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TMI Blog2018 (1) TMI 586X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer for Rs.78,94,597/- only for the expenses u/s 14A r.w.s. Rule 8D of the IT Rules, 1962. 3. Briefly stated facts are that assessee is a private limited company and engaged in activity of consultancy engineering. The assessee during the year under consideration besides the income of its consultancy engineering business also earned dividend income for Rs.33,73,356/- only which was claimed as exempted u/s. 10(34) of the Act. The assessee sum motu offered a disallowance u/s. 14A of the Act in respect of divided income for Rs.3,37,335/- being 10% of dividend income as expenditure incurred in relation to it. The disallowance was made by the assessee in the light of earlier year disallowance and as per the order of appellate authority. However, the AO observed certain facts and deficiency with the amount of disallowance made by the assessee in respect of dividend income as detailed under:- a) Assessee has disallowed suo motu expenses in relation to dividend income which implies that the assessee has incurred the expenses in the connection of dividend income. b) There was no justification filed by the assessee for making the disallowance @ 10% of the dividend income. The cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment. Thus no disallowance is warranted. 6) Without prejudice to the above, it was also submitted that the investment which have given rise to the dividend income during the year should only to be considered for the purpose of disallowance u/s. 14A of the Act. 7) The AO erred in considering the net current asset instead of total of the balance-sheet while making disallowance u/s.14A of the Act Ld. The ld. CIT(A) after considering the submission of the assessee deleted the addition made by the AO after having reliance on the order of Ld. CIT(A) for the preceding Assessment Year 2010-11 which reads as under:- " 4.2 I have considered the submissions of the AR and perused various judicial decisions cited before me in support of the appellant's claim and the decisions available on this particular subject in the public domain. I have also examined the impugned order wherein the disallowance u/s.14A has been made by invoking Rule 8D of the IT Rules, 1962. From the details furnished on record, I note that the appellant had invoked Rule 8D and disallowed a sum of Rs.11,86,541/- under Section 14A of the Act. It is however noted that no cogent reasons were recorded by the AO for regar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... correlation between use of borrowed funds and acquisition of investments. Instead an estimated figure of 10% of exempt income was disallowed by my predecessors. On these facts therefore I find merit in the submissions of the AR that when the assessee has both own funds and borrowed funds then the presumption would be that the investments were acquired out of own funds. This proposition finds support in the decision of the ITAT, Kolkata in the case of H.S.IL Limited vs. Addl. CIT (ITA No.83/Kol/2012) dated 05.08.2014. Since the assessee's net own funds substantially exceeded the cost of investments and the AO not having established any proximate cause between use of secured loans and acquiring investments, disallowance was not justified simply on presumption. For the reasons set out in the foregoing, therefore, I do not find merit in the AO's action of disallowing interest of Rs.9,66,502/- and the same is directed to be deleted. 4.4 Similarly the AO disallowed 0.5% of the average investments by invoking Rule 8D(2)(iii). From the AO's working I note that the disallowance was made at 0.5% of average investments which inter alia included strategic investments in group & sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceeds the amount of investment. Therefore no disallowance of interest expense can be made under Rule 8D(2)(ii) of the IT Rules, 1962. He cited case law of Hon'ble Bombay High Court in the case of CIT vs. Reliance Utilities and Power Ltd. reported in (2009) 313 ITR 340 (Bom) and CIT vs. HDFC Bank Ltd. Income Tax Appeal No. 330 of 2012 dated 23.07.2014. Ld.AR further submitted that the disallowance towards administrative expense can be made under Rule 8D(2)(iii) of the IT Rules, in respect of the investment which have given rise to the dividend income during the year. Ld. AR also contained the major dividend income was received from the subsidiary company. Therefore no disallowance can be made in respect of dividend income received from subsidiary company. The relevant details of the dividend income detailed as under:- (i) Subsidiary Company Amount of dividend Amount (Rs) DC Industrial Plant services Pvt. Ltd. 14,39,940 Kontest Chemicals 15,66,900 30,06,840 30,06,840 (ii) Non-subsidiary company Investech Securities Pvt. Ltd. 50,400 50,400 50,400 Total 30,57,240 In this rega ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made during the year under Appeal in mutual fund etc. 2. own fund of the appellant is far more than the total cumulative investment. From the above details we observed that there is no ambiguity with regard to own fund available with the assessee. In such facts and circumstances a presumption can be drawn that investment has been made out of own fund of assessee. Therefore no disallowance on account of interest expense should be made under Rule 8D(2)(ii) of IT Rules. In holding so, we draw our support and guidance from the judgment of Hon'ble Bombay High Court in the case of Reliance Utilities and Power Ltd. (supra) wherein it was held as under:- "The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the CIT(A) and Tribunal" 6.1 Similarly the ld. AR also relied on the order of the Hon'ble Bombay High Court in the case of CIT vs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said submissions of the learned counsel for the computing the disallowance under section 14A of the Act read with rule 8D(2)(ii) and (iii) of the Rules, the Assessing Officer while adopting the average value of during the previous year. Similarly, in computing the disallowance under section 14A of the Act read with rule 8D(2)(ii) and (iii) of the Rules, the Assessing Officer while strategic investments." Thus, the strategic investments need to be excluded for the purpose of the disallowance under section 14A read with rule 8D of Income Tax Rules. The ld. DR before us has not brought anything contrary to the argument of ld. AR that the impugned investments are not strategic investments. Thus in the above proposition and respectfully following the order of this Tribunal in the case of Electrosteel Casting Limited (supra) we reverse the order of lower authorities. In view of the above, we hold that the investments made in the non-subsidiary company which have yielded dividend income can only be considered for the purpose of the disallowance under section 14A r.w.r. 8D(2)(iii) of Income Tax Rules 1962. Thus the appeal filed by Revenue is partly allowed. Accordingly, AO is directed. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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