TaxTMI 
TaxTMI 
2016 (8) TMI 51
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....der Rule 8D(2)(i) and also there was no interest expenditure pertaining to investments as it has sufficient reserves and surplus and regular income of the business was more than the investments in such funds. AO while accepting the explanation of assessee with reference to the direct expenditure however, invoked Rule 8D(2)(ii) to disallow proportionate interest expenditure on certain secured loans obtained to an extent of Rs. 11,49,176/- and also 0.5% of average value of investments and Rs. 21,189/- under Rule 8D(2)(iii). Assessee contested the same before the CIT(A) to submit that there is no satisfaction recorded by the AO while invoking Section 14A and further all the borrowals are for specific purposes and no part of the borrowed amount was diverted to investments and questioned the disallowance. It was contended that AO cannot disallow expenditure by making general observations in a mechanical way and relied on the decision of Hon'ble Delhi High Court in the case of Maxcopp Investment Ltd., Vs. CIT [15 taxmann.com 390] (Delhi). Since assessee questioned the very invoking of Section 14A, Ld. CIT(A) elaborately discussed the principles governing Section 14A, Rule 8D in his o....
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....th Hospitals Ltd., and an amount of Rs. 75,96,688/- in the shares of Dr. Reddy Labs. The shares of Dr. Reddy Labs were sold during the year. An amount of Rs. 5.49 Crores was invested in Birla Sunlife Mutual fund during the year and as explained by the Ld. Counsel, the Fixed Deposits to the tune of Rs. 7.55 Crores in earlier year were partly cancelled. As seen from the balance sheet also there was sufficient share capital and reserves which cover more than the investments made in earning the exempt incomes. Following the principles laid down by the Hon'ble Bombay High Court in the case of CIT Vs. Reliance Utilities & Power Ltd., [313 ITR 340] (Bom), we are of the opinion that no part of the interest paid on the borrowed funds can be disallowed under Rule 8D(2)(ii). Moreover, if at all there is any diversion of funds that should trigger disallowance u/s. 36(1)(iii) i.e., for diversion of funds from the business. AO has not disallowed any amount u/s. 36(1)(iii). In view of this, we are of the opinion that the interest paid on term loans obtained cannot be considered as interest which is not directly attributable to any particular income or receipt under Rule 8D(2)(ii). In view of ....
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.... which has yielded any exempt income in the relevant FY. Expenditure cannot be in relation to the total investment irrespective of the fact whether any income is earned or not during the year. Before going into the merits of assessee's contentions, it is deemed necessary to look into the provisions contained under rule 8D(2) which is relevant for our purpose. The same is extracted hereunder for the sake of convenience: 8D. (1) xxxxxxxxxxx (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely :- (i) the amount of expenditure directly relating to income which does not form part of total income; (ii) in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely :- A X B/C Where A = amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year ; B = the average of value of investment, income from wh....
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....al income". The term total income has not been defined either u/s 14A or under Rule 8D. Therefore, one has to look to the definition of 'total income' as appearing in section 2(45) of the Act, which reads as under: "total income" means the total amount of income referred to in section 5, computed in the manner laid down in this Act ; Section 5 of the Act reads as under:- Scope of total income. 5. (1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year ; or (c) accrues or arises 57 to him outside India during such year : Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section (6)* of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India. (2) Subject ....
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....ll not form part of the total income, as appearing in the balance sheet of the assessee on first day and last day of the previous year. Therefore, while disallowance of expenditure under clause (i) is related to income earned which does not form part of total income, clause (iii) relates to the average of the value of investment appearing in the balance sheet. On a plain reading of Rule 8D(2) as a whole the legislative intent becomes clear that the disallowance of expenditure contemplated under sub-rule(i) must relate to the income which does not form part of the total income of that year. Therefore, investment, which has not resulted in any income cannot be considered for the purpose of disallowance under Rule 8D(2)(i). However, while computing disallowance under rule 8D(2)(iii), the average of the total investment of the assessee as appearing in the balance sheet on the first day and last day of the year irrespective of the fact whether it has yielded income or not can be considered for the purpose of disallowance. The use of the words does not or shall not in Rule 8D(2)(iii) connotes that income not only does not form part of total income during the year but it also shall not fo....