsequently, the assessee filed revised return on March, 30, 2010 declaring income of ₹ 34,37,59,455/-. While framing the assessm .....

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g such exempt income. The Ld. Assessing Officer enhanced the disallowance by ₹ 1,78,69,431/- applying Rule-8D of the rules. Right from beginning, the assessee had claimed that the assessee is pre-dominantly, in the business of financial services/facilities to its customers like loan against securities, IPO finance, bill discounting, working capital loan etc. It is further noted that the assessee made the investment in mutual funds out of excess funds, temporarily available, for a short spa .....

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ssee explained that the investment was made out of own surplus funds. Before we go into the questions at hand it would be appropriate to not only examine the provisions of section 14A of the Act but also to notice its legislative history. Section 14A was inserted into the Act by the Finance Act, 2001 with retrospective effect from 01/04/1962. For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in rela .....

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or any assessment year beginning on or before the 1st day of April, 2001. As a result of the insertion of the said proviso, Section 14A was as follows:- Expenditure incurred in relation to income not includible in total income. 14A. For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. Provided that nothing contained in t .....

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2007:- (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of .....

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e incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in .....

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dy made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001. 3.4. By Notification No.45/2008 dated 24/03/2008, the Central Board of Direct Taxes (CBDT), in exercise of its powers under section 295 of the said Act read with subsection (2) of section 14A of the said Act, made the Incometax (Fifth Amendment) Rules, 2008 to further amend the said Rules (i.e., the Income-tax Rules, 1962) by introducing Rule .....

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sessee; or (b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely :- (i) the amount of expenditure directly relati .....

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h does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year ; C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year ; (iii) an amount equal to one-half per cent of the average of the 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 .....

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d: 82 ITR 452 (SC) and Rajasthan State Warehousing Corporation v. CIT: 242 ITR 450 (SC) was different. In Maharashtra sugar Mills Ltd (supra) the assessee s business comprised of two parts, namely, (1) cultivation of sugar cane and (2) the manufacture of sugar. The Revenue had contended that as the income from the cultivation of sugar cane, being the result of an agricultural operation, was not exigible to tax, therefore, any expenditure incurred in respect of that activity was not deductible. T .....

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y out of place in construing the provisions of a taxing statute. We have to take the provisions of the statute as they stand. If the amount claimed is permissible under the Act then the same has to be deducted from the gross profit. If it is not permissible under the Act, it has to be rejected. As mentioned earlier, it is not disputed that the cultivation of sugarcane and the manufacture of sugar constituted one single and indivisible business. Section 10(2) says that profits under section 10(1) .....

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The fact that the income arising from a part of that business is not exigible to tax under the act is not a relevant circumstance. 3.6. In Rajasthan State warehousing Corporation (supra), the Supreme Court after, inter alia, considering its earlier decisions in CIT v. Indian bank Ltd: 56 ITR 77 (SC) and Maharashtra Sugar Mills Ltd (supra) laid down the following principles:- (i) if income of an assessee is derived from various heads of income, he is entitled to claim deduction admissible under t .....

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or profession when an assessee is carrying on business in various ventures and some among them yield taxable income and the others do not, the question of allowability of the expenditure under section 37 of the Act will depend on: (a) fulfillment of requirements of that provision noted above; and (b) on the facts whether all the ventures carried on by him constituted one indivisible business or not; if they do, the entire expenditure will be a permissible deduction but if they do not, the princi .....

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ct of the said business was deductible and, in such a case, the principle of apportionment of the expenditure relating to the non-taxable income did not apply. However, where the business was divisible, the principle of apportionment of the expenditure was applicable and the expenditure apportioned to the exempt income or income not exigible to tax, was not allowable as a deduction. 3.8. The object behind the insertion of section 14A in the said Act is apparent from the Memorandum explaining the .....

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n the exempt income against taxable income. This is against the basic principles of taxation whereby only the net income, i.e., gross income minus the expenditure is taxed. On the same analogy, the exemption is also in respect of the net income. Expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. It is proposed to insert a new section 14A so as to clarify the intention of the Legislature since the inception of the Income - tax Act, 1961, that .....

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ith retrospective effect reflects the serious attempt on the part of Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the said act against the taxable income. The Supreme Court further observed as under:- In other words, section 14 A clarifies that expenses incurred can be allowed only to the extent that they are relatable to the earning of taxable income. In many cases the nature of .....

