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Issues Involved:
1. Disallowance of interest u/s 14A of the IT Act. 2. Computation of deductions u/s 80HHC and 80-IA. Summary: 1. Disallowance of Interest u/s 14A of the IT Act: The primary issue in the appeals was the disallowance of interest paid by the assessee u/s 14A of the IT Act. The assessee, a company engaged in manufacturing cycles and two-wheeler parts, earned dividend income of Rs. 57,19,27,325, which was claimed as exempt under ss. 10(34) and 10(35) of the Act. The AO disallowed a portion of the interest expenditure, asserting that borrowed funds were used to earn the exempt dividend income. The AO's disallowance was based on the premise that the assessee had invested borrowed funds in shares and mutual funds, leading to a disallowance of Rs. 3,48,04,375, later reduced to Rs. 1,20,54,664 by the CIT(A). The CIT(A) upheld the disallowance in principle but restricted it to the interest paid by the main unit in Ludhiana, as no funds from other units were used for the investments. The assessee argued that the investments were made from non-interest-bearing funds, such as dividend proceeds and sale proceeds of shares, and that no disallowance was warranted. The Tribunal found that the AO and CIT(A) had proceeded on mere presumption without establishing a nexus between the interest-bearing funds and the investments. The Tribunal held that the disallowance u/s 14A could not be made on mere presumption and deleted the entire addition, allowing the assessee's appeal. 2. Computation of Deductions u/s 80HHC and 80-IA: The Revenue's appeal also contested the CIT(A)'s direction to compute deductions u/s 80HHC and 80-IA based on the income assessed as a result of the appeal order. The Tribunal found no infirmity in the CIT(A)'s directions and dismissed the Revenue's appeal on this issue. Conclusion: The appeal of the assessee was allowed, and the appeal of the Revenue was dismissed.
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