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TMI Blog2017 (10) TMI 1656X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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. Thus we hold that in any case no disallowance of interest expenditure u/s. 14A was liable in the present case and the same needs to be deleted. Entire investments were strategic investments and the sole objective of the investment was not to earn dividend or capital gain on sale of such share but to provide trading platform to the general public - Undoubtedly and undisputedly, the investment made in share of LSE Securities Ltd. was for the purpose of facilitating and providing a trading platform to the general public by creating a subsidiary company. Having said so, the commercial expediency of making the impugned investment stands established and the interest expenditure incurred thereon cannot therefore be held to be for any non business purpose so as to warrant disallowance of the same u/s. 14A of the Act. Reliance placed by assessee on the decision of Oriental Structural Engineers Pvt. [ 2013 (1) TMI 720 - DELHI HIGH COURT] is apt wherein it has been categorically held that the investm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpediency. iii). That the assessee had sufficient interest free funds in the shape of 'Reserves and Surplus' and share capital and, thus, no borrowed funds having been utilized for the purpose of making the investment and, as such, no disallowance u/s. 14A was required to be made. 2. Without prejudice to above, the Ld. CIT(A) has erred in stating that interest paid on member's security amounting to Rs. 11,80,000/- should be considered for the purpose of the disallowance under Section 14A read with sub rule(2) of Rule 8 Don't he contention that the appellant had mixed funds and it could not be ascertained that which funds have been used for which purpose. The finding of the CIT (A) in this regard is not sustainable. 5. During the course of hearing before us, learned counsel for the assessee challenged the disallowance made on several counts as under: 1) Absence of satisfaction recorded by the Assessing Officer of the incorrectness of the claim of the assessee that no expenditure was incurred vis-à-vis these investments. 2) That in any case the entire investments were made out of own interest free funds of the assessee and no interest bearing funds has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh Court of Punjab & Haryana (Commissioner of Income Tax, Jalandhar) Vs. Deepak Mittal, (Section 14A of the Income Tax Act, 1961, read with rule 8D of the Income Tax Rules, 1962-Expenditure incurred in relation to income not includible in total income [Dividend income]-Assessment year 2007-08) - Assessee had earned dividend income and consistent case of assessee was that he had not made any expenditure on earning such income. However. Assessment proceedings disagreeing with the plea of assessee held that interest bearing funds had been invested for generating dividend income and had made an addition by making disallowance under section 14A, read with rule 8D. Whether since Assessing Officer instead of proceeding to collect material or evidence to determine expenditure incurred by assessee, relied upon rule 8D and applied it as a formula, disallowance was to be deleted. Held, yes [Para 9] (in favour of assessee)." 7. Thereafter our attention was drawn to the order of the Assessing Officer where purportedly satisfaction of the incorrectness of the claim of the assessee was recorded by the Assessing Officer at para 2.4 as under: 2.4 In view of the observations above and having ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer could not said to be an objective satisfaction. Ld. counsel for the assessee relied on number of judicial decisions in this regard as under: 1) CIT Vs. Kapsons Associates, (2016) 381 ITR 204 (P & H) 2) Ganeshay Overseas Industries Ltd. Vs. DCIT, ITA No. 186/Chd/2015 dated 19.10.2015 3) DCIT Vs. Loil Healthfood, ITA No. 235/Chd/2015 dated 09.09.2015 9. The Ld. DR, on the other hand, stated that due satisfaction had been recorded by the AO as pointed out by the Ld. Counsel for the assessee at para 2.4 of the assessment order and the case laws relied upon by the assessee were not applicable in the facts of the present case. 10. We have heard both the parties vis-à-vis the contention relating to satisfaction of the AO with regard to the incorrectness of the claim of the assessee that no expenses were incurred for the purpose of making the impugned investments. There is no dispute vis-a-vis the proposition of law that before making disallowance u/s. 14A the Assessing Officer has to first of all record that having regard to the accounts of the assessee he is not satisfied with the correctness of the claim of the assessee in respect of expenditure incurred in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions. This can be done only if the Assessing Officer records his reasons for his not being satisfied in writing." 11. Having said so, while applying the above proposition to the facts of the present case as pointed out before us and as is evident from a perusal of the order of the Assessing Officer placed before us we find that the assessee had contended before the Assessing Officer that no expenses either in the nature of interest or other had been incurred by the assessee in relation to the said investment. Reasons for claiming so had also been given by the assessee stating that own funds had been used for making the investments and since dividend is directly credited through e-banking no other expenditure is also incurred. The Assessing Officer, we find, rejected the claim of the assessee though purportedly on the basis of the books of account of the assessee but no objective reasons for rejecting the said claim is found. The Assessing Officer, as rightly pointed out by the Ld. Counsel for the assessee has simply summarily dismissed the claim of the assessee without specifically dealing with the contention of the assessee in the context of the books of account of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT (Appeals) stating that in view of availability of mixed funds the disallowance was warranted. 15. Having heard the contentions of both the parties, we find merit in the contentions of the Ld. counsel for the assessee. We find that the assessee had duly demonstrated the fact that the investments made in various years was not out of borrowed funds and having demonstrated the availability of enough own funds the assessee had also duly demonstrated that there were sufficient own interest free funds for making the impugned investments. Therefore, there was no reason for making any disallowance of interest. The reliance placed by the Ld. counsel for the assessee on the decision of the Jurisdictional High Court in the case of Max India Ltd. (supra) is apt wherein it has been held that 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. The relevant findings of the Hon'ble High Court are as under: "9. This presumption is unfounded. Merely because the interest free ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plans submitted by small exchanges and recommended that small exchanges may be permitted to promote a subsidiary which can acquire membership rights of larger stock exchanges viz. NSE/BSE/CSEADSE' or any other exchange subject to usual conditions applicable to the other members. Thereafter, a circular No. SMD-II/policy/CIR-37/99 dated 26.11.1999 was passed, wherein it was held that the small stock exchanges may promote/float a subsidiary company to acquire membership rights of other stock exchanges subject to certain conditions. Copy of the said circular is enclosed on pages 76 of the paper book. • Out of the said conditions, one condition was that the subsidiary company shall be 100% owned by the stock exchange promoting/floating such a subsidiary/company. • Further, a consequential amendment was made under Rule 17C of the Income tax rules to include the said kind of investments in the forms or mode of investment or deposit by a charitable or religious trust or institution, as specified in the said rule, to claim exemption under section 11 of the Act. The relevant clause of Rule 17C is mentioned below: Rule 17C: The forms and modes of investment or deposits un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore be held to be for any non business purpose so as to warrant disallowance of the same u/s. 14A of the Act. Reliance placed by ld. counsel for the assessee on the decision of the Delhi High Court in the case of Oriental Structural Engineers Pvt. is apt wherein it has been categorically held that the investment being attributable to commercial expedience, expenses incurred in relation to the same cannot be termed to have been incurred for earning exempt income. We, therefore, hold that since the investments were strategic investments no disallowance could be made u/s. 14A of the Act. 21. In view of the above, we, therefore, set aside the order of the Ld. CIT(Appeals) and direct that the disallowance made u/s. 14A be deleted. Ground of appeal No. 1 raised by the assessee, therefore, stands allowed. 22. In ground No. 2 the assessee has contested the inclusion of funds pertaining to members security amounting to Rs. 11,80,000/- received by the assessee for the purpose of calculating the interest expenses disallowable u/s. 14A. Since in ground No. 1 we have deleted the entire disallowance made u/s. 14A including the interest component, the said ground becomes infructuous and need ..... X X X X Extracts X X X X X X X X Extracts X X X X
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