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ing any apportionment of expenses incurred in relation to exempt income ..Expenses allowed can only be in respect of earning taxable income. This is the purport of section 14A. In section 14A, the first phrase is for the purposes of computing the total income under this Chapter which makes it clear that various heads of income as prescribed in the Chapter IV would fall within section 14A. The next phrase is, in relation to income which does not form part of total income under the Act . It means .....

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e total income. The exact words used by the Supreme Court are as under:- "Further, section 14 specifies five heads of income which are chargeable to tax. In order to be chargeable, an income has to be brought under one of the five heads. Sections 15 to 59 lay down the rules for computing income for the purpose of chargeability to tax under those heads. Sections 15 to 59 quantify the total income chargeable to tax. The permissible deductions enumerated in sections 15 to 59 are now to be allo .....

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ble has, in principle, been now widened under section 14 A. (emphasis supplied) 3.11. Sub-section (1) of section 14A clearly stipulates that for the purposes of computing total income under Chapter IV (Computation of Total Income), no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the said Act. A lot of emphasis was laid on the expressions incurred and in relation to . It was contended by ld. .....

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which is made directly and for the object of earning exempt income could be disallowed under section 14A. He submitted that if the dominant and main objective of spending was not the earning of exempt income then, the expenditure could not be disallowed under section 14A provided it was otherwise allowable under sections 15 to 59 of the said Act. It was emphasized that the expenditure must be actual and cannot be computed on the basis of some formula as stipulated under Rule 8D read with sub-se .....

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Supreme Court observed that the expressions pertaining to , in relation to and arising out of , used in the deeming provision, are used in the expansive sense. The Supreme Court further observed as under:- 49. The expression in relation to (so also pertaining to ), is a very broad expression which presupposes another subject matter. These are words of comprehensiveness which might both have a direct significance as well as an indirect significance depending on the context… … In th .....

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of CIT-II v. Hero Cycles Ltd., decided on 4/11/2009, observed that:- Disallowance under Section 14A requires finding of incurring expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance under Section 14A cannot stand. 3.15. We are of the view that unless and until there was actual expenditure for earning the exempted income, there could not be any disallowance under section 14A. While we agree that the expression expenditure incurred refers .....

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ned, it provides the manner in which the Assessing Officer is to determine the amount of expenditure incurred in relation to income which does not form part of the total income. However, if we examine the provision carefully, we would find that the Assessing Officer is required to determine the amount of such expenditure only if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure i .....

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ation of the amount of the expenditure incurred in relation to exempt income is that the Assessing Officer must record that he is not satisfied with the correctness of the claim of the assessee in respect of such expenditure. Sub-section (3) is nothing but an offshoot of sub-section (2) of Section 14A. Sub-section (3) applies to cases where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income under the said Act. In other wor .....

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k upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-section (2) of Section 14A of the said Act. It is only if the Assessing Officer is not satisfied with the correctness of the claim of the assessee, in both cases, that the Assessing Officer gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the said Act in accordance with the prescribed metho .....

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used is - such method as may be prescribed . By virtue of Notification No.45/2008 dated 24/03/2008, the Central Board of Direct Taxes introduced Rule 8D in the said Rules. The said Rule 8D also makes it clear that where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred in relation to income .....

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er to himself determine the amount of expenditure is that he must record his dissatisfaction with the correctness of the claim of expenditure made by the assessee or with the correctness of the claim made by the assessee that no expenditure has been incurred. It is only when this condition precedent is satisfied that the Assessing Officer is required to determine the amount of expenditure in relation to income not includable in total income in the manner indicated in sub-rule (2) of Rule 8D of t .....

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he total income. (ii) The second component being computed on the basis of the formula given therein in a case where the assessee incurs expenditure by way of interest which is not directly attributable to any particular income or receipt. The formula essentially apportions the amount of expenditure by way of interest [other than the amount of interest included in clause (i)] incurred during the previous year in the ratio of the average value of investment, income from which does not or shall not .....

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amount of expenditure which would be disallowed under Section 14A of the said Act. It is, therefore, clear that in terms of the said Rule, the amount of expenditure in relation to exempt income has two aspects - (a) direct and (b) indirect. The direct expenditure is straightaway taken into account by virtue of clause (i) of sub-rule (2) of Rule 8D. The indirect expenditure, where it is by way of interest, is computed through the principle of apportionment, as indicated above. And, in cases wher .....

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ges 139- 140]. The said Notes on Clauses refers to clause 7 of the Bill which had sought to amend Section 14A of the said Act. It is specifically mentioned in the said Notes on Clauses that:- This amendment will take effect from 1st April, 2007 and will, accordingly, apply in relation to the assessment year 2007-08 and subsequent years. This is apparent, first of all, from the Notes on Clauses of the Finance Bill, 2006 [Reported in 281 ITR (ST) at pages 139-140]. The said Notes on Clauses refers .....

