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TMI Blog2017 (10) TMI 1463X X X X Extracts X X X X X X X X Extracts X X X X ..... surplus funds which are interest free and which is demonstrated from the quantum of share capital and reserves available with the assessee over the years - If an assessee establishes that its interest free funds were equal to or more than the interest bearing funds it would be open to it to contend that presumption arises that the expenditure for earning interest income was incurred from out of its interest free funds warranting no disallowance of interest expenditure u/s 14A r.w.r. 8D. Disallowance made on account of interest expenditure as per rule 8D(2)(ii) of the Rules be deleted. We direct that the expenses to be disallowed under rule 8D(2)(ii) be calculated by taking into account only those investments which have earned income during the year. Section 14A r.w.r. 8D is applicable for working out the deduction claimed u/s 80P(2)(d) by the assessee and that no disallowance of interest expenditure is allowable as per Rule 8D(2)(ii) while the expenditure to be disallowed as per Rule 8D(2)(iii) is to be calculated by taking into consideration only those investments which have earned income during the year. D enial of deduction u/s 80P(2)(e) - rental income earned by it from letting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in upholding the quantum of disallowance worked out by the AssessingOfficeru/s14Aread with Rule 8D of the Income Tax Rules, 1962. 3. That the Worthy CIT(A) erred in facts as well as in law in upholding disallowance u/s 80P(2)(e) amounting to ₹ 8,69,01,552/- in respect of the rent derived by the appellant from letting out of godowns for storage, processing etc. of commodities and therefore the said order be set aside. 3. The only issues arising in the present appeal are therefore two fold; i) the disallowance of deduction claimed by the assessee u/s 80P(2)(d) of the Act on account of interest and dividend income earned by it and ii) the disallowance of deduction claimed by the assessee u/s 80P(2)(e) of the Act in respect of rental income derived by it. 4. Ground No.2 raised by the assessee is against the order of the Ld.CIT(Appeals) upholding the denial of deduction claimed by the assessee u/s 80P(2)(d) of the Act amounting to ₹ 7,25,20,354/- on account of interest and dividend income earned by it. The assessee had claimed 100% deduction of the interest and dividend income earned by it without reducing any proportionate expenditure and had claimed before t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the assessee had admitted to the applicability of the same in assessment year 2005-06 and had been followed in the case of the assessee for subsequent years also. It was also pointed out by the Ld. DR that the Hon'ble jurisdictional High Court in the case of Punjab State Cooperative Milk Producers Federation Ltd. vs Commissioner of Income Tax & Anr. reported in 336 ITR 495 had upheld the applicability of section 14A while calculating the eligible deduction u/s 80P(2)(d) of the Act. As far the assessee's contention of no disallowance to be made as per rule 8D(2)(ii) on account of interest, the Ld. DR contended that on account of the mixed funds available with the assessee the provisions of rule 8D(2)(ii) were clearly applicable. 8. We have heard contentions of both the parties, perused the orders of authorities below and also gone through the documents placed before us. 9. On the first contention raised by the assessee that section 14A r.w.r. 8D is not applicable while working out the claim of deduction u/s 80P(2)(d), we find that the Ld. DR has rightly pointed out that the issue has already been dealt with by the Hon'ble jurisdictional High Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usly deleted by Finance (No. 2) Act, 1967, w.e.f. 1st April, 1968. 14. Further, s. 14A was inserted in the Act by Finance Act, 2001 w.e.f. 1st April, 1962. The said section provides that any expenses incurred by the assessee for earning income which does not form part of total income under the Act, shall not be an allowable expenditure. The apex Court in Walfort Share & Stock Brokers's case (supra), defining the scope of s. 14A of the Act, incorporated retrospectively from 1st April, 1962, had laid down as under : "The insertion of s. 14A with retrospective effect is the serious attempt on the part of the Parliament not to allow deduction in respect of any expenditure incurred by the assessee in relation to income, which does not form part of the total income under the Act against the taxable income (see Circular No. 14 of 2001 dt. 22nd Nov., 2001). In other words, s. 14A clarifies that expenses incurred can be allowed only to the extent they are relatable to the earning of taxable income. In many cases the nature of expenses incurred by the assessee may be relatable partly to the exempt income and partly to the taxable income. In the absence of s. 14A, the expenditure i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rpose of chargeability to tax. The theory of apportionment of expenditures between taxable and nontaxable has, in principle, been now widened under s. 14A. Reading s. 14 in juxtaposition with ss. 15 to 59, it is clear that the words "expenditure incurred" in s. 14A refers to expenditure on rent, taxes, salaries, interest, etc. in respect of which allowances are provided for (see ss. 30 to 37)." 