TMI Blog2018 (3) TMI 792X X X X Extracts X X X X X X X X Extracts X X X X ..... total investment made by the assessee in shares and securities at the relevant time stood at more than 10 crores, it cannot be said that the said investment was entirely made by the assessee from its own funds. The interest bearing borrowed funds thus were utilised by the assessee at least partly for making investments in shares and securities and disallowance on account of interest thus was required to be made under section 14A by applying Rule 8D. However, while computing such disallowance, only net interest expenditure has to be taken into consideration and the investment in shares and securities on which exempt income was actually earned by the assessee during the year under consideration has to be taken into account. We, therefore, set aside the impugned order passed by the Ld. CIT(A) on this issue and restore the matter to the file of the A.O. for computing the disallowance to be made on account of net interest expenditure under section 14A by applying Rule 8D(2)(ii) by taking into account only those investments on which exempt income was actually earned by the assessee during the year under consideration. Ground No. 2 of the revenue’s appeal for A.Y. 2012-13 is thus partly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to the said loans should not be disallowed if the same were not given for the purpose of business. According to the A.O., the assessee failed to furnish the said details. He, therefore, proceeded to make a disallowance out of interest to the extent of ₹ 15,13,308/- being interest @ 12% p.a. attributable to the loan amount of ₹ 1,26,10,904/- 4. The disallowance made by the A.O. out of interest expenditure was challenged by the assessee in the appeal filed before the Ld. CIT(A) and after considering the submissions made by the assessee as well as the material available on record, the Ld. CIT(A) deleted the disallowance made by the A.O. out of interest for the following reasons given in his impugned order: Having carefully examined the factual matrix, I find that the Ld.AO has disallowed a portion of the interest in notional terms, without a complete overview of the situation. It is seen that while the appellant has given interest free loans (rather has been unable to charge interest) the assessee itself is in receipt of interest free loans have also examined the ledger copies of the seven parties who have not been charged any interest. It is seen that the lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and therefore, the notional interest worked out by the Ld. AO would not be applicable to the assessee, more so in a situation where there were doubtful loans which were difficult to recover. In the factual matrix, in my considered view of the matter, there were adequate interest-free funds available with the appellant, as emerges from the Capital Accounts of the Partners, and the Financial Statements submitted by the appellant for the subject Assessment Year. It is also seen that the situation is covered by the case laws and judicial precedents filed by the appellant, more specifically by the judgment of HDFC Bank Ltd. v. DCIT Ors. (2016) 383 ITR 529 (Bom). In view of the factual matrix emerging in the circumstances, as well as the judicial precedents relevant in the matter, I find that the appellant firm is deserving of relief and the action of the Ld. A.O. is unsustainable. The ground is therefore allowed in favour of the appellant . 5. The learned DR submitted that interest free loans were given by the assessee for non-business purpose as specifically found by the A.O. during the course of assessment proceedings. He contended that there was thus a clear case of di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Ld. CIT(A) deleting the disallowance made by the A.O. out of interest expenditure and upholding the same, we dismiss ground no 1 of the revenue s appeal. 8. In ground no 2 of its appeal in A.Y. 2012-13, the revenue has challenged the action of the Ld. CIT(A) in restricting the disallowance of ₹ 67,30,674/- made by the A.O. u/s 14A to ₹ 5,03,714/- 9. As found by the A.O. on perusal of the balance sheet of the assessee firm as on 31.03.2012, the assessee had made investment in shares, units and securities to the tune of ₹ 7,87,95,988/-, ₹ 75,41,408/- and ₹ 1,75,54,609/- respectively. The assessee had also earned dividend income of ₹ 67,00,090/- which was claimed to be exempt from tax. In computation of total income, a disallowance of ₹ 5,03,714/- was offered by the assessee on account of indirect expenses incurred in relation to the earning of exempt income as per Rule 8D(2)(iii). No disallowance on account of interest expenditure however, was offered by the assessee as per Rule 8D(2)(ii). According to the A.O., interest bearing borrowed funds were partly utilised by the assessee for making investments in shares and securities