TMI Blog2018 (1) TMI 600X X X X Extracts X X X X X X X X Extracts X X X X ..... curities and some of the investments were made by the assessee in subsidiary companies for strategies purpose. Hence, we confirm the order passed by the ld CIT(A), so far the disallowance under Rule 8D (2) (ii) is concerned. For disallowance under Rule 8D(2)(iii), the assessee had suo-moto disallowed ₹ 1,05,100/-, however, we note that in order to compute the disallowance under Rule 8D (2) (iii), only dividend bearing securities should be considered. Therefore, we direct the AO to compute disallowance after taking consideration the investment which was given rise to the exempt income, that is, dividend bearing shares and securities, as per the method suggested in the judgment of REI Agro ltd. vs. DCIT reported in [2013 (9) TMI 156 - ITAT KOLKATA] and the disallowance so computed should be reduced by ₹ 1,05,100/-, the suo moto amount disallowed by the assessee. - Decided partly in favour of revenue - ITA No.172, 173 And 174/Kol/2016 - - - Dated:- 10-1-2018 - SHRI A. T. VARKEY, JM AND DR. A.L.SAINI, AM For The Appellant : ShriSaurabh Kumar, Addl. CIT(DR) For The Respondent : Shri Asim Choudhury, Advocate ORDER Per Dr. Arjun Lal Saini, AM: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cer noticed from the Profit loss Account of the assessee as well as computation sheet that assessee had earned Dividend Income of ₹ 13,18,618/- and claimed the same as exempt u/s 10 of the I.T Act,1961. The assessee has also claimed long term capital gain of ₹ 48,41,068/- as exempt u/s 10(38) of the I.T. Act,1961. The assessee was asked to file a detail of disallowable expenditure in terms of section 14A r.w.r 8D of I.T. Rules. During the assessment proceedings the assessee submitted before the AO that he earned dividend income amounting to ₹ 13,81,618/- and also earned income from long term capital gain amounting to ₹ 48,41,068/-. It was clarified to AO that no expenditure was incurred by the assessee which is directly related to earning of these incomes. However, the assessee himself disallowed ₹ 6,43,032/- related to earning of exempted income. Thereafter, the AO observed from the computation of income from Business or Profession that the assessee has made an addition under the head Expenses debited to profit loss account which relate to exempt income an amount of ₹ 6,43,032/-. However, on further perusal of details, the AO noted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elationto is of much wider import and not only encompasses direct indirect expenditure but alsothose expenditures which are proximate to any income not chargeable to tax. Hence, expenditures relating to exempt income are liable to be disallowed. Actually, the assessee had disallowed certain expenditures u/s. 14A, most of which are otherwise also not allowable. The AO Noted that subsequently, the assessee had filed a computation with notes which has no basis or relevance, as the assessee has picked up certain investment leaving others without any reason although exempt income arises or shall arise from those investments also. The AO observed that it was evident from the nature of business of the assessee and accrual of dividend income that part ofadministrative as well as interest expenses attributable to exempt income, the provisions of section14(2) read with rules 8D would be applicable to the assessee. The AO also, relied on the judgment ofHon'ble ITAT Special Bench Mumbai in the case of M/s. Daga Capital Management Pvt. Ltd. Vs. ITO 6(2)(2), Mumbai in ITA No. 8057/Mum/03, ratio of which is mostly approved by the Hon'ble High Court Bombay (except retrospective applic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has allowed the appeal of the assessee. During the appellate proceedings, the counsel submitted before the ld. CIT(A) that AO did not consider that the shares which had been invested, was over a period of time. The assessee submitted before the ld. CIT(A) that he had purchased shares from his surplus funds, as the sale proceeds of shares were utilized to buy new shares. The assessee had also invested in their subsidiary company, as strategic investment to expand their real estate business. The ld CIT(A) after going through the month-wise sale and purchase details of investments, observed that there was surplus funds for investment from which exempt income was being earned. The ld CIT(A) also noted thatthere was no disallowance of interest in the earlier years and perusal of the month-wise details of purchase and sale of investment for FY 2006-07 also showed that the assessee had surplus fund on the sale of investments which was used to purchase further investments. Further assessee had made strategic investment in wholly owned subsidiaries from which the assessee had submitted that no dividend income had been earned from the same till date. On the verification of the Memorandum of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year, which is to be considered but it is the average of the value of investments which has given rise to the income which does not form part of the total income, is to be considered. In respect of the provisions of rule 8D(2)(iii), which is the subject-matter of the appeal, a perusal of the said provision shows that what is disallowable under rule 8D(2)(iii), is the amount equal to percentage of the average value of investment the income from which does not or shall not form part of the total income. Thus under sub-clause (iii), what is disallowed is percentage of the numerator B in rule 8D(2)(ii). Again this is to be calculated in the same line as mentioned earlier in respect of Numerator B in rule 8D(2)(ii) of the Act. Therefore, not all investments become the subject-matter of consideration when computing disallowance u/s 14A r.w.r 8D. The disallowance u/s 14A r.w.r. 8D is to be in consideration to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income. We note that, so far the disallowance under Rule 8D(2)(ii) is consid ..... X X X X Extracts X X X X X X X X Extracts X X X X
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