IN INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI, BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI A. MOHAN ALANKAMONY, ACCOUNTANT MEMBER . ITA No.1718 Mds 2016 & C.O. No.107 Mds 2016 (in I.T.A. No.1718 Mds 2016) Assessment Year : 2012-13 Deputy Commissioner of M s Pioneer Press Pvt. Ltd., Income Tax, v. No.21B, Boopathy Buildings, Corporate Circle 2, Thiruthangal Road, Madurai. Sivakasi 626 123. PAN : AABCP 3492 R ( Appellant) (Respondent & cross-objector) Appellant by : Shri A.V. Sreekanth, JCIT Respondent by : Shri K. Paramananadham, CA Date of Hearing : 31.08.2016 Date of Pronouncement : 23.09.2016 ORDER PER N.R.S. GANESAN, JUDICIAL MEMBER: This appeal of Revenue is directed against order of Commissioner of Income Tax (Appeals) 1, Madurai, dated 11.03.2016 and pertains to assessment year 2012-13. assessee has also filed cross-objection against very same order 2 I.T.A. No.1718 Mds 16 C.O. No.107 Mds 16 of CIT(Appeals). Therefore, we heard appeal and cross- objection together and disposing of same by this common order. 2. only issue arises for consideration in appeal is with regard to disallowance made by Assessing Officer under Section 14A of Income-tax Act, 1961 (in short "the Act"). 3. Shri A.V. Sreekanth, Ld. Departmental Representative, submitted that Assessing Officer computed disallowance under Rule 8D(2) of Income-tax Rules, 1962. However, CIT(Appeals) partly deleted disallowance made by Assessing Officer on ground that disallowance cannot exceed dividend income received by assessee. According to Ld. D.R., method for computing expenditure was prescribed in Rule 8D(2). All three limbs of Rule 8D(2) have to be taken into consideration for purpose of computing disallowance for earning exempt income. In this case, assessee has borrowed money and paid interest. Even though assessee claims that borrowed funds were used for purpose of business, according to Ld. D.R., limb (ii) of Rule 8D(2) of Income-tax Rules, 1962 would come into operation since payment of interest is not relatable to any particular income. 3 I.T.A. No.1718 Mds 16 C.O. No.107 Mds 16 CIT(Appeals) himself observed that borrowed funds and assessee s own funds got mixed up and it is not possible to identify specific borrowals for purpose of investment in shares. If that is so, Rule 8D(2)(ii) has to be necessarily applied. Moreover, 0.5% of investment made during year, which resulted for earning of income which does not form part of total income, also needs to be taken into consideration. In view of express language of Rule 8D(2), according to Ld. D.R., CIT(Appeals) is not justified in restricting disallowance made by Assessing Officer. 4. On contrary, Shri K. Paramanandam, Ld. representative for assessee, submitted that disallowance under Section 14A of Act shall be restricted to exempt income earned by assessee. Since there was no proximity between borrowed funds and investment, Assessing Officer cannot apply provisions of Rule 8D(2). Moreover, Assessing Officer has not recorded any satisfaction for purpose of making disallowance. According to Ld. representative, Section 14A of Act could be applied only in case where assessee earned exempt income which does not form part of total income. 4 I.T.A. No.1718 Mds 16 C.O. No.107 Mds 16 Therefore, CIT(Appeals) has rightly allowed claim of assessee. 5. We have considered rival submissions on either side and perused relevant material available on record. We have carefully gone through provisions of Section 14A of Act and Rule 8D of Income-tax Rules, 1962. Rule 8D(2) provides for method of computation of disallowance for purpose of making disallowance under Section 14A of Act. Section 37 of Act specifically provides for allowance of expenditure for purpose of earning income. exception was taken from Section 37 by providing Section 14A of Act that expenditure which is not incurred for earning taxable income cannot be allowed while computing taxable income. In case before us, assessee admittedly invested in shares which resulted in dividend. dividend income earned by assessee is exempted from taxation. Therefore, expenditure incurred by assessee for earning dividend income, which does not form part of total income, cannot be allowed while computing taxable income. 6. Rule 8D(2) provides method for computing disallowance. first limb of 8D(2) of Act provides for disallowance of direct 5 I.T.A. No.1718 Mds 16 C.O. No.107 Mds 16 expenditure. In case before us, assessee claims that no borrowed funds were utilized for purpose of making investment and no interest was paid. Therefore, Rule 8D(2)(i) may not be applicable at all. Now coming to Rule 8D(ii), assessee admittedly borrowed funds. Therefore, borrowed funds and its own funds got mixed up and it cannot be identified from which funds investment was made. It also cannot be identified whether expenditure incurred by assessee for payment of interest is attributable to taxable income or for non-taxable income. Therefore, this Tribunal is of considered opinion that Rule 8D(ii) is squarely applicable to present case. Now coming to Rule 8D(2)(iii), average investment made during year under consideration, as per balance sheet has to be taken into consideration and 0.5% of investment which resulted income and does not form part of total income, has to be taken into consideration. Since these facts were not taken into consideration by CIT(Appeals), this Tribunal is of considered opinion that matter needs to be reconsidered by Assessing Officer Accordingly, orders of authorities below are set aside and issue of disallowance is remitted back to file of Assessing Officer. Assessing Officer shall re-examine matter in light of provisions of 6 I.T.A. No.1718 Mds 16 C.O. No.107 Mds 16 Rule 8D(2) of Income-tax Rules, 1962 and thereafter recomputed disallowance. 7. With above observation, appeal of Revenue is allowed for statistical purposes and cross-objection of assessee is dismissed. Order pronounced on 23rd September, 2016 at Chennai. sd - sd - (A. Mohan Alankamony) (N.R.S. Ganesan) Accountant Member Judicial Member Chennai, rd Dated, 23 September, 2016. Kri. Copy to: 1. Appellant 2. Respondent 3. CIT(A)-1, Madurai) 4. Principal CIT, Madurai-1, Madurai 5. DR 6. GF. Deputy Commissioner of Income-tax, Corporate Circle 2, Madurai v. M/s Pioneer Press Pvt. Ltd