TMI Blog2011 (3) TMI 1836X X X X Extracts X X X X X X X X Extracts X X X X ..... me Tax Rules which came into the statute book with effect from 24/03/2008 prospectively. 2. The learned CIT(A) has grossly erred in law and on facts in confirming the action of ld. AO in making addition of Rs. 1,63,847/- u/s 14A of the Act as much as the CIT(A) has also erred in law and on facts in applying Rule 8D of the Income Tax Rules. 3. Both the lower authorities have erred in law and on facts in passing the orders without properly appreciating the facts and that he further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. This action of both the authorities is in clear breach of law and P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the said bank for making investment. It is clear from the audited statement of accounts that short term borrowings were made for Bhavnagar Unit only and in the year under consideration borrowed short term fund of cash credit from bank was Rs. 1,95,724/- whereas investment remained outstanding as on 31-3-2006 in the HDFC floating rate fund at Rs. 34,57,515/-. There was further cash credits of Rs. 19,02,456/- taken at the end of year. It was, therefore, submitted that no borrowed funds have been used for the purpose of making investment for earning exempt income. It was also clear that nexus of funds invested is directly from the current account of HDFC bank and no borrowed funds were used for making investment. Some case laws were reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned Counsel for the assessee emphasized that since investment is not made out of borrowed funds, therefore, addition be deleted. He has relied upon the order of ITAT Ahmedabad Bench in the case of the same assessee in the preceding assessment year 2005-06 in ITA No.3533/Ahd/2008 and C. O. No.288/Ahd/2008 dated 09-09-2010. 4. On the other hand, the learned DR submitted that the issue is now finally decided by the Hon ble Bombay High Court in the case of Godrej And Boyce Manufacturing Co. Ltd. Vs DCIT and Another 328 ITR 81 in which the Hon ble Bombay High Court held that Section 14A is applicable to dividend income and income from Mutual Funds exempt u/s 10(33) of the Act. He further submitted that the Hon ble High Court has als ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... basis for effecting the apportionment. While making that determination, the Assessing Officer should provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case. 5. Considering the facts of the case in the light of the above decision, we are of the view the matter requires reconsideration at the level of the AO. The assessee has specifically pleaded before the AO that it has received dividend income of Rs. 7,80,380/- in the assessment year under appeal by making investment of surplus funds in HDFC floating rate fund . It was pleaded that surplus funds were available for investment in the current account of HDFC bank. Copy of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year under appeal. The AO can resort to reasonable basis for making disallowance as per the above decision if the AO would be able to prove that assessee had incurred any expenditure directly or indirectly in relation to the dividend income which does not form part of the total income as mentioned in section 14A of the IT Act. It would mean that the AO shall have to prove nexus between the borrowed funds and the investment made by the assessee for earning exempt income. The AO has failed to do so and merely applied Rule 8D of the IT Rules which is no longer applicable to the assessment year under appeal. The order of the authorities below thus cannot be sustained in law. In the preceding assessment year 2005-06, it was noted that there wer ..... X X X X Extracts X X X X X X X X Extracts X X X X
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