IN INCOME TAX APPELLATE TRIBUNAL BENCH : CHENNAI BEFORE SHRI N.R.S. GANESAN, JUDICIAL MEMBER AND SHRI D. S. SUNDER SINGH, ACCOUNTANT MEMBER] I.T.A.No.2071/Mds/2016 Assessment year : 2009-10 S.R. Sabapathy Vs. Asstt. Commissioner of 3/135, V.V.V Salai Income-tax Uthandi Corporate Circle V(2) Chennai 600 119 Chennai [PAN ABKPS 6985 R] ( Appellant) ( Respondent) Appellant by : Shri G. Seetharaman, Advocate Respondent by : Shri B. Sahadevan, JCIT Date of Hearing : 27 -09-2016 Date of Pronouncement : 17-10-2016 O R D E R PER D.S. SUNDER SINGH, ACCOUNTANT MEMBER This appeal of assessee is directed against order of Commissioner of Income-tax (Appeals)-3, Chennai, dated 21.3.2016 for assessment year 2009-10. 2. All grounds of appeal are related to addition made by AO relating to disallowance u/s14A r.w.r 8D amounting to Rs.18,73,250/-. :- 2 -: ITA No.2071/16 3. assessee filed Return of Income for F.Y 2009- 10 declaring total income of Rs.77,29,050/-. case was taken up for scrutiny and assessing officer found that assessee had received amount of Rs.99,43,100/- as dividend and claimed same as exempt u/s 14A. assessee has not attributed any expenditure towards earning dividend income. Therefore AO made addition of Rs.17,60,172/- u/r 8D(2)(i) and Rs.1,13,078/- u/r 8D(2)(iii). assessee went on appeal before CIT(A) and Ld.CIT(A) confirmed addition made by AO as per following discussion in Page No.4 of order: I have carefully gone through findings of AO and also relevant provisioN of Income Tax Act and rules. Section 14A is crystal clear without any ambiguity that expenditure incurred for earning exempted income which is not part of total income shall be disallowed. I am inclined to agree with findings of AO. This view is also supported by Hon'ble High Court of Bombay in case of Godrej and Boyce Mfg. Co. Ltd., (328 ITR 81 )(Bom), while upholding constitutional validity of section 14A read with Rule 8D also observed that argument that investment yielding tax free dividend income has been made out of own funds, so that no interest expenditure has been incurred in relation to dividend income, was no longer dispositive of matter, and that, even so, disallowance in respect of interest would have to be made. and no presumption of investment of own funds, on ground of its sufficiency, could be drawn, distinguishing its own decision in case of CIT vs Reliance Utilities & Power Ltd [2009] 313 ITR 340/178 Taxman 135 (Bom) its relevant observations (at placitum 5, Primary Agricultural Credit Society 135 reading as under: :- 3 -: ITA No.2071/16 In all these decisions, tribunal held that no nexus had been established between borrowed funds and investments by assessee in dividend yielding shares/income-yielding mutual funds. Now assuming that this is so, only conclusion which emerges is that assessee had utilized its own funds for purpose of making investments. fact that assessee has utilized its own funds in making investments would not be dispositive of question as to whether assessee had incurred expenditure in relation to earning of such income. Even if assessee has utilized its own funds for making investments which have resulted in income which does not form part of ht total income under Act, expenditure which is incurred in earning of that income would have to be disallowed. That is exactly matter which A.O has to determine. Respectfully following ratio laid down by Hon'ble Bombay High Court in case cited supra, I, therefore, sustain tile addition made by AO amounting to RS.18,73,250 u/s. 14A, appellant fails on this ground. 4. Aggrieved by order of AO assessee is in appeal before us. 5. ld A.R appearing for asessee has argued that assessee is individual having Income from Salary, House Property and other sources. He has not claimed any expenditure against any source of income hence submitted that application of Rule 8D(2)(iii) has no application. He further argued that question of disallowance of expenditure comes in to operation only when expenditure allocation required to be made in case of taxable income and non taxable income. When assessee has not claimed any expenditure at all :- 4 -: ITA No.2071/16 question of allocation of expenditure towards exempt income and non-exempt income does not arise. He further argued in respect of disallowance of interest assessee has not invested entire borrowed funds towards shares but made investments in loans which are earning interest. Therefore according to him disallowance of interest by application of Rule 8D(2)(ii) also is not judicious. 6. On other hand Ld.D.R. argued that AO has given opportunity to assessee and given show cause notice for which assessee had not responded. From assessment order it reveals that assessee had borrowed money and invested in shares. Since there was no explanation from assessee DR has argued that at stage of assessment and before Ld.CIT(A) assessee has not demonstrated with books of accounts and Bank account statements that assessee has invested interest bearing for earning interest income also. Therefore D.R has argued that AO has rightly disallowed interest as per Rule 8D(2)(ii). 