2017 (5) TMI 1812

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....e disallowance of Rs. 59,69,827/- made in accordance with the provision of section 14A of the Act which was duly computed in accordance with the provisions of Rule 8D of the Income Tax Rules. 2. Whether on the facts and in the circumstances of the case the CIT(A) was justified in observing that AO has also failed to prove nexus between interest bearing funds and investment made out of that when there is no such requirement either under section 14A or Rule 8D. 3. Whether on the facts and in the circumstances of the case the CIT(A) was justified in holding that no notional interest or hypothetical interest could have been disallowed by the AO by invoking provisions of section 14A when assessee had its own fund and such funds/reserves being substantially higher than, even otherwise the advances to the debtors. 4. Whether on the facts and in the circumstances of the case the CIT(A) was justified in deleting the disallowance u/s 14A of the Act without giving any finding as to how the mandatory provisions of Rule 8D meant for computing the disallowable expenditure was computed by the assessing officer are not binding in the case of the assessee. The ap....

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....empt which is evident from the computation of the total income where from the sale of mutual funds have been taxed as capital gain and the next year also the assessee gave the tax on the gain on sale of mutual funds. He submitted that from the chart as enclosed out of total investment of Rs. 91,58,22,106/- the income of investment of Rs. 22,08,22,106/- was exempted and the income on balance investment was taxable. He submitted that, therefore, entire investment could not be taken into consideration for computing the disallowance u/s 14A of the Act. He further submitted that even invoking the provision of section 14A by the Assessing Officer is faulty as in the earlier year, this assessment year 2012- 13, and also facts were identical and no disallowance was made by the Assessing Officer by invoking the provision of section 14A. He drew our attention to the Assessment Order dated 31/3/2015 pertaining to the A.Y. 2012-13 enclosed along with the written submissions. 4.2 We have heard the rival contentions, perused the material available record and gone through the order of the authorities below. The Ld. CIT(A) has given a finding on fact as under:- "On careful perusal of a....

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....dition made by the AO by invoking the provisions of Sec 14A of the Act cannot be sustained. Apart from this also, AO has failed to prove nexus between interest bearing funds and investments made out of that. Assessee's appeal in Gr no. 1 & 2 stands allowed." 4.3 The aforesaid finding of fact is not controverted by the Revenue by placing any contrary material on record. It is also transpired from the record that the Assessing Officer while computing the disallowance has taken into consideration both investments related to exempt income as well as taxable income. Under these facts in our considered view, the Assessing Officer was not justified in making the disallowance by invoking provision section 14A of the Act. The mandate of the section 14A(2) of the Act is that the Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income but in the given case the Assessing Officer has not restricted itself to the exempt income also considered the taxable income, while computing the disallowance. The Assessing Officer failed to give a clear finding in respect of the submissions of the assessee that the investm....

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....hich does not form part of the total income under this Act in accordance with such method as may be prescribed, if the AO, having regard to the accounts of the assessee is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to the income which does not form part of the total income. Similar requirement is of Rule 8D(1). In this case even though the AO has made the disallowance by relying on the provisions of section 14A but he did not comply with the conditions as stipulated in section 14A(2)/Rule 8D(1). He has not recorded any satisfaction with regard to the incorrectness of claim of the assessee. Similar issue has been decided by the Jaipur Bench of the ITAT in the assessee's group case. M/s Ruby Merry Enterprises (P) Ltd. vs. JCIT (OSD) Central Circle 3, Jaipur Copy enclosed. The findings of Hon'ble ITAT are in para 3.3 of its order which is reproduced as under:- "3.3 We have heard the rival contentions and perused the materials available on record. As regards Ground no. 1 raised by the assessee, it is noted that such issue has already been decided in favour of the assessee by the ITAT, Jaipur SMC Bench in ....