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TMI Blog2017 (12) TMI 808X X X X Extracts X X X X X X X X Extracts X X X X ..... are & Stock Brokers (2010) 326 ITR 01 (SC) to the facts of the present case. 1.3 the learned Commissioner of Income Tax (Appeals)-I, Kochi is erred in stating that the CBDT Notification No.A.50050/112/2015-Ad.I dated 27 October, 2015 is an indicative for deleting the disallowance u/s 14A. 1.4 It is prayed that the order of the Commissioner of Income-tax (Appeals) deleting the disallowance u/s 14A be reversed and that of the Assessing Officer restored. 2. the learned Commissioner of Income Tax (Appeals) is not justified in deleting the addition of Rs. 73,71,048/- made on account of amortization of software expenditure. 2.1 the learned Commissioner of Income Tax (Appeals)-I, Kochi ought to have restricted the depreciation on software expenditure to be capitalized by taking into account the disallowance of Rs. 73,71,048/- deleted. 2.2 the learned Commissioner of Income Tax (Appeals)-I, Kochi is not correct to allow depreciation on software expenditure totaling to Rs. 3,93,87,415/-. 2.3 the learned Commissioner of Income Tax (Appeals)-I, Kochi ought to have considered software expenditure at Rs. 3,68,55,240/- instead of Rs. 3,93,87,415/- while directing to allow depre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has been invested in investments yielding exempt income. Insofar as the disallowance made by the A.O. towards amortization of software expenses, the CIT(A) deleted the additions made by the A.O. on the ground that this amortization was done because the life of the software was expected to be more than five years and expected to create benefits of enduring nature. The CIT(A) further allowed depreciation at the rate of 60% on remaining amount on the ground that the assessee has omitted to claim depreciation on remaining amount of software expenditure. The CIT(A) further observed that the assessee has demonstrated with evidences that it has developed in-house software and also capitalized the software and put to use for more than 180 days. Accordingly, the assessee is eligible for depreciation at the rate of 60% as applicable to software and related assets. Aggrieved by the CIT(A)'s order, the Revenue is in appeal before us. 5. The first issue which came up for consideration from the Revenue's appeal is disallowance of expenditure incurred in relation to exempt income u/s 14A r.w.r. 8D(2)(ii) of the Income-tax Rules, 1962. 6. The learned Departmental Representative submitted that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t to earn any exempt income. The assessee further contended that these investments are fully come out of its own funds in the nature of share capital and share premium and no part of interest bearing fund has been used to make investments in subsidiary companies. 9. Having considered both the sides, we find merits in the contention of the assessee for the reason that the assessee has demonstrated with evidences, no part of interest bearing funds has been used to make investment in shares which yield exempt income. The assessee has furnished details to prove availability of its own funds and also proved beyond doubt the term loan and working capital loan have been used for acquisition of fixed assets as well as working capital requirements of the assessee. Therefore, we are of the view that there is no reason for the A.O. to disallow the interest paid on term loan and working capital loan. The CIT(A), after considering the relevant submission, has rightly deleted the addition made by the A.O. towards disallowance of interest under Rule 8D(2)(ii). 10. Insofar as the disallowance of administrative and general expenses under Rule 8D(2)(iii) is concerned, the assessee claims that, it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Court, important anomaly which we cannot be unmindful is that whereas the entire tax exempt income is Rs. 48,90,000, the disallowance ultimately directed works out to nearly 110 per cent of that sum, i.e., Rs. 52,56,197. By no stretch of imagination can s.14A or r.8D be interpreted so as to mean that the entire tax exempt income is to be disallowed. The window for disallowance is indicated in s.14A, and is only to the extent of disallowing expenditure "incurred by the assessee in relation to the tax exempt income". This proportion or portion of the tax exempt income surely cannot swallow the entire amount as has happened in this case." 11. In view of the matter and considering the ratio of the case law discussed above, we are of the considered view that disallowance as contemplated u/s 14A of the Act cannot exceed exempt income. Therefore, we direct the A.O. to restrict the disallowance worked out under Rule 8D(2)(iii) to the extent of exempt income earned by the assessee for the relevant period. 12. The next issue came up for consideration is deletion of additions made by the A.O. towards disallowance of amortization of software development expenses. The A.O. had disallowed ..... 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