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Income Tax Appellate Tribunal, ‘C’ BENCH, CHENNAI
Before: SHRI N.R.S. GANESAN & SHRI A. MOHAN ALANKAMONY
आदेश /O R D E R
PER N.R.S. GANESAN, JUDICIAL MEMBER:
All the three appeals of the assessee are directed against the respective order of CIT(A) -11 for the Assessment Years 2009-10, 2011-12 & 2012-13. Since common issue arises for consideration in all the appeals, we heard the same together and disposing of the same by this common order.
Shri R.Vijayaraghavan, the learned counsel for the assessee submitted that the only issue raised for consideration is that computation of disallowance under Section 14A read with Rule 8D of the rules. Shri R.Vijayaraghavan, the learned counsel for the assessee submitted that some of the investment made by the assessee resulted in taxable income. What was to be disallowed is the income which does not form part of the total income of the assessee. Since the income which forms part of the total income cannot be considered for disallowance under Section 14A, the same shall be excluded while computing the disallowance under Rule 8D(2). This fact was not considered by both the authorities below. Moreover, the term loan was availed by the assessee in the earlier assessment year which was used for the purpose for which the loan was obtained. Therefore, the borrowed funds were not used for earning exempted income.
According to the learned counsel for the assessee, the loan was specifically sanctioned for a specific project and the same cannot be diverted for making investment. Therefore, according to the learned counsel, the loan borrowed by the assessee for a specific project cannot be considered as disallowance under Section 14A. The learned counsel for the assessee submitted that the entire investment was made from the profit of the assessee.
Therefore, there cannot be any disallowance.
On the contrary, Shri A.V.Sreekanth, the learned Department Representative submitted that there cannot be any disallowance with regard to the income which forms part of the total income. The disallowance has to be determined under Rule 8D only in respect of income which does not form part of the total income of the assessee. In this case, the assessee estimated the disallowance without following Rule 8D. Therefore, at the initial assessment, the AO disallowed the claim by assuming the expenditure at 5% of the income which does not form part of the total income. Subsequently, the assessment was re-opened under Section 147 of the Income Tax Act and the AO computed the disallowance under Rule 8D (2) of the Income Tax Rules. Since disallowance is computed strictly as per Rule 8D (2) after reopening the CIT(A) as rightly confirmed the order of the AO.
We have considered the rival submissions on either side and also perused the material available on record. In the grounds of appeal, the learned counsel for the assessee raised an issue with regard to re-opening of the assessment. However, no argument was advanced during the course of hearing. Therefore, the issue raised by the assessee with regard to re-opening of the assessment is dismissed.
6. Now coming to the merit of the appeal, the first claim of the assessee was that the investment which resulted taxable income cannot be considered for disallowance under Rule 8D. This Tribunal is of the considered opinion that the income which forms part of the total income cannot be considered for any disallowance at all. What is to be disallowed under Rule 8D is an expenditure incurred by the assessee for earning the income which does not form part of the total income. In the case before us, the AO has strictly applied the provisions of Rule 8D (2). In fact, the AO has taken the direct expenditure with regard to the first limb of Rule 8D (2)(i) at Rs.4,00,000/-. This was deleted by CIT (A) on the ground that there was no direct expenditure incurred by the assessee. The CIT (A) has also found that the AO observed that the assessee made disallowance under Section 14A at 5% of the income without following Rule 8D. In fact, the CIT (A) computed the disallowance by applying the second and third limbs of Rule 8D(2). The main claim of the assessee is that the loan was borrowed for a specific project. Therefore, there cannot be any disallowance in second limb of Rule 8D (2). This Tribunal is unable to accept the contention of the learned counsel for the assessee. When the assessee borrowed loan in the earlier assessment years for a specific project and without repaying the same, invest the profit in the shares and bonds which resulted exempted income, it cannot be said that the assessee has invested its own funds. Had the assessee repaid the loan from the profit earned in the earlier assessment years or during the current assessment years, the liability for payment of interest would be reduced considerably. However, without repaying the loan borrowed for the so called specific project, the assessee choose to invest in the shares and bonds which resulted in exempted income. Therefore, the assessee has incurred expenditure which cannot be contributed to any particular income. In other words, the second limb of Rule 8D(2) is clearly applicable in such circumstances. Moreover, even assuming for arguing sake, the assessee has invested its own funds, the third limb of Rule 8D(2) would come into operation. Therefore, 0.5% of the average investment which resulted exempted income has to be considered for disallowance. The order of CIT(A) clearly shows that the CIT(A) has applied Rule 8D(2)(ii) and Rule 8D(2)(iii). Therefore, this Tribunal do not find any reason to interfere with the order of the CIT (A). Accordingly, the same is confirmed.
In the result, all the three appeals filed by the assessee are dismissed.
Order pronounced on 23rd September, 2016 at Chennai.