TaxTMI 
TaxTMI 
2018 (3) TMI 792
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.....2012 declaring a total income of Rs. 87,37,770/-. In the profit and loss account filed along with the said return, a sum of Rs. 1,54,40,021/- was debited by the assessee on account of interest expenditure. During the course of assessment proceedings, it was noticed by the A.O. that the assessee has given loans to various parties aggregating to Rs. 1,26,10,904/- on which interest was not charged. In this regard, he required the assessee to furnish the relevant details showing the purpose of giving the said loans and to explain as to why interest attributable to the said loans should not be disallowed if the same were not given for the purpose of business. According to the A.O., the assessee failed to furnish the said details. He, therefore, proceeded to make a disallowance out of interest to the extent of Rs. 15,13,308/- being interest @ 12% p.a. attributable to the loan amount of Rs. 1,26,10,904/- 4. The disallowance made by the A.O. out of interest expenditure was challenged by the assessee in the appeal filed before the Ld. CIT(A) and after considering the submissions made by the assessee as well as the material available on record, the Ld. CIT(A) deleted the disallowance made ....
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....d merit in the contention of the appellant that the entire amount of loan on which no interest was charged during the year will be deemed to have come out of the capital of the partners and free of interest loan available with the appellant. Accordingly, it appears that while making the impugned disallowance, the Ld. A.O. appears to have missed sight of these material facts as available in the Books of and Financial Statements. Overall, it emerges that there were adequate interest free funds available with the appellant, and therefore, the notional interest worked out by the Ld. AO would not be applicable to the assessee, more so in a situation where there were doubtful loans which were difficult to recover. In the factual matrix, in my considered view of the matter, there were adequate interest-free funds available with the appellant, as emerges from the Capital Accounts of the Partners, and the Financial Statements submitted by the appellant for the subject Assessment Year. It is also seen that the situation is covered by the case laws and judicial precedents filed by the appellant, more specifically by the judgment of HDFC Bank Ltd. v. DCIT & Ors. (2016) 383 ITR 529 (Bom). In....
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....rm of partners capital were available with the assessee firm at the relevant time to give the loans in question free of any interest. In our opinion, these facts and figures available before the A.O. were sufficient to show that the interest free loans in question were given in assessee firm out of its own funds and there was no diversion of interest bearing borrowed funds warranting any disallowance out of interest expenditure claimed by the assessee. We, therefore, find no infirmity in the impugned order of the Ld. CIT(A) deleting the disallowance made by the A.O. out of interest expenditure and upholding the same, we dismiss ground no 1 of the revenue's appeal. 8. In ground no 2 of its appeal in A.Y. 2012-13, the revenue has challenged the action of the Ld. CIT(A) in restricting the disallowance of Rs. 67,30,674/- made by the A.O. u/s 14A to Rs. 5,03,714/- 9. As found by the A.O. on perusal of the balance sheet of the assessee firm as on 31.03.2012, the assessee had made investment in shares, units and securities to the tune of Rs. 7,87,95,988/-, Rs. 75,41,408/- and Rs. 1,75,54,609/- respectively. The assessee had also earned dividend income of Rs. 67,00,090/- which was claime....
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....rowings specifically used fur taxable income or receipts. (b) Rule 8D(2)(iii) was not applicable as there was no expenditure actually incurred for earning the exempt income. On such contention of the appellant, the issue was remanded to the A.O. and the A.O. vide his report dtd. 19.05.2014 submitted that the interest bearing loan funds were utilized only for the purpose of business and not for investment. For the purpose of investment rental income was utilized as total rental income of Rs. 3,48,90,068/- was available with the appellant. Further, the average investment taken by the A.O. of Rs. 9,45,23,277/- includes a average of stock in trade of Rs. 4,12,14,610/- also. The appellant submitted that: (a) The A.O. in the remand report has accepted that the investment in shares was out of rental incomes and no part of the borrowed loan was utilized in shares and hence Rule 8D(2)(ii) cannot be invoked in such respect. (b) As regards the disallowance under Rule 8D(2)(iii) average investment was considered by A.O. of Rs. 9,45,23,277/- which included the average value of stock-in-trade and hence the same has to be exclude for which the appellant relied on the judgment of the j....
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.... in this regard, the appeal on this ground is allowed. 6. For the subject A.Y 2012-13, I find that the situation is similar, and that the Appellant has suo moto made a disallowance under Rule BD(2)(iii) of Rs. 5,93,7L4/-. Therefore, very clearly and patently, there was no reason for the Ld. AO to do the same, as it would tantamount to a double disallowance. I find merit in the contention of the Ld. A.R that as regards disallowances u/s BD(2)(ii) while computing disallowance under Rule 8D(2)(ii), the Ld.AO has taken the gross interest payment of Rs. 1,54,40,O27/- and has disallowed Rs. 62,26,950/- without considering receipt of interest of Rs. 87,t7,BB2l-. The appellant's case is well covered by the decisions of various Hon'ble Courts including the Hon'ble Apex Court that only net interest has to be taken into consideration for such purposes of making disallowance. I also find strength in the arguments placed by the Ld. A.R that even otherwise for the purposes of disallowance under Rule BD(2)(ii) only average of the investment in shares which has yielded dividend has to be included and provision of Rule 8D(2)(ii) are not at all applicable in respect of income from mut....
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....issed." As the above judgment, is from the Hon'ble Jurisdictional High Court being the jurisdictional authority, as far as assessee's case is concerned, the ratio of decision as discussed above will in my considered opinion be directly be incidental to the instant case, 7. I have further considered the judicial references cited by the appellant, namely a decision of Hon'ble Delhi High Court dated 25.02.2015 reported in (2015) 372 ITR 694 (Del) in which also it has been very clearly held that without recording satisfaction there could be no question of disallowance u/s 14A read with Rule 8D. The decision of Hon'ble Delhi High Court is reported in 372 ITR 694 (Del). It was also held in the aforesaid decisions of ITAT, Kolkata Bench & Hon'ble Delhi Court that disallowance under Rule 8D(2)(ii) and 8D(2)(iii) could only be made in respect of only those investments on which dividend income has been earned. Similarly, Hon'ble Delhi Court in the case of ACB India Ltd. v. ACIT (2015) 374 ITR 108 has again held that disallowance under Rule 8D(2)(ii) / 8D(2)(iii) could only be with reference to the investment on which dividend income had been earned and this was a....
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....ds. The interest bearing borrowed funds thus were utilised by the assessee at least partly for making investments in shares and securities and disallowance on account of interest thus was required to be made under section 14A by applying Rule 8D. However, while computing such disallowance, only net interest expenditure has to be taken into consideration and the investment in shares and securities on which exempt income was actually earned by the assessee during the year under consideration has to be taken into account. We, therefore, set aside the impugned order passed by the Ld. CIT(A) on this issue and restore the matter to the file of the A.O. for computing the disallowance to be made on account of net interest expenditure under section 14A by applying Rule 8D(2)(ii) by taking into account only those investments on which exempt income was actually earned by the assessee during the year under consideration. Ground No. 2 of the revenue's appeal for A.Y. 2012-13 is thus partly allowed. 14. Now, we shall take up the appeal of the revenue for A.Y. 2013- 14 which involves a solitary issue relating to the deletion by the Ld. CIT(A) of disallowance of Rs. 72,65,727/- made by the A.O. u....