TMI Blog2019 (7) TMI 701X X X X Extracts X X X X X X X X Extracts X X X X ..... tivity, which is not earned any income during this year. Rule 8D can be applied only when there is mixed funds available with the assessee, which cannot be segregated, but, considering the financial pattern of the assessee, it is clear that interest expenditure incurred by the assessee is towards investment activities. Therefore, this expenditure can be set off against income from investments. Therefore, assessee cannot claim any expenditure, which is exempt from tax i.e. dividend income as well as share income from partnership firm. Therefore assessee is not eligible to claim portion of interest expenditure incurred towards investment activities, which has not earned any income. CIT(A) has allowed the interest expenditure proportionate to the borrowed funds and own funds. Therefore, we are inclined to accept the findings of the ld. CIT(A) and accordingly, interest expenditure is allowed proportionately to the own funds available with the assessee i.e. 22% and 78% of the interest expenditure is sustained. Accordingly, grounds raised by the assessee are dismissed. With regard to quantum of interest expenditure, the net expenditure to be considered not the total interest expend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paid of ₹ 12,93,947/- was claimed as loss. Further, AO verified the balance sheet submitted along with the return of income and noticed that the assessee borrowed the amounts to the extent of ₹ 2,37,38,450/- from various persons/concerns, and the above borrowed funds along with the own capital of ₹ 66,19,504/- was invested in share application money in various companies to the extent of ₹ 2,42,53,505/-. The AO noticed that major portion of the amounts borrowed as loans was utilized as investments on share application money in various companies. When asked to justify as to how it is eligible for claiming deduction of interest paid on loans taken when the said loans were invested in shares of different companies from which only dividend income was earned or expected to earn which is exempt from tax, the assessee filed the following reply: This is to inform you that I am partner in M/s. Sunil Ispot Udyog and Sri Durgo Steel Traders. I am also Director of M/s. Poncharatna Metal Processing Ltd. and Sir Narsing Laxmi Steels Pvt. Ltd. I am getting income from interest and also as Remuneration from companies to run, manage, condu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om bank etc. According to the appellant, his own capital was utilised for making investments, the income from which were exempt and therefore, Sec 14A were not applicable to his case. 06.1 It is to be seen that partners' share of profit from investments in firms and income arising from investments in shares of companies, is not liable :0 tax. The assessee's investment may have enabled him to become a Director/Partner in the company/firm. But that is not the issue. The issue is that the income earned by him by virtue of such investment, i.e. dividend / share of profit would constitute exempt income, and as per Sec 14A of the LT. Act, any expenditure incurred in relation to such income would not be allowable as deduction. Therefore, whether borrowed funds were used for making such investments is to be seen. The balance sheet of the appellant shows that he had interest bearing funds amounting to ₹ 2,37,38,450/- and non-interest bearing funds of ₹ 66,19,504/- and as the funds were mixed up, it cannot be categorically stated that interest- free funds were only utilised towards investment, income from which was exempt. There is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idend was received from Pancharatna Metal Processing Limited. 1. The interest income received on the investment made out of the borrowed funds is ₹ 2,41,523/-. Particulars Amount in Rs. Interest income received ₹ 2,41,523/- Less: Interest paid ₹ 15,35,470/- Net Interest paid ₹ 12,93,947/- From the above table, it can be drawn that the net Interest paid by the assessee individual is ₹ 12,93,947/-. We would further like to mention that the assessing officer has considered Interest Income as income earned for application of monies received on borrowings but has disallowed expenditure paid on the same. 2. Further we would like to mention that in the scrutiny proceedings of the assessee for the AY 2013-14, the Ld. AO has allowed the interest expense claimed by the assessee against the interest income. The AO has raised the ques ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt. As such, interest received on such investments must be reduced from the same. 9. On the other hand, ld. DR relied on the orders of revenue authorities. 10. Considered the rival submissions and perused the material on record. We notice that assessee is earning income form house property, income from salary, income from business being share income from partnership firm M/s Sri Durga Traders and income from other sources being interest/dividend received from various persons/concerns. During this year, as per the balance sheet submitted before us, it is noticed that assessee having his own capital to the extent of ₹ 66.19 lakhs and borrowed loans to the extent of ₹ 2.37 crores and assessee has utilized the funds to invest in shares to the extent of ₹ 2.43 crores and made investment in all other sundry assets along with cash balance to the extent of ₹ 60.5 lakhs. From the above, it is clear that assessee has his own capital to the extent of ₹ 66.19 lakhs, which was applied in acquiring other sundry assets including cash to the extent of ₹ 60.5 lakhs, whereas, majority of the borrowed funds were utilized to acqui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... financial pattern of the assessee, it is clear that interest expenditure incurred by the assessee is towards investment activities. Therefore, this expenditure can be set off against income from investments. Therefore, assessee cannot claim any expenditure, which is exempt from tax i.e. dividend income as well as share income from partnership firm. Therefore, in our considered view, assessee is not eligible to claim portion of interest expenditure incurred towards investment activities, which has not earned any income. We notice that CIT(A) has allowed the interest expenditure proportionate to the borrowed funds and own funds. Therefore, we are inclined to accept the findings of the ld. CIT(A) and accordingly, interest expenditure is allowed proportionately to the own funds available with the assessee i.e. 22% and 78% of the interest expenditure is sustained. Accordingly, grounds raised by the assessee are dismissed. With regard to quantum of interest expenditure, the net expenditure to be considered not the total interest expenditure. 11. As the facts and grounds raised in ITA No. 90/Hyd/2017 are identical to that of ITA No. 753/Hyd/2016, following the decision th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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