AI Drafter 
TaxTMI 
TaxTMI 
2019 (1) TMI 602
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....d with DLF Home Developers Ltd.) 3. Accordingly, no substantial question of law arises from disallowance of Rs. 3.46 crores made by Assessing Officer ('AO', for short) on account of golf club membership fee. 4. The second issue relates to disallowance of more than Rs. 80.66 crores made by the AO under Section 14A of the Act, by applying Rule 8D of the Income Tax Rules, 1962 ('Rules, for short). 5. The AO on the aforesaid question had observed: "7. On perusal of the comparative Balance Sheets as on 31.03.2010 & 31.03.2011, it is noticed that the assessee company has shown to have invested its funds in equity shares, which stand at Rs. 2,73,331.69/- lacs as at the beginning of the year and at Rs. 1,78,239.36/- lacs as at the end of the year. However, the assessee has not attributed any expenses which have been incurred to carry out the activity of investments, though it is an accepted fact that for carrying out any such activity, some kind of expenditure necessary has to be incurred. In view of the income tax circular no.5/2014 assessee vide order sheet entry dated 24.03.2014 was asked that since the assessee has done investment and has earned dividend income during curre....
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....rage of total assets 12,48,368 + 11,01,824/2 Disallowance = A*B/C 36,150.41* 2,25,785.53/ 11,75,096 11,75,096 6,946.01 6,946.01 iii. Aggregate of Opening and Closing value of Investment (Average Value of Investment) V*% of above as per Rule 8D Value of investment Total for 30.03.2011 & 31.03.2010 Average value of Investment 0.5 of above as on 31.03.2011 2,73,331.69 4,51,571.05 2,25,785.53 1,128.93 as on 31.03.2010 1,78.239.36 1,128.93 Total disallowance [Aggregate of (i), (ii) & (iii)] 8,074.94 7.2 The disallowance as worked u/s 14A r.w. Rule 8D comes to Rs. 80,74,94,000/- however, the assessee has already disallowed Rs. 8,21,883/- as expenditure u/s 14A r.w. Rule 8D. Therefore, an amount of Rs. 80,66,72,117/- (Rs.80,74,94,000 - Rs. 8,21,8830/- is being disallowed and added back to the total income of the assessee u/s 14A read with Rule 8D of I. T. Rules, 1962. (Addition of Rs. 80,66,72,112/-)" 6. The Commissioner of Income Tax (Appeals), ('CIT (Appeals)', for short) partly allowed the appeal filed by the assessee, holding :- "7.1 Having gone through the detailed submissi....
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....he funds borrowed on interest were utilised for the real estates projects of the appellant. There is no nexus between the funds borrowed and investments made by the appellant in shares and bonds. Therefore, it cannot be presumed that interest cost has been incurred for earning the exempt income. This also justify that appellant has no intention for making the investments to earn any tax free income, rather it was made for the bonafide business purpose of appellant company. The provisions of section 14A read with rule 8D cannot be applied mechanically for making the disallowance. The Assessing Officer has to apply his mind to determine whether disallowance worked out on the basis of Rule 8D is justified in accordance with facts & circumstances of each case and a particular expenditure has been actually incurred for earning the exempt income or not. There has to be a proximate cause for the disallowance of interest with that of earning of the exempt income. However, in this case the Assessing Officer has not given any finding that the interest bearing funds were utilised for earning the exempt income. The appellant has relied on the following judicial precedents: CIT Vs. Hero C....
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....R 640 (SC) in which, it is inter-alia held as under:- "41. Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO." 10. Appropriate in this regard are also the observations of the Supreme Court in Godrej & Boyce Manufacturing Company Ltd. (Supra) wherein they have held as under:- "37. We do not see how in the aforesaid fact situation a different view could have been taken for the Assessment Year 2002-2003. Sub-sections (2) and (3) of Section 14A of the Act read with Rule 8D of the Rules merely prescribe a formula for determination of expenditure incurre....