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TMI Blog2018 (12) TMI 1883X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellant Company and claimed during the assessment proceedings, in view of the decision of Bombay High Court in the case of Godrej Boyce Mfg Co. Ltd. V/s DCIT wherein the method of proportion has been held to be a recognized method for disallowance u/s 14A of the Act. Directions may be given not to apply Rule 8D which computing disallowance under section 14A of the Act. 2. That the Worthy CIT(A)-4, Ludhiana, erred in-law and on facts in not directing the Ld. Assessing Officer, not to apply rule 8D, in view of the fact that no recording of satisfaction with cogent reasons was made in the order regarding the correctness of the claim of expenditure in relation to income which does not form part of total income. Directions be given not to apply Rule 8D as the provisions of Section 14A (2) are not applicable in the case herein. 3. The Worthy CIT(A)-4, Ludhiana erred in law and on facts by not directing the Ld. Assessing Officer to adopt the figure of investment on which exempt income was received, instead of average total investments as taken by the Ld. Assessing Officer, for computing disallowance u/s 14A read with rule 8D. Directions be given to compute disallowance only by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it on record. On careful consideration of the rival contentions, I am of the opinion that as the assessee company has itself made disallowance under section 14A of the Act (although not to the extent disallowed by the Assessing Officer) there remains no doubt that the provisions of section 14A of the Act are absolutely applicable in the case of the assessee company. I am also of the opinion that the submissions made by the assessee company during assessment proceedings have rightly been rejected by the Assessing Officer with justifiable reasoning. I am further of the opinion that the provisions of section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 will also be applicable on those investments from which the assessee company has not received any exempt income in view of clarification issued by the CBDT, New Delhi vide Circular No. 5 of 2014 wherein the legislative intention of the parliament for bringing section 14A of the Act to the Statute has been discussed in detail. Moreover, I have not come across any decision which has been delivered after considering Circular No. 5 of 2014 issued by the CBDT, New Delhi. In view of these facts, I also do not find any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he order of the authorities below. 8. We have considered the rival contentions, perused the orders of the authorities below and have also gone through the case laws referred to before us. 9. The issue before us relates to disallowance made of expenditure incurred in relation to earning of exempt income, as per the provisions of Section 14A of the Act read with Rule 8D of the Rules. The facts which are not in dispute, is that the assessee during the impugned year had earned exempt income comprising of dividend income of Rs. 99,74,498/- and Long Term Capital Gain on which Security Transaction Tax (STT) was paid amounting to Rs. 27,83,768/- .Thus the assessee had earned exempt income amounting to Rs. 1,27,58,266/-. Further it is an admitted fact that the assessee had suomoto made disallowance of expenses under section 14A of the Act amounting to Rs. 26,25,032/-. 10. Taking up the first contention of the Ld. Counsel for the Assessee that since no cogent reasons had been recorded by the Assessing Officer for rejecting the correctness of the claim of expenditure as computed by the assessee for the purpose of making disallowance under section 14A the disallowance could not have been ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issed. 11.1 As for the alternate contention of the Ld. Counsel for the assessee, that the disallowance calculated as per Rule 8D(2)(iii) was to be restricted to those investments only on which exempt income had been earned, we find merit in the same. We have gone through the case laws referred to by the Ld. Counsel for the Assessee in support of this preposition and we find that both the Special Bench of the ITAT in the case of Vireet Investments (supra)and the Hon'ble Delhi High Court in the case of ACB India Ltd. (supra) have laid down the preposition that for the purpose of calculating the disallowance u/s 14A read with Rule 8D, only those investments which have earned exempt income have to be considered. The relevant findings of the Hon'ble Delhi High Court in the case of ACB India Ltd. in this regard are as under: Facts as disclosed by the AO, who expressed his opinion that the claim of the assessee for no disallowance was warranted since no expenditure was incurred, had to be rejected. Therefore, the first condition for application of Section 14A in this case was fulfilled. In such eventuality the AO is required by the mandate of Rule 8D to follow Rule 8D(2). Clauses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e total investment itself. Even though the CIT(Appeals) noticed the exact value of the investment which yielded taxable income, he did not correct the error but chose to apply his own equity. Given the record that had to be done so to substitute the figure of Rs. 38,61,09,287/- with the figure of Rs. 3,53,26,800/- and thereafter arrive at the exact disallowance of .05%. 5. In view of the above reasoning, the findings of the ITAT and the lower authorities are hereby set aside. The special Bench of ITAT in the case of Vireet Investments(supra) has also laid down this proposition. 12. In view of the above we hold that the disallowance under section 14A Read with Rule 8D(2)(iii) is to be calculated by taking into consideration only those investment which have earned exempt income during the year. The Assessing Officer is directed therefore to recompute the disallowance in accordance with aforesaid proposition laid down by the Courts. In view of the above Ground No. 1 and 2 raised by the assessee are dismissed while Ground No. 3 is allowed. 13. Ground No. 4 raised by the assessee relates to disallowance of interest expenses under section 36(1)(iii) of the Act reads as under: 4. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalized in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction." The judgment of various Courts in the case of Hero Cycles (P) Ltd. Vs. CIT, Ludhiana C.A. No. 514 of 2008 dt. 05/11/2015, Bright Enterprises Pvt. Ltd. Vs. CIT, Jalandhar (2016) 381 ITR 107 (P&H) held that no disallowance of interest is called for where the assessee has got sufficient own funds. The Assessing Officer is directed to go through the fund position namely capital and interest free advances, reserves and surplus to determine whether any borrowed funds have been utilized more than available own funds and take a decision keeping in view the decisions rendered above. If sufficient own funds are available, no disallowance is called for. This ground may be treated as set aside to the file of Assessing Officer. 12. In the result this ground of appeal is allowed. 17. Our attention was also drawn to th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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