IN INCOME TAX APPELLATE TRIBUNAL BENCH, CHENNAI BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI ABRAHAM P. GEORGE, ACCOUNTANT MEMBER ITA No.1505/Mds/2016 Assessment Year : 2011-12 M/s Tractors and Farm Equipment Assistant Commissioner of Ltd., v. Income Tax, No.35, Nungambakkam High Road, Corporate Circle 3(1), Nungambakkam, Chennai - 600 034 Chennai - 600 034. PAN : AAACT 2761 Q (Appellant) (Respondent) Appellant by : Sh. R. Vijayaraghavan, Advocate Respondent by : Shri Shiva Srinivas, JCIT Date of Hearing : 04.08.2016 Date of Pronouncement : 30.09.2016 ORDER PER N.R.S. GANESAN, JUDICIAL MEMBER: This appeal of assessee is directed against order of Commissioner of Income Tax (Appeals) 11, Chennai, dated 30.03.2016 and pertains to assessment year 2011-12. 2. only issue arises for consideration is with regard to disallowance made by Assessing Officer to extent of 2 I.T.A. No.1505/Mds/16 `4,87,77,924/- under Section 14A of Income-tax Act, 1961 (in short "the Act"). 3. Shri R. Vijayaraghavan, Ld.counsel for assessee, submitted that assessee earned dividend income of `27,02,66,864/- and claimed same as exempt under Section 10(34) of Act. Assessing Officer found that assessee has not incurred any expenditure for earning exempt income. According to Ld. counsel, investments were made out of assessee s own funds. assessee had its own funds as on 31.03.2010 at `130,342.43 lakhs and as on 31.03.2011, available funds with assessee was `170,654.87 lakhs. assessee has also generated cash surplus to extent of `39,633.28 lakhs and portion of this amount was invested in mutual funds. According to Ld. counsel, no borrowed funds were used for investment for earning exempt income. 4. Ld. counsel for assessee further submitted that investments in subsidiary company were made long back. disallowance under Section 14A of Act can be made only if Assessing Officer is not satisfied with correctness of claim made by assessee. In this case, according to Ld. counsel, 3 I.T.A. No.1505/Mds/16 assessee has not made any claim at all, there is no question of any non-satisfaction by Assessing Officer. assessee itself found that sum of `29 lakhs can be disallowed as expenditure for earning exempt income. Assessing Officer proceeded to disallow sum of `8,66,34,772/- by applying Rule 8D of Income-tax Rules, 1962. Placing reliance on order of this Tribunal in Tamilnadu Power Finance & Infrastructure Development Corporation Ltd. v. ACIT in I.T.A. No.1813/Mds/2014 dated 19.02.2016, Ld. counsel submitted that only 0.5% of average value of investment, income from which does not or shall not form part of total income as appearing in balance sheet of assessee on first day and last day of previous year, has to be taken into consideration. 5. On contrary, Shri Shiva Srinivas, Ld. Departmental Representative, submitted that admittedly, assessee invested funds in mutual funds and shares and earned exempt income to extent of `27,02,66,864/-. According to Ld. D.R., Assessing Officer found that assessee has not claimed any expenditure for earning of exempt income. By considering volume of portfolio of investment, Assessing Officer found that assessee should 4 I.T.A. No.1505/Mds/16 have incurred expenditure in form of managerial, administrative and monitoring purpose. According to Ld. D.R., Assessing Officer categorically recorded finding that he is not satisfied with explanation of assessee that no expenditure was incurred. Accordingly, he computed disallowance under Section 14A of Act read with Rule 8D of Income-tax Rules, 1962. According to Ld. D.R., Assessing Officer found that there was no direct expenditure incurred by assessee for making investments. However, Assessing Officer found that there was indirect expenditure. In other words, interest paid by assessee is not relatable to any particular income earned by assessee. Therefore, according to Ld. D.R., second limb of Rule 8D(2) is squarely applicable. Moreover, Assessing Officer has also taken average value of investment on first day and last day of previous year as appearing in balance sheet of assessee and income from which does not form part of total income. Assessing Officer has taken 0.5%. Ultimately, Assessing Officer has taken aggregate of second and third limb of Rule 8D(2) and computed disallowance of `8,95,34,771/-. After deducting expenditure claimed by assessee to extent of `29 lakhs, according to Ld. D.R., Assessing Officer determined 5 I.T.A. No.1505/Mds/16 disallowance at `8,66,34,771/-. This disallowance was rightly confirmed by CIT(Appeals). 6. We have considered rival submissions on either side and perused relevant material available on record. first submission of Ld. counsel for assessee is that when assessee invested its own funds, Rule 8D2(ii) of Income-tax Rules, 1962 is not applicable at all. In case before us, admittedly, assessee borrowed loan for purpose of business. assessee also paid interest on borrowed loan. interest expenditure incurred by assessee does not relate to any particular income. In other words, when borrowed funds mixed with assessee s own funds, it cannot be identified from which part of funds investment was made. In other words, when interest paid by assessee on funds borrowed for business is not relatable to any particular item of income, this Tribunal is of considered opinion that second limb of Rule 8D(2) would come into operation. In other words, disallowance has to be computed under Rule 8D(2)(ii) of Income-tax Rules, 1962. 7. We have carefully gone through decision of this Tribunal in Tamilnadu Power Finance & Infrastructure Development 6 I.T.A. No.1505/Mds/16 Corporation Ltd. (supra). In case before this Tribunal in Tamilnadu Power Finance & Infrastructure Development Corporation Ltd. (supra), there was specific finding by this Tribunal that assessee has not incurred any expenditure for making investment. Therefore, this Tribunal found that disallowance has to be computed only under third limb of Rule 8D(2). Accordingly, this Tribunal found that computation has to be made with regard to average value of investment, income from which does not form part of total income of assessee. In case before us, facts are entirely different. assessee admittedly borrowed funds for purpose of business and paid interest. interest paid by assessee is not relatable to any particular income. Therefore, second limb of Rule 8D(2) is squarely applicable. 8. We have carefully gone through order of Assessing Officer. Assessing Officer has found that there was no direct expenditure relating to income which does not form part of total income. Therefore, he computed disallowance under second limb of Rule 8D(2) and also computed average amount expenditure to extent of `8,66,34,771/-. Therefore, this Tribunal 7 I.T.A. No.1505/Mds/16 is of considered opinion that CIT(Appeals) has rightly confirmed order of Assessing Officer. This Tribunal do not find any reason to interfere with order of lower authority and accordingly same is confirmed. 9. In result, appeal filed by assessee is dismissed. Order pronounced on 30th September, 2016 at Chennai. sd/- sd/- (Abraham P. George) (N.R.S. Ganesan) Accountant Member Judicial Member Chennai, th Dated, 30 September, 2016. Kri. Copy to: 1. Appellant 2. Respondent 3. CIT(A) 11, Chennai-34 4. Principal CIT-3, Chennai 5. DR 6. GF. M/s Tractors and Farm Equipment Ltd. v. Assistant Commissioner of Income-tax, Corporate Circle-3(1), Chennai