TMI Blog2018 (12) TMI 410X X X X Extracts X X X X X X X X Extracts X X X X ..... td. vs. CIT [2018 (3) TMI 805 - SUPREME COURT OF INDIA]. There is another error made by the AO in computing the disallowance under clauses (ii) of Rule 8D (2) with reference to the formula prescribed. Numerical B in clause (ii) refers to average value of the investment, income from which does not form part or shall not form part of the total income. The Assessing Officer for numerical B in clause (ii) had taken the total value of the investment and not the investment that had yielded exempt income. The Delhi High Court in ACB India Ltd. vs. Asstt. Commissioner of Income Tax [2015 (4) TMI 224 - DELHI HIGH COURT] has held that only average value of the entire investment that does not form part of the total income is the factor which could be covered by the numerical B for computing disallowance under clause (ii) of Rule 8D(2) of the Rules. - ITA 1260/2018 - - - Dated:- 13-11-2018 - MR. SANJIV KHANNA AND MR. ANUP JAIRAM BHAMBHANI JJ. Appellant Through: Mr. Zoheb Hossain, St. Standing Counsel with Ms. Sampurna Sanyal and Mr. Piyush Goyal, Advs. Respondent Through: Ms. Devika Jain, Adv. SANJIV KHANNA, J. (ORAL) CM No. 46986/2018 (seeking condonation of delay) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,34,548/- as fee and taxes for increase in the share capital. 8. Interest and administrative expenses incurred and paid being more than interest received, the respondent-assessee did not declare taxable income other than income from sale of mutual fund units taxable as short term capital gains 9. The respondent-assessee had earned dividend income of ₹ 19,25,655/- on the investment made in the mutual funds. This dividend income was claimed as exempt income under Section 10 (34) of the Act. 10. The respondent-assessee had disallowed expenses of ₹ 70,20,602/- under Section 14A of the Act as attributable to earning of the exempt income. 11. The Assessing Officer held that though the investment of ₹ 820 crores in equity shares had not yielded dividend income, this investment must be taken into consideration while computing disallowance under Section 14A of the Act for the provision prohibits allowance of any expenditure incurred in relation to exempt income which was not included in the total income by virtue of Section 10 of the Act. Dividend income earned on shares being exempt, disallowance has to be made on income in relation to earning of dividend on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d funds from a bank, interest on debentures, interest paid to corporate bodies and subsidiaries. Interest bearing amount was invested in the shares of the subsidiary companies and for purchase of Right Call Option and for making investment in mutual funds of ₹ 38 crores, which had been redeemed during the year. On account of money advanced to the subsidiary companies, the respondent-assessee had received interest of ₹ 41,81,11,353/-. Thus, there was direct and indirect connection between the borrowed funds and the amounts advanced. Interest received should be allowed to be set off from the interest paid to workout the disallowance. Therefore, for the purpose of computing disallowance under Section 14A, the amount of interest should be taken at ₹ 111,27,55,110/-. 20. Commissioner of Income Tax (Appeals) held that in the absence of direct co-relation between the interest paid and investment in shares, no disallowance should be made under clause (i) of sub-rule (2) to Rule 8D of the Rules. The interest expenditure of ₹ 111,27,55,110/- should be taken as an indirect expenditure for computing disallowance under clause (ii) to sub-rule (2) to Rule 8D of the R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d himself restricted the disallowance to the extent of exempt income. After referring to Walford Share and Stock Brokers P. Ltd. (Supra) it was held- Axiomatically, it is that expenditure alone which has been incurred in relation to the income which is includable in total income that has to be disallowed. If an expenditure incurred has no causal connection with the exempted income, then such an expenditure would obviously be treated as not related to the income that is exempted from tax, and such expenditure would be allowed as business expenditure. To put it differently, such expenditure would then be considered as incurred in respect of other income which is to be treated as part of the total income. XXX 10. The decision of the Delhi High Court in Holcim India Pvt. Ltd (Supra) had referred to the issue whether disallowance of expenditure under Section 14A of the Act would be made even when no exempt income in the form of dividend was earned in the year, and it was observed: 14. On the issue whether the respondent-assessee could have earned dividend income and even if no dividend income was earned, yet Section 14A can be invoked and disallowance of expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in an off market transaction attracts capital gains tax. It is an undisputed position that respondent assessee is an investment company and had invested by purchasing a substantial number of shares and thereby securing right to management. Possibility of sale of shares by private placement etc. cannot be ruled out and is not an improbability. Dividend may or may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax. 11. Decision in Holcim India Pvt. Ltd (Supra) was followed and elaborated in Cheminvest Ltd. (Supra). 26. There is another error made by the Assessing Officer in computing the disallowance under clauses (ii) of Rule 8D (2) with reference to the formula prescribed. Numerical B in clause (ii) refers to average value of the investment, income from which does not form part or shall not form part of the total income. The Assessing Officer for numerical B in clause (ii) had taken the total value of the investment and not the investment that had yielded exempt income. The Delhi High Court in ITA No. 615/2 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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