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Income Tax Appellate Tribunal, BANGALORE BENCHES “B” BENCH: BANGALORE
Before: SHRI B.R. BASKARAN & SMT BEENA PILLAI
ORDER PER BEENA PILLAI, JM. Present appeal has been filed by assessee against order dated 11/07/2019 passed by the Ld.CIT(A)-4, Bangalore for assessment year 2016-17 on following grounds of appeal: Tax effect relating to each Ground of Grounds of Appeal appeal (see note below) The Assessing Officer erred in computing the disallowance of Rs.9,68,872/- uls 14A of the Income Tax Act read with rule 8D(2)(i)
1. Rs. 2,99,381/- ,8D(2)(ii) and 8D2(iii) The Assessing officer while apportioning the interest expenditure ought to have observed that the investments Page 2 of made by the assessee are from out of its own reserves and the interest paid on loans, were for its working capital requirements only. The Assessing officer ought to have observed that the major part of its investments were in group companies and there are cross investments by the group companies in the assessee company more than the investments made by it. There were no disallowance in the previous years. The CIT(A) did not make a reference to and follow the decision of the Hon'ble Karnataka High Court in CIT Vs Micro Labs 383 ITR 490. The Jurisdictional High Court decision is binding on him. The relevance of Rule 80(1) was not considered. On the facts and the circumstances no disallowance u/s 14A is called for.
Brief facts of the case are as under: 2. The assessee is engaged in the business of trading in tea, warehousing and advisory services and had declared income from Brent. It filed its return of income declaring loss of Rs.1,43,46,691/- for year under consideration. The case was selected for scrutiny and notice under section 143(2) was issued to assessee. In response to statutory notices, the representative of assessee appeared before the Ld.AO and filed requisite details as called for.
From the details filed, the Ld.AO observed that assessee had an investment of Rs.3,85,82,000/- quoted/non-quoted equity shares. Is it was also observed that assessee had shown dividend income of Rs.62,62,497/-having earned during the year under consideration. The Ld.AO observed that assessee had suo Moto disallowed sum of Rs.60,000/-under section 14A of the Act.
Not satisfied with the suo moto disallowance made by assessee, Ld.AO computed disallowance is of Rs.9,68,872/- under section 14A read with rule 8D(2)(i)-(iii). Aggrieved by the addition made by the Ld.AO, assessee preferred appeal before the Ld.CIT(A). 5.The Ld.CIT(A) upheld the disallowance made by the Ld. AO by observing as under: “Further, the reasons for applying Rule 8D(2)(ii) are that there. was no direct nexus between the interest expenditure incurred by the appellant and the funds used for the purpose of investment. Appellant claims that there are no borrowings which have been used for making investment and the borrowed funds have been completely utilized for the purposes of business only. Therefore, the Assessing Officer has observed that various Courts have held that there should be a close proximity between the expenses attracted for disallowance u/s and the tax exempt investment portfolio of the appellant. In this regard it becomes essential to go through the exact wording of Rule 8D2(ii). The sub clause 2(ii) of Rule 80 has been specifically added to the computation of disallowable expenditure to take care of such cases where the assessee may have interest expenditure with the earning of exempt income. Further observed that even on logical grounds, assessee's contention that there is no interest cost involved in making investments because these investments have been made out of own funds is not tenable. Even if the assessee is able to establish a direct nexus between the borrowed funds and their application for the purpose of business, we can't take it to mean that there is no interest cost involved in making the investments. There may be an indirect or notional cost but there's cost nonetheless. The above discussion is merely to prove the point that no matter which funds are utilized for the purposes of making the investments, there is an interest for the purposes of making the investments, there is an interest cost involved if the assessee has borrowed funds at the same time. And Rule 8D(2)(ii) is mathematically efficient enough to calculate exactly the proportion of total interest expenditure pertaining to investments. Therefore, the Assessing Officer has determined the amount of expenditure as per the provisions of Sec.14 rw Rule 80 of the IT Rules, 1962 in relation to earning of exempt income.” Aggrieved by the order of Ld.CIT(A) assessee is in appeal before us now. 6. All the grounds raised by assessee is related to the disallowance made under section 14A read with Rule 8D(2)(i)-(iii) of the Act.