TMI Blog2022 (4) TMI 970X X X X Extracts X X X X X X X X Extracts X X X X ..... he facts of the case and explanation given by the assessee. He has not even examined that assessee had surplus funds which were interest free of more than ₹ 556.07 crores as against the exempt income earning investment of ₹ 63.66 crores. Thus, interest expenditure could not have been disallowed. Now in the latest judgement of Hon ble Supreme Court in the case of South Indian Bank [ 2021 (9) TMI 566 - SUPREME COURT] wherein it has been held that where assessee had interest free funds available which exceeds the investment made in tax free fund security then no interest expenditure can be disallowed and it has to be presumed that it is out of assessee s own fund and proportionate disallowance could not warrant under section 14A even where no separate accounts were maintained by the assessee and other expenditure made for earning tax free income. Disallowance could be legally impermissible for the investment made by the assessee in bonds/shares using interest free funds under Section 14A. Thus proportionate disallowance of interest is not warranted under section 14A for investments made in tax-free bonds/ securities which yielded tax free dividend and interest to as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the exempt income generating investments of ₹ 63.66 crores; and lastly, the assessee had itself worked out the disallowance to the amount of ₹ 31,83,042/- being 0.5% of the average value of investment in view of Rule 8D(2)(iii) of the Act. Apart from that, various judgements were also relied upon which have been incorporated in the assessment order. 4. However, the ld. Assessing Officer simply observed that the assessee s claim that it had not incurred any expenses in respect of affairs is not acceptable, therefore, he is constrained to determine the disallowance under Section 14A of the Act. After referring to the delayed provisions and judgements made following general observations:- 5.7 The earning of exempt income is not in nature of passive activity having no input. In fact in present situation making of Investment, maintaining or contributing investment and time of exit from investment are well informed and well coordinated management decisions involving not only inputs from various source but also acumen of senior management functionaries. Therefore, cost is inbuilt into even so called passive Investment. There are incidental expenditures of collectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f his argument was that, nowhere the Assessing Officer has recorded any satisfaction that why the disallowance offered by the assessee is not correct albeit has given a general remark without understanding the expenditure debited and having regard to the books of accounts wherein any specific expenditure can be allocated for earning of the exempt income. In support, he relied upon the judgement of Hon ble Supreme Court in the case of Maxopp Investment Ltd. Vs. CIT (2018) 15 SSC 523 and Godrej Boyce Mfg. Co. Ltd. Vs. CIT (2017) 7 SCC 421. 8. On the other hand, the ld. DR strongly relied upon the order of the Assessing Officer and the ld. CIT (Appeals) and submitted that the Assessing Officer has recorded his satisfaction and then only he was invoked Rule 8D for making the disallowance. 9. We have heard the rival submissions and perused the relevant finding given in the order. We have already incorporated the observations of the Assessing Officer and the assessee s explanation as to why interest expenditure should not have been disallowed on the facts of the present case. Nowhere the Assessing Officer has made any observation on these submissions that no interest can be disal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o separate accounts were maintained by the assessee and other expenditure made for earning tax free income. Hon ble Supreme Court clearly held that if assessee had mixed funds, made up partly of interest free funds and partly of interest-bearing funds and payment has been made out of mixed funds, then the investment must be considered to have been made out of interest free funds. It is the assessee who has such right of appropriation and also the right to assert from what part of the fund a particular investment is made and it would be not permissible for the Revenue to make an estimation of a proportionate figure. Disallowance could be legally impermissible for the investment made by the assessee in bonds/shares using interest free funds under Section 14A. Thus proportionate disallowance of interest is not warranted under section 14A for investments made in tax-free bonds/ securities which yielded tax free dividend and interest to assessee banks where interest free funds are available exceeded their investments. Thus, no disallowance on account of section 14A can be made. 11. Thus, in this case no disallowance of interest could have been made and hence the same is deleted. More ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... larly, the Hon'ble Jurisdictional High Court in the case of HT Media Ltd. (supra) had also reiterated the same principle in the following manner:- Rule 8D(1) states more or less what section 14A(2) of the Act states. It requires the Assessing Officer to first examine the accounts of the assessee and then record that he is not satisfied with (a) the correctness of the assessee's claim of expenditure or (b) the claim made by the assessee that no expenditure has been incurred. Unless this stage is crossed, i.e., the stage of the Assessing Officer recording that he is not satisfied with the claim of the assessee in the manner indicated, i.e., after examining the assessee s accounts, the question of applying the formula under rule 8D(2) does not arise. That this is a mandatory prerequisite for applying rule 8D(2) is fairly well-settled. 15. Thus in absence of any kind of satisfaction by the Assessing Officer after examining the nature of expenditure debited and examining the accounts of the assessee, he cannot proceed to apply Rule 8D. Here in this case, it is more so, because assessee has given a very categorical explanation as to why disallowance u/s. 14A should not b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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