9911796707
TMI Blog2016 (8) TMI 603X X X X Extracts X X X X X X X X Extracts X X X X ..... eld that:- As per audited profit and loss account for the year under appeal, the gross interest income earned by the assessee is shown at ₹ 1,60,47,758/- and expenditure under the head interest and financial charges have been claimed at ₹ 1,19,95,664/- therefore, the net interest income earned by the respondent during the financial year 2009-10 is at ₹ 40,52,094/-. There is no dispute from the side of Revenue to this fact that there is net interest income earned by the assessee during the year, thus with reference to part (ii) of Rule 8D(2) we are of the view that no disallowance is called for towards interest expenditure as the assessee has a net interest income during the year i.e. interest received is more than interest expenditure. Amount equal to 0.5% of the average of the value of investment, income from which does not form part of the total income - Held that:- Out of the categories investments in immovable property, movable property and partnership firm are certainly not eligible to form part of average investment for the purpose of Rule 8-D. As far as investment in share is concerned, assessee has submitted that these investments were made in equity sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct income was assessed at ₹ 1,71,35,544/- and book profit was assessed at ₹ 2,35,75,954/-. This disallowance was called for on the basis of observation of ld. Assessing Officer that assessee was unable to justify that the investment in shares was from his own funds or from the funds on which no interest payment is made by the assessee. By applying Rule 8D r.w.s. section 14A of the Act the disallowance of expenditure comes to ₹ 28,43,777/- out of which assessee company had itself disallowed ₹ 65,753/- in its computation of income and therefore, remaining amount of ₹ 27,78,024/- was disallowed u/s 14A by ld. Assessing Officer. 3. Aggrieved, assessee went in appeal before ld. CIT(A). Ld. CIT(A) partly allowed assessee s appeal by restricting the disallowance to ₹ 6,18,396/- out of the total disallowance of ₹ 27,78,024/- by observing as under :- 3.3. I have carefully considered the Assessment order and submission filed by appellant. It is noticed that Assessing Officer has made disallowance by invoking provisions of section 14A r.w. Rule 8D and same is worked out as under- Particulars Amount Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iii) Interest income earned during the year has not been deducted from total interest expenditure considered for the purpose of working out disallowance u/s 14A. The disallowance if any is required to be restricted after considering net interest expenditure and in present case, there is net interest income. (iv) For the purpose of working out disallowance, the balance in Orchid Developers is inclusive of profit element which was transferred on the last day of the concerned financial year hence same is required to be reduced. (v) The appellant has sufficient interest free funds in form of share capital and reserves and surplus to cover aforesaid investments considered by Assessing Officer for making disallowance u/s 14A hence no proportionate interest expenditure can be disallowed. 3.4. On careful consideration of observation of Assessing Officer and contention of appellant, it is observed that identical issue has arisen in case of appellant for AY 09-10 and vide order dated 30th August 2012 in appeal no CIT(A)- VHI/ACIT/Circ 4/297/11-12, the issue of disallowance u/s 14A made by Assessing Officer was partly confirmed in said order. Following the observations made in sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ership firms being M/s Deep Galaxy Developers, Snehal Developers and Devanshi Corporation, (D) The second contention of appellant that Assessing Officer has considered the investment in shares of Kalupur Commerical Co Operative Bank wherein dividend income has already been subject to tax and no tax free income has been earned hence no disallowance is called on such investment is found correct. Even Assessing Officer himself has not considered closing balance of such investment for 'the purpose of computing disallowance u/s 14A hence Assessing Officer is directed to exclude opening balance of investments in shares of KCCB for the purpose of disallowance u/s 14A of the Act. (E) The appellant has also argued that for the purpose of computing disallowance u/s 14A of the Act closing balance of investment of partnership firm is required to be reduced by share of profit received from firm on last day of financial year is also accepted as such amount has been received on last date and there is no actual utilization of funds by appellant firm. The closing investments considered by Assessing Officer are required to be reduced by such profit element. Assessing Officer has consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Devanshi Corporation Taxable interest income is earned Galaxy Developers 45,45,000 Surya Kiran Developers (2,506) In shares of Kalupur Comm. Co-op. Bank Ltd. Taxable dividend income is earned In mutual fund Assessee has already made proportionate disallowance in return of income for investment of ₹ 6.01 crores hence no disallowance is required. Total 3,79,85,955 Average investment 1,89,92,978 Amount in Rs. Particulars Amount as on 1.4.2009 Amount as on 31.3.2010 Average Average assets (A) 31,91,21,902 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at ₹ 28,43,777/- without satisfying with the correctness of the claim of assessee with regard to the account of books of account and nor recorded any such satisfaction to prove the incorrectness of the disallowance suo motto made by the assessee. Ld. AR further referring to the audited profit and loss account submitted that total interest income earned by the company for Financial Year 2009-10 was at ₹ 1,60,47,758/- whereas expenditure towards interest and financial charges paid is at ₹ 1,19,95,664/- and the total net income earned by the assessee during financial year 2009-10 is at ₹ 40,52,094/-. Referring to this position of net interest income earned by the assessee during the year ld. AR submitted that when disallowance u/s 14A is calculated the proportionate portion of interest expenditure is disallowed with regard to the total investment held by the company against the total assets of the company and as there is no interest expenditure incurred by the company ld. Assessing Officer was not justified in making any such disallowance on account of interest expenditure u/s 14A of the Act. Ld. AR further referred and relied on the decision of the co-ordinate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of section 14A of the Act and Rule-8D of the IT Rules which read as under :- Sec. 14A. Expenditure incurred in relation to income not includible in total income.