TaxTMI 
TaxTMI 
2014 (10) TMI 928
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....th the correctness of the claim of the expenditure in respect of exempted income, then he has to calculate the disallowance as per rules and in this case the A.O. has amply demonstrated that he is not satisfied with the correctness of the claim that no interest bearing borrowed funds have been utilized for investment in shares of companies. 1.2 Observing that the A.O. should prove the nexus between interest bearing fund and tax free investment before invoking provisions of section 14A of the IT Act. That the appellant craves to add, amend, alter, delete or modify any or all the above grounds of appeal before or at the time of hearing." 3. The only grievance of the Department in this appeal relates to the deletion of disallowance made by the Assessing Officer u/s. 14A of the I.T. Act, 1961 (hereinafter referred to as 'the Act' in short). 4. Facts relating to this issue, in brief, are that the assessee e-filed its return of income on 30/09/2009 declaring an income of Rs. 4,72,26,780/- The Assessing Officer accepted the trading results declared by the assessee, however, during the course of assessment proceedings, he noticed that the assessee received dividend income of Rs. 18,33,....
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....14A of the Act r.w.r. 8D(2)(ii) & (iii) of the I.T. Rules 1962 and worked out the disallowance of Rs. 32,14,818/- in the following manner:- I) A. Amount of interest Rs. 1,36,90,516/- B. Average value of investment income from which does not /shall not form part of the total income of Rs. 13,81,04,933/- (investment as on 01/04/2008 Rs. 14,20,77,769/- and investment as on 31/03/2009 of Rs. 13,41,32,097/-). C. Average of the total asset appearing in the B/S of Rs. 74,90,12,956/- (total asset as on 01/04/2008 of Rs. 69,43,62,932/- and total asset as on 31/03/2009 of Rs. 80,36,62,980/-). Disallowance u/s. 14A A x B/ C = 13690516 x 138104933/749012956 = Rs. 2524293/- II) ½% of average of investment = ½% x 138104933 = Rs. 690525/- The total amount of the disallowance u/s. 14A r.w.r. Rule 8D of I.T. Rule comes to = (I + II) = Rs. 2524293 + Rs. 690525 = Rs. 3214818/-. 5. Being aggrieved, the assessee carried the matter to the ld. CIT(A) and submitted that the assessee received an amount of Rs. 18,33,158/-being dividend income from investment in shares and the said income was not taxable by virtue of the provisions of section 10(34) of the Act. It was further sta....
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....tment was on the revenue and the Assessing Officer had not provided any reason whatsoever to prove the nexus between the amount invested and the exempted income. Therefore, the disallowance made by invoking the provisions of section 14A of the Act was not justified. It was further submitted that the provisions of section 14A(2) of the Act clearly stipulates that the Assessing Officer shall compute the expenditure to be disallowed under this section, only if he is not satisfied with the correctness of the claim of the assessee in this respect and not otherwise. It was contended that in assessee's case, the Assessing Officer had provided no reasons whatsoever to disbelieve the accounts of the assessee or its claim that no expenditure was incurred in relation to earning the dividend income and that own-funds were utilized for making the investment and the books of accounts produced before the Assessing Officer duly justified the contention of the assessee that no expenditure was incurred for earning the said dividend income. Therefore, the disallowance was merely on the basis of assumption and presumption. It was stated that the Assessing Officer had not provided any reason for reject....
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.... of the Act exists only as a matter of scheme of collection of tax on entire dividend and not as a scheme to grant exemption. Reliance was placed on the following case laws:- 1) Sudhir Kapadia Vs. ITO (ITA No. 7888M03 dated 26/02/2003, Mum. 'C' Trib.) 2) Hitesh D Gajaria Vs. ACIT 11(2) - (ITA No. 993MUM2007) decided on 14/11/2008 (Mum. 'H' Trib.) 7. It was contended that if the proposition that the tax on distribution of dividend was not a tax on income earned by way of dividend by shareholders or unit holders was accepted, then the provisions may be ultravires the purpose of the Income-tax Act as well as the Constitution. It was contended that by imposing tax at the stage of distribution itself, it is assumed that there is element of taxable income in the dividend distributed and to keep a balanced overall tax rate for collection relatively lower rate of tax had been imposed on distributed income and once it is settled that dividends suffers a payment of tax, it cannot be said that dividend is an exempt income and does not form part of total income under the whole Act. It was stated that the provisions of section 14A of the Act can be applied in relation to only such income whi....
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.... thus, not applicable since the Ld. A.O. has not provided justified reasons to disbelieve the claim of the appellant that no expenditure was incurred in relation to earning the dividend income. iv) The disallowance made by the A.O. is entirely based on presumptions and estimation. v) Dividend income is outside the scope of section 14A and therefore, section 14A is not applicable in the case of the appellant. vi) The investment in shares cannot be termed to be investment, income from which does not or shall not form part of total income since profit/loss on sale of such investment constitutes part of total income. vii) The entire amount of investment should not be taken into consideration for the purpose of computation of disallowance u/s. 14A read with rule 8D since it also includes the investments, the income of which is taxable in the hands of the assessee. 9. The learned CIT(A), after considering the submissions of the assessee, observed that the Assessing Officer made the disallowance of Rs. 32,14,818/- u/s. 14A of the Act r.w.r. 8D of the I.T. Rules 1962 by rejecting the explanation of the assessee that no expenditure was incurred for earning dividend income of Rs. 18....
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....for satisfaction of the Assessing Officer were not supported by the facts of the case, therefore, no disallowance of expenses could have been made under Rule 8D. Accordingly, the addition of Rs. 32,14,818/- was deleted. Now the Department is in appeal. 11. Learned D.R. strongly supported the order of the Assessing Officer and reiterated the observations made by the Assessing Officer in the assessment order dated 15/12/2011. Reliance was placed on the following decisions:- 1) M/s. Pavak Securities Pvt. Ltd. Vs. ITO, Mumbai in I.T.A.No. 1803/Mum/2012 dated 13/09/2013 (Mum. 'C' - Trib.) 2) M/s. Lakshmi Ringh Travellers Vs. ACIT in I.T.A.No. 2083/Mds/2011 dated 02/03/2012 (Chennai 'A' - Trib.) 12. In his rival submissions, learned counsel for the assessee reiterated the submissions made before the authorities below and further stated that the cases relied by the learned D.R. were relating to trading concerns wherein some expenses might have been incurred to earn the dividend income, but in assessee's case no such expenses were incurred and the investment was made out of interest free funds. Therefore, the disallowance made by the Assessing Officer was rightly deleted by the Ld. C....