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Section 14A of the said Act that:- This amendment will take effect from 1st April, 2007 and will, accordingly, apply in relation to the assessment year 2007-08 and subsequent years. 3.21. We may also refer to the CBDT Circular No.14/2006 dated 28.12.2006 and to paragraphs 11 to 11.3 thereof. Paragraph 11 dealt with the method for allocating expenditure in relation to exempt income and paragraphs 11.1 and 11.2 explained the basis and logic behind the introduction of sub-section (2) of Section 14A .....

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sion such method as may be prescribed appearing in Section 14A(2) of the said Act. Thus, it is clear that, in effect, the provisions of subsections (2) and (3) of Section 14A would be workable only with effect from the date of introduction of Rule 8D. This is so because prior to that date, there was no prescribed method and sub-sections (2) and (3) of Section 14A remained unworkable. 3.22. So far as, as to how Section 14A to be worked for the period prior to the introduction of Rule 8D, is conce .....

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fulfillment of a condition precedent is also implicit in section 14A(1) [as it now stands] as also in its initial avatar as section 14A. It is only the prescription with regard to the method of determining such expenditure which is new and which will operate prospectively. In other words, section 14A, even prior to the introduction of sub-sections (2) & (3) would require the assessing officer to first reject the claim of the assessee with regard to the extent of such expenditure and such rej .....

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all, to ascertain the correctness of the claim of the assessee in respect of the expenditure incurred in relation to income which does not form part of the total income under the said Act. Even where the assessee claims that no expenditure has been incurred in relation to income which does not form part of total income, the assessing officer will have to verify the correctness of such claim. In case, the Assessing Officer is satisfied with the claim of the assessee with regard to the expenditure .....

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see, he shall have to reject the claim and state the reasons for doing so. Having done so, the assessing officer will have to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the said Act. He is required to do so on the basis of a reasonable and acceptable method of apportionment. 3.23. In view of the foregoing discussion, we find that the assessee suo-moto disallowed ₹ 6.36 lakhs on account of interest and ₹ 8.74 l .....

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er ₹ 172 crores was utilised for the purpose of fixed assets in terms of the balance sheet as on 31st March, 1999, is fallacious. Firstly, the balance sheet as of 31st March, 1999 is nor relevant. What would be relevant would be balance sheet as on 31st March, 2000. Apart from that, the counsel has been unable to point out from the balance sheet that the balance sheet as on 31st March, 1999 showed that the shareholders funds were utilised for the purpose of fixed assets. The P&L a/c an .....

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#8377; 180 crores of share capital. In this context, the finding of fact recorded by CIT(A) and Tribunal as to availability of interest-free funds really cannot be faulted. If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In this case this presumption is established considering the finding of fact both by the CIT(A) an .....

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he Tribunal holding that Section 14A of the Act is inapplicable where the investment has been made in stock in trade. This non entertainment of an appeal being on the ground that this Court found no substantial question of law. (Para18) That if appeal is not admitted from an order of the Tribunal, then it is open to the Tribunal in another case to decide directly contrary to the view taken by the earlier order of the Tribunal, which is not entertained by this court in appeal. This without even a .....

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Tribunal has acted beyond the limits of its authority. (Para19) Impugned order of the Tribunal has an observation therein that there is no such thing as estoppel in law and by virtue of that gives itself a licence to decide the issue before it ignoring the binding precedent in the petitioner s own case in HDFC Bank Ltd(supra). Once there is a binding decision of HIGH Court, the same continues to be binding on all authorities within the State till such time as it stayed and / or set aside by the .....

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on the basis of the facts put before it. However till such time as the decision of this court stands it is not open to the Tribunal or any other Authority in the State of Maharashtra to disregard it while considering a like issue. In case HIGH Court are wrong, the aggrieved party can certainly take it up to the Supreme Court and have it set aside and / or corrected or where the same issue arises in a subsequent case the issue may be re urged before HIGH Court to impress upon it that the decision .....

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227 of the Constitution of India. This is in view of the manner in which the impugned order of the Tribunal has chosen to disregard and/or circumvent the binding decision of this Court in respect of the same assessee for an earlier assessment year. This is a clear case of judicial indiscipline and creating confusion in respect of issues which stand settled by the decision of High Court. (Para24) It is in the above view, that High Court set aside the impugned order of the Tribunal dated 23rd Sept .....

