RUCHI GLOBAL LTD,MUMBAI vs. DCIT CEN CIR 40, MUMBAI

The solitary issue in dispute relates to disallowance of an amount of Rs. 18,64,095/- u/s 14A read with rule 8D.

Briefly the facts are, in course of assessment proceeding the assessing officer noticing that assesse had received exempt income by way of dividend amounting of Rs. 41,32,659/-, whereas, it has disallowed an amount of Rs. 33,670/- u/s 14A called upon the assesse to explain why disallowance u/s 14A should not be made by applying the provision of rule 8D. Though, assesse objected to the disallowance proposed by the AO, however, the assessing officer completed the assessment by disallowing a further amount of Rs. 18,64,095/- u/s 14A read with rule 8D. Assessee challenged the disallowance before the CIT (A). However, Ld. CIT (A) ultimately upheld the disallowance made by the AO.

The Ld. AR submitted that identical issue arose in assessee’s own case in assessment year 2010-11 and the Tribunal after considering the submissions of the asessee has restored the issue back to the assessing officer with certain directions. He submitted, similar direction may also be issued for the impugned assessment year. 5. The Ld. DR while agreeing that similar issue was dealt with by the Tribunal in assessee’s own case for the subsequent assessment year, submitted that matter can be remitted back to the assessing officer for reconsideration.

We have heard the parties and perused material on record. As could be seen before the first appellate authority the assessee contested disallowance of interest expenditure by confiding that it had sufficient interest free fund available to make investments in shares and securities. The aforesaid contention has not been examined by the CIT (A) in the light of the ratio laid down in the decisions of the honourable jurisdictional High court. We have also noted considering the aforesaid fact while deciding assessee’s appeal for assessment 2010-11 in ITA no. 6164/Mum/2013 dated 13/05/2016 the Tribunal has restored the matter back to the file of the assessing officer for fresh consideration with the following observations. We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon. As far as the disallowance of interest expenditure under rule 8D(2)(ii), it is the contention of the assessee it has sufficient surplus interest free fund available to make the investment. However, the aforesaid contention of the assessee has been brushed aside by the Assessing Officer and the learned Commissioner (Appeals), without proper verification. In case, the assesseehas mixed funds both borrowed and own interest free funds,as per the ratio laid down in the decisions relied upon by the learned Authorised Representative, the presumption would be the investment have been made out of interest free surplus funds. In the present case, the Assessing Officer has not established a direct nexus between the borrowal made by the assessee and the investment in shares. Unless, a direct one to one relationship is established between the borrowed funds and the investment made in exempt income yielding assets no disallowance under section 14A can be made. As this aspect has not been examined by the Departmental Authorities, we are inclined to restore the issue back to the file of the Assessing Officer for necessary

Facts being materially same in the impugned assessment year we set aside the impugned order of CIT (A) and restore the matter back to the file of the assessing officer to decide the issue afresh