TaxTMI 
TaxTMI 
2015 (3) TMI 395
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....0/-. It had earned a dividend income of Rs. 33,600/- which was claimed exempt. AO found that assessee had investments totaling to Rs. 63,49,38,874/- in equity shares at the year end. The AO further noted assessee had charged in its P&L account interest of Rs. 33,93,15,003/-. A proposal was made to disallow the expenditure attributable to the investments. In reply assessee stated that none of the investments were made out of any loans. As per the assessee it had general reserves of Rs. 5.15 Crores and interest free deposits from tenants Rs. 49.13 Crores, apart from its capital. As per the assessee therefore, there was no question of disallowance u/s 14A of the Act. AO was of the opinion that reply was superficial and the assessee had not adduced anything to show that the investments was made from non interest bearing funds. As per the AO assessee did not produce the fund flow statement without which it was not possible to verify its claim. Further, as per the AO whether the dividend was declared by various private companies in which assessee had invested was irrelevant since non-declaration of dividend were only to avoid dividend distribution tax. He therefore, applied Rule 8D(2)(ii....
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....non-interest bearing funds were used for making the investments. Further, according to the learned DR, earning of income from investments was not necessary pre-requisite for invoking Sec14A of the Act. Once the said section was invoked AO was duty bound to make a disallowance under every clause of Rule 8D and could not limit himself to clause(iii) thereof, Thus, according to learned DR, the CIT(A) erred in deleting the disallowance made under Rule 8D(2)(ii). 7. Per contra, and in support of the Cross Objection learned AR submitted that assessee had total investments working out to Rs. 63,49,8,874/- of which the interest from dividend of Rs. 33,600/- came from investments in shares worth Rs. 2,30,400/- of M/s Indian Overseas Bank (IOB). The major investments were in shares of Drive-in enterprises Limited, M/s Prakruthi Infrastructure and Development Co.,Ltd., and Chamundi Plasto Sacks Pvt.Ltd and these had not yielded any dividend. The share capital and reserves of the assessee as on 31-03-2009 came to Rs. 52,64,52,854/- apart from the interest free advance received from its lessees. As per the learned AR the increase in investments during relevant previous year was negligible. M....
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....tments made by it. In our opinion, it is not necessary to draw a one to one nexus between investments and interest free funds. When the funds had gone out of a common pool and the assessee had interest free funds in excess of the investments, it could take a valid plea that such investments were made out of interest free funds. In taking this view we are fortified by the judgment of Hon'ble Gujarat High Court in the case of CIT Vs Gujarat Industrial Development Corporation Ltd (2013) 218 Taxmann Guj.142, which view was taken also by Hon'ble Punjab & Haryana High Court in the case of CIT Vs Deepak Metal (2014)361 ITR 131. Relevant parts of the former judgment are reproduced hereunder; 4.1 At the outset, it is needed to be mentioned that Section 14A was incorporated in relation to the income not includible in total income. The assessee obtained unsecured Government loans of huge amount of Rs. 384.95 crores and paid interest to the tune of Rs. 6.62 crores (rounded off). It also invested in different kinds of equity shares, a large amount to the tune of Rs. 295.78 crores (rounded off) and as per the provision of Section 10(34), the prospective dividend income received from such inve....
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....ilable with the assessee, the question would arise of fastening the tax liability on the assessee. In the instant case, the respondent assessee had not used borrowed funds, for the purpose of investment in equity shares. For the deduction claimed under Section 80M, on the dividend income of these shares, both the CIT (Appeals) and the Tribunal have rightly allowed the interest free expenses incurred for earning the dividend and allowed the deduction under Section 80M on the net income received. And, the Revenue having failed to establish that the respondent assessee had incurred any expenses for earning dividend income from the amount borrowed, they have rightly not added sum of Rs. 6.62 crores invoking provisions of Section 14A which does not permit deduction of expenditure incurred in relation to income not includible in total income In the case of CIT Vs Deepak Metal observations of the Hon'ble Punjab & Hayana High Court were as under; Sole ground taken by the revenue in these appeals is that the dividend income returned by the assessee could not have been earned by him without making direct or indirect expenses. Contention of the revenue is that Section 14-A of the Act is....
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....on of the assessee was that he had not made any expenditure on earning such income, the Assessing Officer in terms of sub-section 2 of Section 14-A of the Act was to proceed further to collect such material or evidence to determine expenditure, if any, incurred by the assessee but the Assessing Officer instead relying on Rule 8-D of the Rules applied as a formula, applicable to an assessee who has incurred expenditure by way of interest which is not directly attributable to any particular income or receipt which is not the case of the present assessee, which was clearly a wrong application introduced as a substitute for subsection 2 of Section 14-A of the Act and thus was not permissible in law. 10. At this stage, reference to the impugned judgment of the Tribunal is necessary. In para 14 of its judgment, the Tribunal has observed as under: "Before any disallowance is made, essentially there has to be certain expenditure which must have been incurred by the assessee, which in the present case is missing. The Assessing Officer has not brought on record any expense having been incurred by the assessee to earn the non-exempt income or the exempt income. In the absence of the sam....
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....4A cannot stand. In the present case finding on this aspect, against the revenue, is not shown to be perverse. Consequently, disallowance is not permissible. We have taken this view earlier also in ITA No.504 of 2008 (Commissioner of Income Tax Chandigarh II vs. M/s Winsome Textile Industries Limited, Chandigarh),decided on 25.8.2009, wherein it was observed as under:- "6. Contention raised on behalf of the revenue is that even if the assessee had made investment in shares out of its own funds, the assessee had taken loans on which interest was paid and all the money available with the assessee was in common kitty, as held by this Court in CIT v. Abhishek Industries Limited, (2006) 286 ITR 1and therefore, disallowance under section 14A was justified." In view of law laid down by judgment of this Court which is fully applicable to the facts of this case, nothing remains to be adjudicated afresh. 12. In view of the discussion made earlier, we are of the opinion that no substantial question This being the case, question of disallowance of interest u/s 14A of the Act, do not arise at all. 9. Vis-à-vis the disallowance made under Rule 8D(2)(iii), a look at the assessm....