TMI Blog2018 (2) TMI 2015X X X X Extracts X X X X X X X X Extracts X X X X ..... s is concerned, it has been held in the case of DCIT vs REI Agro Ltd. [ 2013 (5) TMI 582 - ITAT KOLKATA] that it is only the investment which yielded tax free income that should be considered for working out the average value of investment while applying the Rule 8D(2)(iii) of the Rules. This order of the tribunal has been confirmed by the decision of Hon‟ble Calcutta High Court i. [ 2013 (12) TMI 1517 - CALCUTTA HIGH COURT] - In view of the aforesaid legal position we are of the view that the order of the CIT(A) on this issue cannot be sustained. Plea of the assessee to exclude funds which are not generating exempt income, that is, which had not yielded any exempt dividend income during the previous year while working out the average value of investments for the purpose of applying Rule 8D(2)(iii) of the Rules, should be accepted. We do not accept the plea of the assessee that commission of financial advisor was paid by the Mutual Fund directly therefore no any expenses have been incurred by the company to maintain the investment portfolio. Ultimately, the directors of the company or top management instructs the financial advisor, about how much investment is to be d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expense, as per the provisions of section 14A r.w.r 8D of the Income Tax Act, 1962, in its Profit Loss account. In response to that, the assessee submitted its reply on 26.02.2015. After going through the reply of the assessee, the AO found that assessee has incurred expenditure in relation to earning of exempt income, therefore, provisions of section 14A r.w.r 8D would be applicable. The assessing officer noted that for the purpose of applicability of section 14A, it is not necessary that the assessee should have actually earned exempt income during the year. All the income frominvestments which does not or shall not form part of total income are to be included for working out this disallowance. This way, the assessing officer, considering all the investments, consisting funds generating exempt income and funds not generating exempt income,worked out disallowance as per Rule 8D(2)(iii), which is given below: Opening balance of investments as on 31.03.2011 5,90,67,943/- Closing balance of investments as on 31.03.2012 19,57,15,948/- Average value of investments 12,73,91,94 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Birla Sunlife Dividend Yield Plus - Growth 20,82,612 2 HDFC Equity Fund Growth 17,35,230 3 Kotak Mid Cap Growth 4,67,226 4 Pramerica Dynamic Fund Growth 29,34,000 5 Reliance Growth Fund Retail Plan 3,50,123 Sundaram Select Midcap Appreciation Fund 20,02,717 Total(A) 1,47,22,343 B Funds not generating Exempt Income i. Debt Oriented Mutual Funds 1 Birla Sunlife Cash Manager Growth 1,50,50,418 2 Birla Sun Life Capital Protection Oriented Fund 30,00,000 Series 1 Growth 3 Birla Sun Life Monthly Income - Growth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 DWS Premier Bond Fund - Regular Plan Growth 20,00,000 6 DWS Short Maturity Fund - Growth Plan 22,84,544 7 HDFC Cash Management Fund - Treasury Advantage Retail Growth 5,16,80,076 8 ICICI Prudential Regular Savings Fund Growth 95,00,000 9 Kotak Bond (Regular) Growth 2016612/54 55,00,000 10 Kotak Credit Opportunities Fund Growth 54,09,733 11 SBI Dynamic Bond Fund 13424221 - Growth 15,00,000 12 UTI Bond Fund Growth Plan Regular 80,00,000 13 UTI Treasure Advantage Fund Growth Plan 4,00,00,000 Total(B) 17,16,61,197 Total (A+B) 19,57,15,948 The ld. Counsel for the assessee, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g officer was erred in taking into account those funds which are not generating exempt income. Hence, thedisallowance, if any, to be made, should be in relation to the funds generating exempt income. 2.4 On the other hand, the ld. DR for the Revenue has primarily reiterated the stand taken by the assessing officer which we have already noted in our earlier para and is not being repeated for the sake of brevity. 2.5 We have given a careful consideration to the rival submissions, and perused the materials available on record, we note that the disallowance u/s 14A r.w.r8D(2)(iii) should be in relation to funds generating exempt income only. In respect of provisions of Rule 8D(2)(iii), which is the subject matter of the appeal in the assessee‟s case under consideration, a perusal of the said provision shows that what is disallowable under Rule 8D(2)(iii) is the amount equal to % of the average value of investment, the income from which does not and shall not form part of the total income. Thus, under Rule 8D(2)(iii) what is disallowable is % of the dividend bearing securities or funds generating exempt income. Therefore, not all investments become the subject matter o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les. 2.6 In the result, the appeal filed by the assessee (Ground No.2), is allowed for statistical purposes. 3.Ground No.3 raised by the assessee relates to addition of income of ₹ 25,000/- made by the AO under the head of profit and gains of business or profession , while computing the tax liability. The ld. Counsel for the assesseepointed out that assessing officer, while going through the income-tax computation form, has taken the amount of ₹ 7,15,07,112/- as profit and gains of business or profession . However, in the assessment order, the AO after making disallowance u/s 14A has correctly computed income under the head profit and gains of business or profession at ₹ 7,08,45,144/-, therefore, the difference of ₹ 25,008/- is to be rectified as per the assessee`s reconciliation given below: (i) Income-tax computation: 7,15,07,112/- (ii)AO‟s order after taking disallowance u/s 14A: 7,09,45,144//- Balance 76,19,68/- Less: Disallowance u/s 14A: 63,69,60/- Balan ..... X X X X Extracts X X X X X X X X Extracts X X X X
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