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TMI Blog2014 (11) TMI 229X X X X Extracts X X X X X X X X Extracts X X X X ..... to 295,05,66,475 as on 31/03/09. AO being of the view that as per the provisions of section 14A read with rule 8D, expenditure in relation to income which does not form part of total income has to be disallowed, issued a show cause notice to assessee proposing to compute disallowance as per section 14A read with rule 8D of the Act. In response to the show cause notice issued by the AO, assessee submitted its reply stating therein that the investments in mutual funds were made out of internal accruals comprised of share capital, reserves and surplus etc. and no borrowed fund was utilized for making the investment. Hence, as no expenditure was incurred by assessee towards earning exempt income, no disallowance can be made. Assessee furnishing the details of loans taken from the banks with loan disbursed month-wise, stated that except March'09 closing balance of loan taken is more than the closing balance of loans disbursed, which proves the fact that there was no surplus borrowed fund available with assessee to be invested in mutual funds. It was further stated that only in the month of March'09, the investments in mutual funds are higher because banks disbursed the maximum a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in case the of Godrej and Boyce Co. Ltd. (supra), Rule 8D was indeed to be applied. It is clear that the said rule is to be applied under the provisions of the Act under such circumstances and the AO does not have any discretion to work out the disallowance by taking the average rate of interest and actual number of days for which funds are invested in mutual funds. Further, even if the disallowance worked out on this basis was higher than the exempt income itself, the AO was indeed required to make disallowance of the amount worked out as per Rule 8D itself, as he does not have the discretion to restrict the disallowance to the extent of exempt income itself. Likewise, there is no merit in the contention that no prudent businessman will borrow at high cost and invest at lower returns, as the only fact that leads to the application of sec. 14A r.w. Rule 8D is that an expenditure has been incurred in relation to the earning of the exempt income. Under the circumstances, finding no infirmity in the action of the AO, the disallowance of Rs. 14,23,29,696/- is upheld and the grounds raised in this appeal are decided against the appellant." 4. Reiterating the submissions made before the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o disbursement of loan by banks to achieve their target, there was surplus fund available with the assessee from the borrowed fund, which could not be immediately disbursed and had to be invested keeping in view the business prudence, accordingly, assessee invested in mutual funds. However, such temporary parking of funds cannot not be taken into account for making disallowance u/s 14A. In this context, learned AR relied upon a decision of ITAT, Mumbai bench in case of Kunal corporation Vs. ACIT, 28 ITR (Trib.) 27. Learned AR finally submitted that during the year assessee has earned exempt income of Rs. 90 lakhs whereas disallowance made u/s 14A is to the tune of Rs. 13,49,17,666, which cannot be the intention of the legislature. AR submitted that only because the provisions of section 14A provides for disallowance of expenditure on exempt income, it cannot be applied in an arbitrary manner. If at all, disallowance is to be made u/s 14A read with rule 8D, then, it has to be in proportion to the exempt income earned by assessee. In this context, learned AR relied upon a decision of the ITAT, D Bench in case of Sahara India Financial Corporation Ltd., Vs. DCIT, 105 DTR 19. 5. The l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as against mutual fund investments of Rs. 295,05,66,475, thereby resulting in excess of investment over the surplus funds available with assessee to the extent of Rs. 89,19,41,920. When this figure is juxtaposed to the month-wise borrowals made by assessee from banks, it is to be noted that only in the month of March'09, borrowals made by assessee from banks is more than the loan disbursed to the borrowers. Therefore, if at all there is any investment made by assessee out of borrowed funds in the mutual funds, then, the same can possibly be in the month of March'09 only. Further, on a perusal of the balance sheet, it appears that own funds available with assessee from reserves and surplus and current liabilities is to the tune of Rs. 314,82,01,550=00 whereas the total investments as on 31/03/2009 is Rs. 295,05,66,474. From this, it is clear that the investments made in mutual funds could have been made out of the own funds available with assessee without utilizing the borrowed funds. In these circumstances, when assessee was having sufficient surplus funds to make investment in mutual funds no disallowance can be made towards interest expenditure unless nexus is establishe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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