TaxTMI 
TaxTMI 
2023 (4) TMI 230
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....ear 2016-17. 2. We have gone through the order of the ld.Pr.CIT and we have noted that the ld.Pr.CIT has held the assessment order passed by the AO in the present case to be erroneous causing prejudice to the Revenue, for the reason that the AO had failed to make inquiries with regard to the expenses to be disallowed incurred for earning exempt income, as per the provisions of section 14A of the Act. The ld.Pr.CIT noted that the facts on record revealed that the assessee had earned exempt income; that its current and non-current investments far exceeded its own interest free funds in the form of shareholders' fund and the assessee had also paid substantial interest, and therefore, the investments had been made out of interest bearing funds....
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.... financial cost. The ld.counsel for the assessee contended that out of interest portion of the above, only Rs.44,27,520/- at the most could be considered for the purpose of disallowance. The interest paid on term loans which had been used for the purpose for which the loans had been taken cannot be attributed for investment in shares/mutual funds earning exempt income. He further contended that despite this fact being brought to the notice of the ld.Pr.CIT, as noted in his order at para no.4, he went on to hold the assessment order as being erroneous for no inquiry being conducted on the issue of disallowance under section 14A of the Act, without dealing with this contention of the ld.counsel for the assessee. He further pointed out that in....
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....g this in mind, we have also noted that the ld.Pr.CIT's finding of error on account of the assessee having disallowed less expenses u/s 14A of the Act, is based on assumption of incorrect facts. The ld.Pr.CIT proceeded on the fact that the assessee having earned exempt income of Rs.66.00 lakhs and its investment in current and non-current assets far exceeding its own share capital and reserves, surely, the investment in this exempt income earning asset was made from the interest bearing funds of the assessee, on which the assessee had paid substantial amount of interest of Rs.6.26 crores. Based on this assumption of facts, he proceeded to work out the disallowance of interest applying formulae given under Rule 8D(2)(ii) at Rs.30,34,560/- ta....
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....ould not have been included for the purpose of computing interest components disallowable as per Rule 8D(2)(ii) of the Rules. Even otherwise, the assessee has demonstrated before us that exempt income was earned only on the current investment made by the assessee, While the ld.Pr.CIT in his formula as prescribed by Rule 8D(2)(ii) has taken both current and non-current investments for arriving at the average quantum of investment made by the assessee. Thus even average quantum of investments has been incorrectly taken for the purpose of working out quantum of administrative expenses to be disallowed as per Rule 8D(2)(iii). Thus, it is clearly evident that the basis of calculating expenses disallowable under section 14A of the Act by the Ld.P....
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....d.Pr.CIT was duty bound to consider this contention of the assessee, and thereafter give his finding on the same, that despite the said contentions and taking note of the same also, expenses were still liable to be disallowed under section 14A of the Act, and the AO having made no inquiry, the assessment order therefore ought be held to be erroneous so as to cause prejudice to the interest of the Revenue. No such exercise having been done by the ld.Pr.CIT in the present case; his finding of the error, merely on the ground that no inquiry was made by the AO on the issue of 14A, without dealing with the contentions made by the ld.counsel for the assessee before him, is not tenable in law. Explanation 2 to section 263 is clearly not applicable....