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Hon'ble jurisdictional High Court, it can be concluded that since the investment was made out of surplus funds, no further disallowance is required to be made u/s 14A of the Act as section 14A provides for disallowance of expenditure incurred in relation to income which does not form the part of the total income, meaning thereby, there should be direct nexus between the actual expenditure incurred for the purpose of earning tax free income. No doubt, the word in relation to appears to be br .....

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uthority conferred by the section upon Assessing Officer to deem or assume certain expenditure to have been incurred in relation to tax free income. The proximity cause of disallowance u/s 14A is its relationship with the tax exempt income. Wherever the expenses incurred has no relationship with the income not includible in the total income, there cannot be any occasion to invoke the provision for making the disallowance u/s 14A of the Act. In the light of the foregoing discussion, it can be con .....

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at is not irrelevant or arbitrary. In the light of the discussion, we are of the view, the Ld. Assessing Officer cannot reject the claim of the assessee merely because it is not as per Rule-8D. To invoke Rule-8D, the Assessing Officer should provide a justifiable reason for not accepting the claim of the assessee that no expenditure had been incurred for earning the tax free dividend income. In fact, it is apparent from the record/annual accounts of the assessee that no borrowed funds were utili .....

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the interest income is more than the interest expenditure as is evident frompage-14 of the paper book. In such a situation, the decision from jurisdictional High Court in CIT vs Jubilant Enterprises Pvt. Ltd. (ITA No.1512 of 2014) order dated 28/02/2017 supports the case of the assessee. Likewise, the decision in Paresh K Shah of coordinate Bench (ITA No.8214/Mum/2011) and Kolkata Bench in Trade Apartments Ltd. (ITA No.1277/Kol/2011) further supports the case of the assessee. In Paresh K. Shah v .....

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appellant had sufficient interest free funds to make the investments. 2. On the facts and in the circumstances of the case and in laws the Commissioner of Income Tax(Appeals) erred in not considering the fact that the borrowed funds were not utilized for the purpose of making investment in the shares. 3 The only issue arising from the appeal of the assessee is whether in the facts and circumstances of the case, the Commissioner of Income Tax(Appeals) is justified in confirming the disallowance .....

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tments in the shares made in the sister concern of the assessee with a view to have control over the affairs of the sister concern and not for earning the dividend income. It was further contended that the interest income is more than the interest expenditure; therefore, no disallowance is called for u/s 14A. 3.2 The Assessing Officer did not accept the contention of the assessee and made the disallowance on account of interest u/s 14A to the tune of ₹ 15,40,831/- and further ₹ 2,24, .....

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in ITA No. 1277/Kol.2011. The ld AR of the assessee has pointed out that the assessee has offered net income to tax and therefore, no question of disallowance u/s 14A arises. He has further submitted that the assessee s own fund is sufficient for making the investments in the shares of the sister concern. Further, there is no new investments during the year and all investments in the earlier year and the revenue has not made any disallowance u/s 14A in the earlier year. 4.1 On the other hand, t .....

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he has relied upon the order of the Ahmedabad Benches of the Tribunal in the case of Advance Finstock P Ltd in ITA No.3221/Ahd/2011 and submitted that the Tribunal has upheld the disallowance made u/s 14A when the assessee has used mixed funds for the purpose of investments in shares. 5 Having considered the rival submissions as well as the relevant material on record, we find that the assessee s own funds comprising share capitals reserves and surplus is ₹ 4,48,47,798/-, which is equalan .....

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disallowance can be made on account of interest by applying the provisions of sec. 14A. Further, the assessee earned the interest income of ₹ 42,17,981/- against the interest & brokerage expenditure of Rs.. 30,79,450/- . This net interest expenditure offered to tax by the assessee is ₹ 11,38,531/- which show that interest income is more than the interest expenditure and therefore, it cannot be presumed that borrowed fund was utilised for the purpose of making the investments in .....

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ct in the accounts of the assessee, therefore, the ratio laid down in the case of Britania Industries Ltd. vs DCIT (ITA No.390/Kol/2013) order dated 02/03/2016, M/s Raptakos Brett & Co. Ltd. vs Addl. CIT(A) (ITA No.7490/Mum/2013) order dated 10/11/2016 supports the case of the assessee. The ratio laid down in M/s Fedex Finance Pvt. Ltd. vs DCIT (ITA No.1073 and 1067/Mum/2013) and M/s White Water Mass Media vs ACIT (ITA No.2963/Mum/2013) supports the case of the assessee. It is also noted tha .....

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