7. We heard rival submissions and perused material placed on record. assessee is individual earning income from Salary,House Proerty and income from other sources. :- 5 -: ITA No.2071/16 assessee has not claimed any expenditure from any source of income as per details furnished before us. As per section 14A no deduction of expenditure is allowed for income which does not form part of total income. For ready reference we reproduce relevant part of Section 14A which reads as under: 23 [Expenditure incurred in relation to income not includible in total income24. 2514A. 26[(1)]For purposes of computing total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred27 by assessee in relation to27 income which does not form part of total income27 under this Act.] 26[(2) Assessing Officer shall determine amount of expenditure incurred in relation to such income which does not form part of total income under this Act in accordance with such method as may be prescribed28, if Assessing Officer, having regard to accounts of assessee, is not satisfied with correctness of claim of assessee in respect of such expenditure in relation to income which does not form part of total income under this Act. From above section it is clear that expenditure relating to earning exempt income is not deductible from taxable income. In assessee s case as rightly pointed out by A.R there was no expenditure claimed by assessee from any source of Income except interest paid to various banks for which section Rule 8D(2)(ii) is applicable. Therefore we agree with assessees s argument that Rule 8D(2)(iii) has no application in assessee s case. Accordingly we delete addition made by assessing officer amounting to Rs.113078/- u/r 8D(2)(iii) of Act. :- 6 -: ITA No.2071/16 8. next issue of addition in this case is disallowance of Interest u/r 8D(2)(ii) amounting Rs. 17,60,172/-. 9. During assessment AO noted that assessee has borrowed funds of Rs.1,26,67,199/- during year 2007- 08 and Rs.1,37,86,605/- during year 2008-09 aggregating to Rs.2,64,53,804/- and observed that funds were used for purpose of investment in purchase of shares in Qmax Test Equipements. assessee has purchased 249900/- shares of Rs.10/- each for Rs.18434225/-. A.O has given show cause notice seeking explanation from assessee proposing to disallowing interest u/s14A r.w.r 8D. But assessee has nor responded to notice and assessing officer disallowed entire interest claimed by assessee amounting to Rs.1760172/-.In first appeal Ld.CIT(A) confirmed addition placing reliance on 328 ITR 81 in case of Godrej Boyce Mfg and 313 ITR 340 in case of Reliance Utilities & Power Ltd. Though assessee in his argument stated that entire borrowed funds were not utilized for purpose of purchasing shares and part amount was also utilized in loans given to companies on which interest was earned assessee has not furnished details before A.O and Ld.CIT(A). assessee also did not demonstrate sources of funds and its utilization from Bank accounts before us. As per :- 7 -: ITA No.2071/16 information filed before us in paper book A.R worked out disallowance of Rs.7.34 lacs u/r 8D(2)(ii) as under: Interest claimed(A) Rs.17.60 lacs Average Investment: (i) Opening Investment 223.12 (ii) Closing Investment 229.18 ------ 452.30 ------- (iii) Avereage Investment (1+2)/2 (B) 226.15 Average of Total Assets (i)Opening Total Assest 481.00 (ii) closing Total Asset 603.06 ----------- 1084.06 -------------- (iv) Average Total Assets(1+2)/2 (C) 542.03 Disallowance u/r 8D(2) 17.60X226.15 --------------- 7.34 542.03 10. A.R has furnished above computation of disallowance. fact that Interest bearing funds have been invested for purpose of shares has not been disputed by assessee. Therefore we have no hesitation in holding that disallowance u/r 8D is applicable in aasessee s case and uphold order of lower authorities. However regarding quantum of disallowance assessee has furnished :- 8 -: ITA No.2071/16 computation at Rs.7.34 Lacs against disallowance made by AO amounting to Rs.17.60 lacs which require further verification. Therefore we remit matter back to AO for verification of correct amount of disallowance as per information filed by assessee in paper book. assessee is directed to file complete details for disallowing correct amount of disallowance u/r 8D(2)(ii). assessee s appeal is allowed on this ground for statistical purposes. 11. In result, appeal of assessee is partly allowed for statistical purposes. Order pronounced on 17th October, 2016, at Chennai. Sd/- Sd/- (N.R.S. GANESAN) (D.S. SUNDER SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER Chennai Dated: 17th October, 2016 RD Copy to: 1. Appellant 4. CIT 2. Respondent 5. DR 3. CIT(A) 6. GF S.R. Sabapathy v. Asstt. Commissioner of Income-tax Corporate Circle V(2), Chennai