TMI Blog2018 (2) TMI 1588X X X X Extracts X X X X X X X X Extracts X X X X ..... n KRAEL during the year, if any interest allowable to that investment out of borrowed funds, the corresponding interest is directly disallowable u/s. 36(1)(ii). But, he gave a finding that the investment is for the purpose of business, consequent to finding of AO in later year. While invoking rule 8D(ii), he should have at best considered that amount of investment for proportionate disallowance, but directly he took entire average of entire investment and disallowed, even the interest allowable under the head ‘business’. The order of CIT(A) is thus based on misconceptions and wrong appreciation of facts and law thus, not sustainable. Hence, his order and findings from paras 6.13 to 6.17 are thus, set aside. Neither the AO nor the CIT(A) has considered any amount for disallowance under Rule 8D(iii). Therefore, this forum cannot invoke the said rule. Disallowance u/s. 14A cannot be made/restricted, by this forum as there is nothing to disallow under Rule 8D(ii) and AO or CIT(A) has not disallowed any amount under Rule 8D(iii). The grounds are accordingly considered allowed. - ITA No. 835-801/Hyd/16 - - - Dated:- 21-2-2018 - Smt. P. Madhavi Devi, Judicial Member And Shri B. Rama ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made the investments out of internal accruals and not out of borrowings with the sole intention of drawing power from the power plant at a cheaper price. 2.1. The AO observed Konaseema Oakwell Power Limited, has not started its commercial production. AO formed an opinion that if assessee had not invested its funds in KGPL, it would have utilised its funds for its own business without having the necessity to borrow money from banks and other incurring huge interest burden. AO relying upon the decision of the Hon'ble Kerala High Court in the case of V. 1. Baby and Co. (254 ITR 248) and Hon'ble Punjab and Haryana High Court in the case of Abhishekh Industries (286 ITR 1), held that assessee has invested interest bearing funds in share capital of other companies, wherefrom no interest was received. Therefore, proportionate interest out of the total interest claimed as expenditure was disallowed u/s. 36(1)(iii) of the Act. 2.2. While working out interest on investments AO applied the of average BPLR (bench-mark prime lending rate) of 16.82% and worked out the corresponding interest at ₹ 24,76,23,390/-. However, considering the claim of interest and finance charges t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 77; 7,96,73,563/- in shares of other companies, which have already been considered by the Hon'ble ITAT in the appellant's appeal for the earlier years . 4.1. However, with reference to the investment made in the year, he without giving opportunity to assessee, proceeded to invoke the provisions of Section 14A and after discussing various case law, finally confirmed the disallowance of an amount of ₹ 3,91,90,153/- as under: 6.17 Thus, applying Rule 8D(ii), which provides that in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely: = A * (B/C) Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year ; B = the average of 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 the first day and the last day of the previous year ; C = the average of total assets as appearing in the balance she ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal grounds 1. Without prejudice to ground Nos.2 and 3 raised in the appeal, the learned Commissioner of Income Tax (Appeals) erred in directing disallowance of ₹ 3,91,90,153 u/s.14A r.w.rule 8D(2)(ii). 2. Without prejudice to ground Nos.2 and 3 raised in the appeal, the learned Commissioner of Income Tax (Appeals) erred in directing disallowance u/s.14A r.w. rule 8D(2)(ii) without affording an opportunity to the appellant to explain its case. 3. Without prejudice to ground No.2 and 3 raised in the appeal, the learned Commissioner of Income Tax (Appeals) erred in directing disallowance u/s.14A r.w. rule 8D(2)(ii) even though the appellant did not receive any exempt income from the impugned investments in the year under account. 4. Without prejudice to ground Nos.2 and 3 raised in the appeal, the learned Commissioner of Income Tax (Appeals) ought to have restricted the disallowance under Sec.14A to the dividend earned during the year under account . Additional grounds being legal in nature, are admitted as they do not require any factual verification. 6. It was the contention of Ld.DR that CIT(A) erred in giving relief and he supported the order of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a finding that the interest paid is for the purpose of investment in business and allowing the same u/s. 36(1)(iii), the same cannot be considered as directly not attributable interest . When there is direct nexus with business, the same cannot be considered again u/r 8D(ii). Therefore, the disallowance of interest under Rule 8D(ii) does not arise. To that extent, the order of CIT(A) is not correct factually as well as legally. Moreover, while examining the fresh investment of ₹ 2,82,67,573/- in KRAEL during the year, if any interest allowable to that investment out of borrowed funds, the corresponding interest is directly disallowable u/s. 36(1)(ii). But, he gave a finding that the investment is for the purpose of business, consequent to finding of AO in later year. While invoking rule 8D(ii), he should have at best considered that amount of investment for proportionate disallowance, but directly he took entire average of entire investment and disallowed, even the interest allowable under the head business . The order of CIT(A) is thus based on misconceptions and wrong appreciation of facts and law thus, not sustainable. Hence, his order and findings from paras 6.13 to 6.1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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