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TMI Blog2012 (8) TMI 957X X X X Extracts X X X X X X X X Extracts X X X X ..... Member) And C. D. Rao (Accountant Member) For the Petitioner: D. S. Damle For the Respondent: L. K. S. Dahiya ORDER Mahavir Singh (Judicial Member) This appeal by assessee is arising out of order of CIT(A)-VI, Kolkata in Appeal No. 129/CIT(A)-VI/Cir-5/10-11/Kol dated 30.09.2011. Assessment was framed by DCIT, Circle-5, Kolkata, u/s. 143(3) 115WE(3) of the Income-tax Act, 1961 (hereinafter referred to as the Act ) for AY 2008-09 vide his order dated 29.12.2010. 2. This only issue in this appeal of assessee is against the order of CIT(A) in confirming the disallowance of interest expenditure by invoking the provisions of section 14A of the Act read with Rule 83(2)(ii) of the Income-tax Rules, 1962 (hereinafter referred to as the Rules ) and also Rule 8D(3) of the Rules at ₹ 1,02,59,650/-. For this, assessee has raised following three effective grounds: 1. For that on the facts and in the circumstances of the case and in law, the CIT(A) erred in upholding the disallowance of ₹ 1,08,65,937/- u/s. 14A read with Rule 8D under the I. T. Act, 1961. 2. For that on the facts and in the circumstances of the case and in law, the Ld. CIT(A) f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ta interest expenditure. The CIT(A) held that the assessee has huge investment for which there are different types of expenses incurred by it i.e. interest and other expenses. According to CIT(A), funds of the assessee are going from common kitty and there is no distinction of own funds and borrowed funds. According to CIT(A), assessee cannot take the plea that at that particular time it had its own free funds and because of that borrowed funds were not utilised for investment in shares from where exempted income was earned. The CIT(A) finally held that the transactions includes investment yielding exempted income, which are integral part of the business of the assessee. Hence, he confirmed the addition made by AO. Aggrieved, now assessee is in appeal before us. 4. Before us Ld. Counsel for the assessee Shri D. S. Damle narrated the facts that the assessee during the year earned dividend income of ₹ 12.38 cr. from shares held of its subsidiary Hindusthan Newsprint Ltd. and the same was exempted u/s. 10(33) of the Act and accordingly, the same was claimed as exempt. Ld. Cousnel stated that the assessee has made investments in two subsidiaries i.e. Nagaland Pulp Paper Co. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... available with the assessee to cover up the cost of fresh investment of ₹ 17.46 cr. He also drew our attention to Schedule 1A of the annual financial statement for the year year ending 31st March, 2008 which shows that during FY 2007-08 the Govt. of india infused capital fund of ₹ 54.60 cr. in the assessee company and this was infused in the month of September 2007. Ld. Counsel stated that it means that the assessee was having Govt. of India funds to the extent of ₹ 54.60 cr. in September, 2007 and as on 31.03.2008 the profit earned during the year amounting to ₹ 91.83 cr.. He stated that assuming but not accepting that the internal accruals were not utilised for making fresh investments even though the fresh capital infused by Govt. of India during September, 2007 fund had a clear nexus with the investment made during the year and subsidiary company HNL from where it earned dividend of ₹ 12.38 cr. He also narrated that the cost of investment ₹ 21,392.30 lacs whereas assessee s own funds available are at ₹ 87981.12 lacs. In such facts, Ld. Counsel stated that there is no need for AO to make disallowance under Rule 8D(2) of the Rules as ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and there is no other way out to compute the disallowance except as provided in Rule 8D of the Rules. With respect to disallowance on administrative expenses, Ld. CIT, DR Shri Dahiya stated that the assessee has made huge investment rendering into crore of rupees and that also ₹ 214 cr. in acquiring shares of its subsidiaries which requires a lot of advisory consultation including payment of fees, technical deliberations, strategic investment, decision by the management which has a cost. Ld. CIT, DR also relied on the decision of Hon ble Calcutta High Court in the case of Dhanuka Sons Vs. CIT (2011) 339 ITR 319 (Cal). He also relied on 203 Taxman 639, He also relied on the decision of Hon ble Calcutta High Court in the case of CIT Vs. Smt. Leena Ramachandran (2011) 339 ITR 296 (Cal) and the decision of ITAT Delhi Bench in the case of Technopak Advisors (P) Ltd. Vs. Addl. CIT (2012) 50 SOT 31 (Del. Bench). 6. In reply, Ld. Counsel for the assessee Shri Damle relied on the provision of section 14A (1) and (2) of the Act wherein the provision talks of nexus of borrowed fund utilised for tax free income and in case there is no nexus the disallowance cannot be made or the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... means that the fresh investment in the shape of acquiring of shares of HNL by the assessee was out of fresh capital infused by Govt. of India. As per the argument of Ld. Counsel and going through the P L Account for the year ended 31.03.2008, we find that the profit after tax was at ₹ 91.83 cr. which is also available to the assessee for making investment in purchase of shares and subsidiary HNL. These facts clearly establishes that the fresh investment in HNL by assessee was out of interest free funds and no borrowed funds were utilised. But taking the argument of Ld. CIT, DR Shri Dahiya that the funds of the assessee are going from common kitty and there is no distinction of own fund and borrowed fund and assessee cannot take the plea that at that particular time it had its own fund because borrowed funds were still there. According to Shri Dahiya, the transactions of investments yielding exempted income are integral part of the business of the assessee, but in any case, the AO has to prove the nexus between the borrowed funds and investments made by assessee for earning dividend income. Further, as regards to disallowance of administrative expenses, the assessee s content ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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 Rule 8D of the Rules. The assessee has explained that the share capital and reserves, that is its own funds, were utilised for the purpose of investment in shares for earning dividend income and this has not been negated by lower authorities i.e. neither CIT(A) nor AO. The assessee has explained each and every investment with sources of funds and its utilization as well as opening application of funds and closing application of funds as noted above. It is an admitted position in law that expenditure can be disallowed U/s.14A of the Act if and only if it is incurred in relation to income which does not form part of total income. From the facts of the present case, it is clear that there is no link with expenditure for earning of dividend income incurred by the assessee and once the facts are clear, no disallowance can be made by invoking rule 8D of the Rules. Neither the AO nor CIT(A) has recorded any finding that having regard to the account of the assessee, they are not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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