IN INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER ITA Nos.1402, 1403 & 1404/Mds/2016 Assessment Years: 2009-10, 2011-12 & 2012-13 M/s.TAFE Motors and Tractors v. Assistant Commissioner of Limited, Income-tax, No.35, Nungambakkam High Corporate Circle -3(1), Road, Nungambakkam, Chennai 600 034. Chennai 600 034. PAN : AACCT 2459B (Appellant) ( Respondent) Appellant by : Shri R.Vijayaraghavan, Advocate Respondent by : Shri A.V.Sreekanth, JCIT Date of Hearing : 03.08.2016 Date of Pronouncement : 23.09.2016 O R D E R PER N.R.S. GANESAN, JUDICIAL MEMBER: All three appeals of assessee are directed against respective order of CIT(A) -11 for Assessment Years 2009-10, 2011-12 & 2 I.T.A. Nos.1402, 1403 & 1404/Mds/2016 2012-13. Since common issue arises for consideration in all appeals, we heard same together and disposing of same by this common order. 2. Shri R.Vijayaraghavan, learned counsel for assessee submitted that only issue raised for consideration is that computation of disallowance under Section 14A read with Rule 8D of rules. Shri R.Vijayaraghavan, learned counsel for assessee submitted that some of investment made by assessee resulted in taxable income. What was to be disallowed is income which does not form part of total income of assessee. Since income which forms part of total income cannot be considered for disallowance under Section 14A, same shall be excluded while computing disallowance under Rule 8D(2). This fact was not considered by both authorities below. Moreover, term loan was availed by assessee in earlier assessment year which was used for purpose for which loan was obtained. Therefore, borrowed funds were not used for earning exempted income. 3. According to learned counsel for assessee, loan was specifically sanctioned for specific project and same cannot be diverted for making investment. Therefore, according to learned counsel, loan borrowed by assessee for specific project cannot be considered as disallowance under Section 14A. learned counsel for assessee submitted that entire investment was made from profit of assessee. Therefore, there cannot be any disallowance. 3 I.T.A. Nos.1402, 1403 & 1404/Mds/2016 4. On contrary, Shri A.V.Sreekanth, learned Department Representative submitted that there cannot be any disallowance with regard to income which forms part of total income. disallowance has to be determined under Rule 8D only in respect of income which does not form part of total income of assessee. In this case, assessee estimated disallowance without following Rule 8D. Therefore, at initial assessment, AO disallowed claim by assuming expenditure at 5% of income which does not form part of total income. Subsequently, assessment was re-opened under Section 147 of Income Tax Act and AO computed disallowance under Rule 8D (2) of Income Tax Rules. Since disallowance is computed strictly as per Rule 8D (2) after reopening CIT(A) as rightly confirmed order of AO. 5. We have considered rival submissions on either side and also perused material available on record. In grounds of appeal, learned counsel for assessee raised issue with regard to re-opening of assessment. However, no argument was advanced during course of hearing. Therefore, issue raised by assessee with regard to re-opening of assessment is dismissed. 6. Now coming to merit of appeal, first claim of assessee was that investment which resulted taxable income cannot be considered for disallowance under Rule 8D. This Tribunal is of considered opinion that 4 I.T.A. Nos.1402, 1403 & 1404/Mds/2016 income which forms part of total income cannot be considered for any disallowance at all. What is to be disallowed under Rule 8D is expenditure incurred by assessee for earning income which does not form part of total income. In case before us, AO has strictly applied provisions of Rule 8D (2). In fact, AO has taken direct expenditure with regard to first limb of Rule 8D (2)(i) at Rs.4,00,000/-. This was deleted by CIT (A) on ground that there was no direct expenditure incurred by assessee. CIT (A) has also found that AO observed that assessee made disallowance under Section 14A at 5% of income without following Rule 8D. In fact, CIT (A) computed disallowance by applying second and third limbs of Rule 8D(2). main claim of assessee is that loan was borrowed for specific project. Therefore, there cannot be any disallowance in second limb of Rule 8D (2). This Tribunal is unable to accept contention of learned counsel for assessee. When assessee borrowed loan in earlier assessment years for specific project and without repaying same, invest profit in shares and bonds which resulted exempted income, it cannot be said that assessee has invested its own funds. Had assessee repaid loan from profit earned in earlier assessment years or during current assessment years, liability for payment of interest would be reduced considerably. However, without repaying loan borrowed for so called specific project, assessee choose to invest in shares and bonds which resulted in exempted income. Therefore, assessee has incurred expenditure which cannot be contributed to any 5 I.T.A. Nos.1402, 1403 & 1404/Mds/2016 particular income. In other words, second limb of Rule 8D(2) is clearly applicable in such circumstances. Moreover, even assuming for arguing sake, assessee has invested its own funds, third limb of Rule 8D(2) would come into operation. Therefore, 0.5% of average investment which resulted exempted income has to be considered for disallowance. order of CIT(A) clearly shows that CIT(A) has applied Rule 8D(2)(ii) and Rule 8D(2)(iii). Therefore, this Tribunal do not find any reason to interfere with order of CIT (A). Accordingly, same is confirmed. 7. In result, all three appeals filed by assessee are dismissed. Order pronounced on 23rd September, 2016 at Chennai. Sd/- Sd/- (A. Mohan Alankamony) (N.R.S. Ganesan) Accountant Member Judicial Member Chennai, Dated, 23rd September, 2016. sp. Copy to: 1. Appellant 2. Respondent 3. CIT(A) 4. CIT, 5. DR 6. GF. M/s.TAFE Motors and Tractors Limited v. Assistant Commissioner of Income-tax, Corporate Circle -3(1), Chennai