-(1)For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, 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 the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act: Provided that nothing contained in this section shall empower the Asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g in the balance sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets. (c) An amount equal to % of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the relevant accounting year. 12. There is no dispute to the fact that assessee company is having exempted income as well as investments having tax free income in the immediately previous year and the year under appeal and, therefore, provisions of section 14A of the Act read with Rule 8D are squarely applicable on the assessee. Disallowance u/s 14A of the Act has to be calculated on the basis of method provided under Rule 8D(2) as referred above which has got three parts. We will analyze each part separately. 13. (i) part relates to amount of expenditure directly relating to income which does not form part of total income. We observe that assessee has voluntarily made disallowance of ₹ 65,753/- u/s 14A of the Act and to examine this fact we refer to the computation of income available at pages 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for A.Y. 2008-09. The main provisions of Section 14A are to be applied. Further Rule 8D (1) reads as follows: Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with- (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2). 5.1 As per this Rule, as reproduced above, the AO has to determine the disallowance having regard to the accounts of the assessee to satisfy himself in respect of the claim of expenditure made by the assessee as well as in respect of the claim whether any expenditure was incurred in relation to the income which does not form part of the total income; hence, exempt under the Act. The AO is first required to determine the amount of expenditure in relation to such exempted income. We have also noted that even for A.Y. 2008-09 the Respected Coordinate Bench D ITAT Ahmedabad in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that no expenditure had been incurred in relation to exempt income. In both cases, the AO, if satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure, as the case may be, cannot embark upon a determination of the amount of expenditure in accordance with any prescribed method, as mentioned in sub-s. (2) of s. 14A. It is only if the AO is not satisfied with the correctness of the claim of the assessee, in both cases, that the AO gets jurisdiction to determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the Act in accordance with the prescribed method, the prescribed method being the method stipulated in r. 8D. While rejecting the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, in relation to exempt income, the AO would have to indicate cogent reasons for the same. It is, therefore, clear that determination of the amount of expenditure in relation to exempt income under rule 8D would only come into play when the Assessing Officer rejects the claim of the assessee in this regard. If one examines sub-rule (2) of rule 8D, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... penditure incurred in relation to income which does not form part of the total income under the Act. Even where the assessee claims that no expenditure has been incurred in relation to income which does not form part of the total income, the Assessing Officer will have to verify the correctness of such claim. In case, the Assessing Officer is satisfied with the claim of the assessee with regard to the expenditure or no expenditure, as the case may be, the Assessing Officer is to accept the claim of the assessee in so far as the quantum of disallowance under section 14A is concerned. In such eventuality, the Assessing Officer cannot embark upon a determination of the amount of expenditure for the purposes of section 14A (1). In case, the Assessing Officer is not, on the basis of the objective criteria and after giving the assessee a reasonable opportunity, satisfied with the correctness of the claim of the assessee, he shall have to reject the claim and state the reasons for doing so. Having done so, the Assessing Officer will have to determine the amount of expenditure incurred in relation to income which does not form part of the total income under the Act. He is required to do s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... immovable property, movable property and partnership firm are certainly not eligible to form part of average investment for the purpose of Rule 8-D. As far as investment in share is concerned, assessee has submitted that these investments were made in equity shares of Kalupur Commercial Coop. Bank Ltd. is held since last year at ₹ 54,37,500/- and assessee earns taxable dividend income and, therefore, the same should not be considered for calculation of average investment. Now the only amount left is investment in mutual fund which stood at ₹ 6,00,48,057/- as on 31.3.2009 at Rs.NIL as on 31.3.2010. Therefore, the average investment for the purpose of calculation of disallowance in part (iii) of the method provided under Rule 8D(2) of IT Rules shall be 0.5% of ₹ 3,00,24,029 (6,00,48,057 + 0 2). This amount works out at ₹ 1,50,120/-. Now summarizing all the three parts of Rule 8D(2), we find that in part (i) ₹ 65,753/- is the amount of admissible expenditure voluntarily disclosed by assessee and accepted by us. So no disallowance is called for. In part (ii) we have observed above that no disallowance is called for on the interest expenditure and in p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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