TaxTMI 
TaxTMI 
2014 (3) TMI 963
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....refore, both cross appeals are disposed of through this common consolidated order. 5. Briefly the facts of the case are that the AO considered the issue of disallowance u/s 14A of the Income Tax Act at the assessment stage. It was seen from audited accounts that dividend income of Rs. 75,000/- and Rs. 41,40,888/- was earned which have been claimed as exempt from tax in the computation. However, no expenditure incurred in relation to exempt income was deducted. The assessee was directed as to why the expenses incurred in earning such exempt income should not be disallowed as per provisions of section 14A read with Rule 8D. The assessee did not furnish any explanation in this regard but confirm earning of the dividend of such amount. It is also stated that investments were however, made in earlier years. The AO examined the applicability of provisions of section 14A in the matter and found that assessee company has taken loans from the banks and others to the extent of Rs. 76,23,53,929/-. The company has not been able to demonstrate by way of any evidence that none of the loan funds have been used for making investments. The AO observed that carrying cost of investments in terms o....
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....ing the year under consideration the appellant had earned dividend income of Rs. 75,000/- and Rs. 41,40,888/-. The AO applied sec. 14A read with Rule 8D and determined a sum of Rs. 14,21,311/- to be disallowed u/s 14A. The appellant however claimed that there should be no disallowance. I shall now discuss the case on merits. I have perused the order of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. vs. DCIT & 328 ITR 81 (2010). The Court observed as under on 14A: "The following principles would emerge from section 14A and the decision in Walfort: a) The mandate of sec. 14A is to prevent claims for deduction of expenditure in relation to income which does not form part of the total income of the assessee; b) Section 14A(1) is enacted to ensure that only expenses incurred in respect of earning taxable income are allowed; c) The principle of apportionment of expenses is widened by sec. 14A to include even the apportionment of expenditure between taxable and non-taxable income of an indivisible business; d) The basic principle of taxation is to tax net income. This principle applies even for the purposes of sec. 14A and expenses towards non-....
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....le (2) of Rule 8D of the said Rules. 31. It is, therefore, clear that determination of the amount of expenditure in relation to exempt income under Rule 8D would only come into play when the AO rejects the claim of the assessee in this regard. If one examines sub-rule (2) of Rule 8D, we find that the method for determining the expenditure in relation to exempt income has three components. The first component being the amount of expenditure directly relating to income which does not form part of the total income. The second component being computed on the basis of the formula given therein in a case where the assessee incurs expenditure by way of interest which is not directly attributable to any particular income or receipt. The formula essentially apportions the amount of expenditure by way of interest [other than the amount of interest included in clause (i)] incurred during the previous year in the ratio of the average value of investment, income from which does not or shall not form part of the total income, to the average of the total assets of the assessee. The third component is an artificial figure - one half percent of the average value of the investment, income from wh....
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.... the previous year." Rule 8D2(i) is NIL. As per Rule 8D2(ii) of the interest expenses are not directly attributable to any particular income or receipt the disallowance is to be computed by a specified formula. The appellant has stated that the term loan on which interest was paid, was taken after FY 31/03/99. The shares were acquired in FY 98-99. The term loan was NIL as on 31/03/99. This being the case the interest paid on the term loan is clearly not related to the exempt income and is only attributable to business income. In view therefore, the amount as per Rule 8D2(ii) is NIL. However, the amount as per Rule 8D2(iii) is correctly calculated at Rs. 1,43,479/-. The disallowance under Rule 14A r.w.r. 8D is therefore Rs. 1,43,479/-. (The aggregate of 8D2(i),(ii & iii) is Rs. 1,43,479/-). This amount is therefore confirmed and the balance is deleted. The ground of appeal is partly allowed." 7. Ld. DR relied upon the order of the AO and also referred to the details mentioned in the assessment order as well as order of the ld. CIT(A) and also submitted that mere fact that those shares were old one and not acquired recently was a immaterial and relied upon the decision of Ho....