and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment rental income was utilized as total rental income of ₹ 3,48,90,068/- was available with the appellant. Further, the average investment taken by the A.O. of ₹ 9,45,23,277/- includes a average of stock in trade of ₹ 4,12,14,610/- also. The appellant submitted that: ( a) The A.O. in the remand report has accepted that the investment in shares was out of rental incomes and no part of the borrowed loan was utilized in shares and hence Rule 8D(2)(ii) cannot be invoked in such respect. ( b) As regards the disallowance under Rule 8D(2)(iii) average investment was considered by A.O. of ₹ 9,45,23,277/- which included the average value of stock-in-trade and hence the same has to be exclude for which the appellant relied on the judgment of the jurisdictional Tribunal in the case of ACIT vs. Champion Commercial Co. 139 ITD 108 (Cal). ( c) The appellant also relied upon the judgment of the jurisdiction High Court which had affirmed the judgment of the Jurisdictional Tribunal in the case of REI Agro Industries Ltd. vs DCIT (2013) 144 ITD 141 in which had not earned any exempt income has to be kept out of the ambit of computation of disallowance u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the contention of the Ld. A.R that as regards disallowances u/s BD(2)(ii) while computing disallowance under Rule 8D(2)(ii), the Ld.AO has taken the gross interest payment of ₹ 1,54,40,O27/- and has disallowed ₹ 62,26,950/- without considering receipt of interest of ₹ 87,t7,BB2l-. The appellant's case is well covered by the decisions of various Hon'ble Courts including the Hon'ble Apex Court that only net interest has to be taken into consideration for such purposes of making disallowance. I also find strength in the arguments placed by the Ld. A.R that even otherwise for the purposes of disallowance under Rule BD(2)(ii) only average of the investment in shares which has yielded dividend has to be included and provision of Rule 8D(2)(ii) are not at all applicable in respect of income from mutual funds. It is seen that by adopting this method, the appellant has already made a suo moto disallowance of ₹ 5,03,714l-. I also find merit in the contention of the Ld. A.R that the Ld. AO has made the disallowance without recording a positive satisfaction that the suo moto disallowance made by the appellant was not in order. In the said context, the Hon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es cited by the appellant, namely a decision of Hon ble Delhi High Court dated 25.02.2015 reported in (2015) 372 ITR 694 (Del) in which also it has been very clearly held that without recording satisfaction there could be no question of disallowance u/s 14A read with Rule 8D. The decision of Hon'ble Delhi High Court is reported in 372 ITR 694 (Del). It was also held in the aforesaid decisions of ITAT, Kolkata Bench Hon'ble Delhi Court that disallowance under Rule 8D(2)(ii) and 8D(2)(iii) could only be made in respect of only those investments on which dividend income has been earned. Similarly, Hon'ble Delhi Court in the case of ACB India Ltd. v. ACIT (2015) 374 ITR 108 has again held that disallowance under Rule 8D(2)(ii) / 8D(2)(iii) could only be with reference to the investment on which dividend income had been earned and this was also the view of Hon'ble Calcutta Tribunal referred above. Overall, in the facts and circumstances of the case, I find that the Ld AO ought to restrict the disallowance u/s 14A of the Income Tax Act, 1961 to an amount of ₹ 5,03,714/- as had already been done suo moto by the appellant and the balance is directed to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st expenditure has to be taken into consideration and the investment in shares and securities on which exempt income was actually earned by the assessee during the year under consideration has to be taken into account. We, therefore, set aside the impugned order passed by the Ld. CIT(A) on this issue and restore the matter to the file of the A.O. for computing the disallowance to be made on account of net interest expenditure under section 14A by applying Rule 8D(2)(ii) by taking into account only those investments on which exempt income was actually earned by the assessee during the year under consideration. Ground No. 2 of the revenue s appeal for A.Y. 2012-13 is thus partly allowed. 14. Now, we shall take up the appeal of the revenue for A.Y. 2013- 14 which involves a solitary issue relating to the deletion by the Ld. CIT(A) of disallowance of ₹ 72,65,727/- made by the A.O. under section 14A of the Act Rule 8D of the Income Tax Rules 1962. 15. During the previous year relevant to A.Y. 1013-14, the assessee firm had earned dividend income of ₹ 61,19,426/- which was claimed to be exempt from tax in the return of income filed on 27.09.2013. Since no disallowance o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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