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TMI Blog2012 (8) TMI 325X X X X Extracts X X X X X X X X Extracts X X X X ..... hat the borrowed funds were used for its business in trading transactions. If an analysis of the borrowed funds and its use was considered interest payment alone of Rs.22,80,089/- is attributable to the trading activity. Therefore, in our view AO is very conservative in attributing only 25% of the expenditure to the share trading activity. We uphold the action of AO Dis-allowance u/s 14A - Held that:- Even though on legal principles the matter is in favour of assessee, since assessee has not furnished any details of expenditure before AO and the working furnished was without prejudice to its claim. However in the interest of justice, matter requires re-examination by AO keeping in view of the principles laid down by the above cases and also to see there is any expenditure incurred in relation to the exempt income - Decided partly in favor of assessee. - ITA No.4939/Mum/2011 - - - Dated:- 20-6-2012 - Shri D. Manmohan, And Shri B. Ramakotaiah, JJ. Assessee by: Shri Hari Om Tulsyan Department by: Shri R.D. Burman, DR O R D E R Per B. Ramakotaiah, A.M. This is an assessee s appeal against the orders of the CIT(A)-8 Mumbai dated 29.04.2011. Assessee in the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h could not be recovered and written off. Following the principles laid down by the Special Bench in the case of Shreyas S. Morakhia (Supra) we hold that assessee satisfied the conditions prescribed under section 36(2). Moreover the Hon'ble Supreme Court in the case of TRF Ltd vs. CIT 323 ITR 397 has already considered that it is not necessary to establish that the debt had in fact had become irrevocable after the provisions were amended w.e.f. 1.4.1989. Following the above principles, since necessary details were already filed before the authorities, we have no hesitation in allowing the ground. AO is directed to allow the bad debt as claimed. 6. Ground No.2 is as under: Further on the facts and in the circumstances of the case and in the law the learned CIT (A)-8 has erred in passing the order under section 250 of the Income Tax Act, 1961 by not allowing the rebate under section 88E of Income Tax Act as calculated by learned AO in a wrongful manner on suo moto basis, though assessee/AR of assessee has submitted all the facts and legal position in that regard . 7. Briefly stated assessee is in the business of stock broking and also as a trader/ depository participant. It ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Counsel also referred to the submissions made before the CIT (A) that the percentage of expenditure during the financial year 2006-07 amounted to 85% of the income other than share trading income and during the present year such expenses were 79% of the income of the assessee company other than share trading income. Therefore, it was submitted that most of the expenditure pertains to income other than taxable securities transactions. 9. We have considered the issue. Even though assessee s claim is based on the average rate of income tax as provided under section 88E(2), the issue is with reference to the income arising from such transactions. Assessee s contention is that out of the gross income offered, it has considered 5% of the expenditure and arrived at the net income of Rs.75,12,881/-. However, AO was of the opinion that assessee has not furnished any details of expenditure attributable to the above transactions and estimated the income at 25% of the gross expenditure. He allocated an amount of Rs.41,61,118/- to arrive at the net income from share trading at Rs.37,47,179/-. Per se we are in agreement with the working of AO as he has considered only reasonable 25% of the ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... though assessee/AR of assessee has submitted all the facts and legal position in that regard . 12. This ground arises as assessee had earned dividend of Rs.69,820/-. AO invoked the provisions of section 14A r.w. Rule 8D determined the amount at Rs.4,95,524/-. In the course of assessment proceedings assessee also gave a working under protest determining the disallowable income under section 14A at Rs.2,04,464/- whereas AO determined the amount at Rs.4,95,525/-. Even though there is no dispute with reference to % of average value of investment arrived at Rs.95,195/-, the dispute arose because of amount of interest. It was assessee s contention that interest not attributable to any income directly earned was only Rs.7,08,089/- whereas AO took the amount at Rs.22,80,089/- without giving credit to the income earned under the said head. Therefore, there is a difference between the two workings. Be that as it may it was the contention of assessee that AO is not correct in working out the deduction without any satisfaction being recorded as required under the provisions. The CIT (A) in his order partly upheld the action of AO while directing that the total amounts should be arrived as p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be accepted. 11. The learned DR, on the other hand, has strongly supported the impugned order in this regard also, contending that the learned CIT(A) has excluded security taken from customers . 12. The learned CIT(A), it is seen, restricted the disallowance u/s 14A to Rs.19,43,022/-, calculating the disallowance of expenditure in terms of section 14A read with Rule 8D of the Rules as follows:- a) Direct expenses attributable to earning of exempt income: (Rs..) NIL b) Average exempt investments 37,82,57,180/- c) Average assets 157,64,90,333/- d) Interest payments made by the assessee 2,15,625/- e) Interest disallowed: (d) x (b)/(c) = 51,736/- f) 0.5% of exempt investments = 18,91,286/- Total disallowance u/s 14A [ (e) + (f) ] = 19,43,022/-. 13. The Tribunal (supra), for assessment year 2007-08, had held as follows:- 17. We have heard the parties on this issue and have perused the material on record. During the year, the assessee had earned exempt dividend income of Rs.17,97,010/- in respect of investment made in mutual funds. In the return of income filed, a suo moto disallowance of expenses to the tune of Rs.1,73,038/- had been made by assessee u/s 14A of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stablish nexus of expenses incurred with the earning of exempt income before making any disallowance u/s 14A of the Act. In Maruti Udyog v. DCIT 92 ITD 119(Del), it has been held that before making any disallowance u/s 14A of the Act, the onus to establish the nexus of the same with the exempt income, is on the revenue. In Wimco Seedlings Limited v. DCIT 107 ITD 267 (Del) (TM), it has been held that there can be no presumption that the assessee must have incurred expenditure to earn tax free income. Similar are the decisions in: 1. Punjab National Bank v. DCIT, 103 TTJ 908(Del); 2. Vidyut Investment Ltd., 10 SOT 284(Del); and 3. D.J. Mehta v. ITO, 290 ITR 238(Mum.)(AT). 19. In view of the above, finding no error with the order of the CIT(A) on the point at issue, the same is hereby confirmed. Ground No.3 is thus rejected. 14. In the year under consideration, it is seen that it is not incorrect when the assessee contends that no satisfaction has been recorded by AO regarding the assessee s calculation being incorrect. Even so, Rule 8D of the Rules has been applied. This, in our opinion, is not correct. Such satisfaction of the AO is a pre-requisite to invoke the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y assessee that no expenditure has been made in relation to income which does not form part of total income under the Act, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of r. 80(2). Even the provisions of section 14A(2) clearly state that the AO shall determine the amount of expenditure incurred in relation to such income which does not form part of total income under this Act in accordance with such method as prescribed (under r. 80), 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 income which does not form part of total income under the provisions of this Act. In the present case, there is no linkage or nexus between the funds borrowed by assessee and the impugned investments, hence, no interest expenditure can be disallowed by mechanically applying the provisions of r. 80. The assessee has explained that the share capital and reserves, that is its own funds were utilized for the purpose of investment in shares for earning dividend income and this has not been negated by lower authorities i.e. neither ..... 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