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TMI Blog2017 (5) TMI 579X X X X Extracts X X X X X X X X Extracts X X X X ..... the property acquired under the MOU has been sold and the income therefrom has been offered as business income. However, the relevant documents in support of these contentions are not filed before us. Even otherwise, the assessee has not earned dividend income under the relevant A.Y. The language of s.14A (1) should be read in that context and such that it advances the scheme of the Act rather than distort it. In conclusion, we are of the view that the provisions of s. 14A read with Rule 8D of the Rules cannot be made applicable in a vacuum i.e. in the absence of exempt income. The questions of law are answered in favour of the assessee and against the department - ITA No. 1397/Hyd/2016, ITA No.1398/Hyd/2016 - - - Dated:- 9-5-2017 - Smt. P. Madhavi Devi, Judicial Member And Shri B. Ramakotaiah, Accountant Member For Assessee : Shri P. Muralikrishna For Revenue : Smt. Suman Malik, DR ORDER Per Smt. P. Madhavi Devi, J. M. Both are assessee s appeals for the A.Y 2011-12 and 2009-10. ITA No.1397/Hyd/2016 A.Y 2011-12 1. In this appeal, the assessee is aggrieved by the order of the CIT (A)-9 Hyderabad dated 30.06.2016 confirming the disallowance made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the disallowance under Rule 8D(2) is to be made. He therefore, made the disallowance of an amount equal to 0.5% of the average value of the investment, income in respect of which is exempt from tax. Thus, he made an addition of ₹ 84,18,282. Aggrieved, the assessee preferred an appeal before the CIT (A) who confirmed the order of the AO and the assessee is in second appeal before us. 3. The learned Counsel for the assessee submitted that the investments made by the assessee in its subsidiaries and associated companies was for the business purposes as a commercial expediency and not for the purpose of earning dividend income. He submitted that when the investments are made for commercial expediency, the expenditure incurred cannot be disallowed u/s 37(1) of the Act, as held by the Hon'ble Supreme Court in the case of SA Builders Ltd reported in 288 ITR 1(S.C). He submitted that where it is clear that the investments made are for the business purposes and not for earning of exempt income, the provisions of section 14A are not applicable. 4. Further, he also submitted that the assessee has not earned any dividend income which is exempt from tax during the relevant pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been earned. On further appeal, the Tribunal also confirmed the disallowance. On appeal to the High Court: Section 14A was inserted providing that no deduction shall be allowable in respect of expenditure incurred in relation to the earning of income exempt from taxation. The Supreme Court in the judgment in the case of CIT v. Walfort Share Stock Brokers (P.) Ltd. [2010] 326 ITR 1/192 Taxman 211 has observed that section 14A desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of an exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income. The provision thus is clearly relatable to the earning of actual income and not notional or anticipated income. The computation of total income in terms of section 5 is on real income and there is no sanction in law for the assessment of admittedly notional income, particularly in the context of effecting a disallowance in connection therewith. [Para 10] The computation of disallowance in terms of rule 8D is by way of a determination involvi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... #8377; 84,66,354/ - under section 14A of the Act read with rule 8D(2)(iii) without appreciating the fact and circumstances of the case. The Appellant, therefore, submits that the addition made under section 14A read with rule 8D(2)(iii) may be deleted. 2. The Ld. CIT (A) failed to appreciate that the A.O. erred in invoking provisions of section 14A, even though the said section has got no application when the investment is made for furtherance of business. 3. The Ld. CIT(A) failed to appreciate that the A.O. failed to observe that the provisions of section 14A are not applicable when no exempted income is earned . 9. Brief facts of the case are that the assessee company which is in the business of realty services, filed its return of income for the A.Y 2009-10 on 29.09.2009 declaring total income of ₹ 98,04,249. During the assessment proceedings u/s 143(3) of the Act, the AO observed that the assessee has made huge investments in share capital of M/s. Sri Sai Ram Projects Ltd to the tune of ₹ 12,50,00,000 as a result of which the assessee is holding 31% of the share in the said company. When the assessee was asked to furnish the details of the funds uti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the AO and the assessee is in second appeal before us. 12. The learned Counsel for the assessee reiterated its submissions made before the authorities below and submitted that the investment made by the assessee in M/s. Sri Sai Ram Projects Ltd is in the shares of the company and the memorandum of understanding clearly establishes that it is more in the nature of the under writing contract than investment in shares. He has drawn our attention to various clauses of the MOU to drive his point. He placed reliance upon the judgment of the Hon'ble Supreme Court in the case of S.A. Builders Ltd (Supra) to submit that where an investment is made for commercial expediency, it has to be treated as business expenditure. He submitted that the provisions of section 14A cannot be invoked in the case of business expenditure. 13. The learned DR however, supported the orders of the authorities below. 14. Having regard to the rival contentions and the material on record, we find that the MOU entered into by the assessee with M/s. Sri Sai Ram Projects Ltd is placed on record. On perusal thereof, it is seen that by virtue of the investment in shares, the assessee has acquired interest in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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