15. Adverting to the judgments relied upon by the learned counsel for the assessee, the same do not advance its case. Suffice it to notice that the Doaba Co-operative Sugar Mills case (supra) was a case prior to insertion of s. 14A by Finance Act, 2001 retrospectively from 1st April, 1962 and would, thus, be of no assistance to the assessee. Further, this Court in King Export's case (supra), on consideration of facts involved therein had concluded that there was no expenditure which had been incurred by the assessee for earning the income and the same did not form part of total income. That is not the situation in the present case. 16. In view of the above, the substantial questions of law are answered against the assessee and in favour of the Revenue. 10. Moreover, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nvesting interest free funds towards other assets merely on account of the interest free funds having decreased. In that event so long as even after the decrease thereof there are sufficient interest free funds the presumption that they would be first used to invest in assets yielding exempt income applies with equal force." 12. In view of the same, we hold that the disallowance made on account of interest expenditure as per rule 8D(2)(ii) of the Rules be deleted. 13. As far as the contention of Ld. counsel for assessee that the calculation of administrative expenses to be disallowed as per rule 8D(2)(ii) be restricted to investments which have earned income during the year, we find merit in this contention of Ld. counsel for assessee. The Special Bench of the I.T.A.T. in the case of ACIT vs. Vireet Investments Pvt. Ltd. ITA No.502/Del/2012 dt.16/06/17 has laid down the said proposition and even the Hon'ble Delhi High Court in the case of ACB India Ltd.vs ACIT in ITA No.615/2014 dt-24.03.2015 has held so holding as under: "4.The AO, instead of adopting the average value of investment of which income is not part of the total income i.e. the value of tax exempt investment, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... present case, the facts were distinguishable since the assessee had filed evidence in this regard. The Ld. counsel for the assessee drew our attention to para 5.5 of the Ld.CIT(Appeals)'s order for assessment year 2011-12 pointing out the fact that in assessment year 2011-12 for want of evidence the assessee's ground had been dismissed. The same is reproduced hereunder: "I have gone though the facts of the case, written submission filed by the appellant and report submitted by AO during appellant proceedings. Following the decision by my predecessor for assessment year 2008-09 and by Hon'ble ITAT for the A.Y. 2009-10. as the facts remain same, the undersigned sees no reason to differ with the order passed by my predecessor in the appellant's own case for the A.Y. 2008-09. Since, the due opportunity for computation of deduction was provided by the AO to the appellant during remand proceedings but no reply was submitted by the appellant, it is found that there is no income on account of letting out of godowns which is available for deduction u/s 80P(2)(e) of the Act. The AO was justified in disallowance of claim of deduction u/s 80P(2)(e) of the Act. As a result, this g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ld.CIT(Appeals). 23. We have heard contentions of both the parties and perused the orders of authorities below. We find merit in the contention of the Ld. counsel for assessee. Undoubtedly, the assessee had been denied claim of deduction u/s 80P(2)(e) of the Act by the Ld.CIT(Appeals) following the order of the Ld.CIT(Appeals) in assessee's case for assessment year 2011-12. As rightly pointed out by the Ld. counsel for assessee in the said order the assessee had been denied deduction for want of evidence substantiating his claim of having earned rental income by letting out of godowns, warehousing, etc. As also rightly pointed out by the Ld.Counsel for the assessee the said evidence in the present case had admittedly been filed before the Ld.CIT(Appeals). Clearly, therefore, the Ld.CIT(Appeals) had erred in following his order for assessment year 201112 and dismissing assessee's claim for deduction for want of evidence when the same had actually been filed before him. In view of the same, therefore, we consider it fit to restore the matter back to the file of the Ld.CIT(Appeals) to adjudicate the issue afresh in the light of evidences filed by the assessee substantiating his cla ..... X X X X Extracts X X X X X X X X Extracts X X X X
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