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2014 (4) TMI 269 - AT - Income TaxDisallowance u.s 14A of the Act r.w Rule 8d Held that - The cash flow statement reflects cash from operating activities including cash profits - The assessee has also raised an amount by issue of fresh preference shares - it is apparent that assessee had utilized interest free funds for making fresh investments and that too into its subsidiaries which is not for the purpose of earning exempt income and which are for strategic purposes only - no disallowance of interest is required to be made under rule 8D(i) & 8D (ii) as no direct or indirect interest expenditure has incurred for making investments. Disallowance under Rule 8D(iii) Held that - Assessee had invested in four debt oriented schemes of DSP Merile Lynch, reliance Liquid Plus, Reliance Monthly Interval Mutual Funds and SBI Liquid Plus Funds - these are not really investments and these are in fact parking of surplus funds in a more tax efficient manner the decision in Maxopp Investment Ltd. & Others Versus Commissioner of Income Tax 2011 (11) TMI 267 - Delhi High Court followed - the calculation of disallowance under Rule 8D(iii) made by the AO and upheld by CIT(A) is not correct In view of the fact that AO had included the value of total investments for calculation of disallowance whereas the value of those investments should have been included which were made for the purpose of earning exempt income the assessee had made significant investments in the shares of subsidiary companies which are definitely not for the purpose of earning exempt income thus, the value of strategic investments should be excluded for the purpose of disallowance under Rule 8D(iii) the AO is directed to calculate the disallowance under Rule8D(iii) by excluding the value of strategic investments in the calculation of disallowance Decided partly in favour of Assessee.
Issues Involved:
1. Disallowance by Assessing Officer under Section 14A read with Rule 8D for Assessment Years 2008-09 and 2009-10. Issue-Wise Detailed Analysis: 1. Disallowance by Assessing Officer under Section 14A read with Rule 8D for Assessment Years 2008-09 and 2009-10: Assessment Year 2008-09: The Assessing Officer made a total disallowance of Rs. 46,05,172/- under Rule 8D, comprising: - Rule 8D(i): Rs. 165 - Rule 8D(ii): Rs. 88,450/- - Rule 8D(iii): Rs. 45,16,557/- The CIT(A) confirmed the disallowance of Rs. 46,05,172/- but did not provide specific findings for Rule 8D(ii). The assessee argued that no expenditure was incurred to earn exempted income, stating that interest expenses were related to vehicle loans and that investments were made from surplus funds in mutual funds, which did not require specific expertise. The assessee also highlighted that a significant portion of investments was in subsidiary companies for business purposes, not for earning exempt income. Assessment Year 2009-10: The disallowance under Section 14A was Rs. 75,37,219/-, comprising: - Rule 8D(i): Nil - Rule 8D(ii): Rs. 6,86,658/- - Rule 8D(iii): Rs. 68,50,561/- The CIT(A) upheld the disallowance under Rule 8D(iii) and partly allowed relief under Rule 8D(ii). The revenue appealed against the relief, while the assessee appealed against the disallowance under Rule 8D(iii). Arguments and Findings: The assessee argued that no direct or indirect interest expenditure was incurred for making investments, as the company was cash-rich and investments were made from surplus funds. The investments in subsidiary companies were for strategic business purposes, not for earning exempt income. The assessee also contended that the disallowance under Rule 8D(iii) was excessive and should not exceed the exempt income. The Tribunal referred to the Delhi High Court's ruling in Maxopp Investments, which held that Section 14A read with Rule 8D applies to investments generating exempt income. However, the Tribunal found that the Assessing Officer's calculation of disallowance under Rule 8D(iii) was incorrect, as it included the value of total investments instead of only those made for earning exempt income. The Tribunal cited the case of Promain Ltd. and the Kolkata Tribunal's judgment in Rei Agro Ltd., which excluded strategic investments from the calculation of disallowance under Rule 8D(iii). Conclusion: The Tribunal directed the Assessing Officer to recalculate the disallowance under Rule 8D(iii) by excluding the value of strategic investments. No disallowance was warranted under Rule 8D(i) and 8D(ii) for both assessment years. The appeals filed by the assessee were partly allowed for statistical purposes, and the appeal filed by the revenue was dismissed. Order Pronouncement: The order was pronounced in the open court on 4th April 2014.
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