TaxTMI 
TaxTMI 
2019 (11) TMI 1298
X X X X Extracts X X X X
X X X X Extracts X X X X
....n not appreciating the fact that the loan from bank has been reduced, so much so, the partners have compensated such borrowed funds. 5. Treatment of interest earned from bank under other sources was not in order as these are in the nature of investment in trade and to be charactered as income from business. 3. The first ground, Ground Nos. 1 & 2 in ITA Nos. 92 & 93/Coch/2019 is with regard to addition of Rs. 18,36,878/- on account of disallowance u/s. 14A r.w.s. Rule 8D of the Act. 4. The facts of the case as narrated in ITA No. 92/Coch/2015 are that during the course of verification it was found that in the computation of income, the dividend earned during the year was Rs. 40,51,846.68/- which is exempt u/s. 10 of the I.T. Act. While going through the accounts and other details, the Assessing Officer noticed that the assessee has not segregated the expenditure in respect of dividend income. On verification of balance sheet, it was noticed that the assessee had made investments to the tune of Rs. 19,17,67,946.92 as on 31.03.2010 and during preceding assessment year the total investment was Rs. 19,22,23,220/-. Section 14A of the I.T. Act specifies the methodology to be adopted f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....fied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not for part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this 5.1 Thus, according to the CIT(A), as per section 14A, if an expenditure has a relation or connection with or pertains to exempt income, it cannot be allowed as a deduction even if it otherwise, qualifies under the other provisions of the said Act. The CIT(A) observed that while earning any income from investments, some active and passive expenditure is involved in which event, the provisions of section 14A are applicable. The assessee could not establish that there was no nexus between the expenditure made and investment made with regard to any segmental cash flow alongwith any identifiable banking transactions. According to the CIT(A), there are incidental administrative expenses relating to earning of income which are embedded in the indirect expenses. The CIT(A) relied on the CBDT Circular....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Assessing Officer had made disallowance by invoking the provisions of section 14A of the I.T. Act r.w. Rule 8D(2)(iii) and Rule 8D(2)(iii) of the I.T. Rules. The disallowance made by invoking Rule 8D(2)(iii) of the I.T. Rules is for administrative and common expenses when the assessee derives exempted income. In the instant case, in each of the assessment year's huge investments are made which is given rise to exempted dividend income. Investment decisions are very complex and strategic and obviously they would have incurred administrative expenses such as salary, wages, general expenses, stationery etc. Therefore, it cannot be said that no expenditure was incurred for making the said investments. Hence, we confirm the disallowance made by the Assessing Officer by invoking provisions of section 14A of the I.T. Act r.w. Rule 8D(2)(iii) of the I.T. Rules. 6.1 Insofar as the disallowance of indirect interest expenditure by invoking the provisions of section 14A of the I.T. Ac r.w. Rule 8D(2(ii) of the I.T. Rules, is concerned, the contention of the assessee is that it is having interest free funds in the form of reserves and advances from associate concern and no part of the int....
X X X X Extracts X X X X
X X X X Extracts X X X X
....during the year from his current account which he had utilized for his personal use. Therefore, the Assessing Officer made proportionate disallowance of interest bearing fund. For this purpose, the Assessing Officer relied on the judgment of the Jurisdictional High Court in the case of CIT vs. V.I. Baby & Co. 254 ITR 248 and the judgment of the Allahabad High Court in the case of Marolia & Sons vs. CIT 129 ITR 475. Section 36(1)(iii) of the I.T. Act deals with the deduction on the amount of interest paid in respect of capita borrowed for the purposes of business or profession. It would be found from clause (iii) of sub-section (1) of section 36 of the Act that three conditions must be established by the assessee for getting the benefit under the aforesaid clause: (i) Interest should have been payable (ii) There should be a borrowing and (iii) Capital must have been borrowed or taken for business purposes. If the capital borrowed is not utilized for the purposes of the business, the assessee will not be entitled for deduction under this clause. In case, after having borrowed the capital for business purposes, the firm gives the same to its partner, Shri Thomas Muthoot for his....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ave heard the rival submissions and perused the material on record including the case laws cited by the parties. The AO made addition u/s. 36(1)(iii) of the Act by disallowing the portion of interest paid by the assessee as huge amount had been lent by the assessee to its partners. The contention of the assessee is that since the assessee was following the cash system of accounting, the interest receivable from partners on the amount lent to the partners cannot be offered to tax and it would be offered to tax only on receipt basis which was not actually received by the assessee in the year under consideration. Hence, it was not offered for tax. For this purpose, he relied on the judgment of the Jurisdictional High Court in the case of CIT vs. Muthoot Finance Corporation cited supra. In the present case, we observe that the Assessing Officer disallowed the portion of interest paid by the assessee as the interest bearing borrowings were diverted by the assessee by lending money to the partners without any interest and had not used for the purpose of the assessee's business. In other words, the Assessing Officer had not brought to tax the notional interest receivable from the partners....