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Rei Agro Ltd., Kolkata v. Dcit, Central Circle-Xxvii, Kol. .
Factual and Procedural Background
This order concerns two appeals arising from the assessment year 2008-09: ITA No.1331/Kol/2011 (assessee's appeal) and ITA No.1423/Kol/2011 (Revenue's appeal), both against the order of the CIT(A), Central-I, Kolkata dated 2 August 2011. The assessee is a company engaged in rice processing, power generation and retail sale. During the year under consideration the assessee received dividend income of Rs.1,32,638/-, treated as exempt. The Assessing Officer (AO) invoked section 14A read with Rule 8D of the Income-tax Rules and made a total disallowance of Rs.4,03,36,996/-. The CIT(A) reduced the disallowance to Rs.26,09,386/-. The Revenue appealed against the deletion/reduction of disallowance (Revenue appeal), and the assessee appealed against the portion of disallowance sustained by the CIT(A) (assessee appeal).
Legal Issues Presented
- Whether the AO could invoke section 14A read with Rule 8D without recording the required satisfaction under section 14A(2)/(3) and Rule 8D(1).
- Whether the disallowance under section 14A read with Rule 8D should be computed having regard only to the investments that gave rise to the exempt income (dividend of Rs.1,32,638/-), rather than on the entire investment portfolio (including the Rs.103 crore investment).
- Whether interest and other expenses disallowable under Rule 8D(2)(ii) and the fixed 0.5% disallowance under Rule 8D(2)(iii) were correctly computed by the AO in the facts of this case.
Arguments of the Parties
Revenue's Arguments (Ld. D.R.)
- The assessee made substantial investments in shares (Rs.103 crore) during the year and its loan account increased by Rs.122 crore; therefore investments were made out of interest-bearing borrowed funds.
- Since the assessee did not prove the source of acquisition of shares (i.e., it did not show that investments were made from its own non-interest-bearing funds), the AO was justified in making proportionate disallowance under section 14A read with Rule 8D, relying on the jurisdictional High Court decision in Dhanuka & Sons v. CIT.
- The CIT(A) erred in reducing/deleting the disallowance; decisions such as Dhanuka & Sons and CIT v. Smt. Leena Ramachandran support sustaining the disallowance where linkage between borrowings and investments is not negated by the assessee.
- The AO applied Rule 8D(2)(ii) and (iii) in computation and the Revenue contends that the AO's original disallowance should be restored (or sustained to a larger extent than allowed by CIT(A)).
Assessee's Arguments (Ld. A.R.)
- The assessee argued that section 14A(2) requires the AO to determine disallowable expenditure only after recording satisfaction as to the correctness of the assessee's claim; the AO in this case did not record such satisfaction.
- Under section 14A(3) the requirement of satisfaction applies also when the assessee claims that no expenditure has been incurred; the assessee's return (which did not make any disallowance) amounted to a claim that no expenditure was incurred.
- Financial statements show that the assessee's share capital increased by Rs.4 crore and reserves increased by Rs.112 crore; the assessee had substantial internal funds available and profits before tax were large (figures in the opinion: profits before taxation approx. Rs.130 crore), indicating that investments could have been funded from its own funds.
- Loans relied upon by Revenue were for Letter of Credit (L.C.) and working capital; banks' sanction letters and security conditions indicate those borrowings were tied to business purposes (e.g., L.C. stock security) and were not available for diversion to acquire investments in shares.
- The assessee pointed to Tribunal precedents (e.g., Balarampur Chini Mills Ltd.) holding that where the assessee explains investments were from own funds and no linkage with borrowings is shown, Rule 8D cannot be mechanically applied to disallow interest.
- Only the investments that actually yielded exempt income (the dividend of Rs.1,32,638/-) should be considered for computing disallowance; large investments that did not produce exempt income in the year cannot be included in the numerator for Rule 8D calculations.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court (as stated in the opinion) |
|---|---|---|
| Dhanuka & Sons v. CIT [2011] 201 Taxman 105 (Kol) / 12 taxmann.com 227 (Cal) | Revenue relied on the holding that in absence of material disclosing source of acquisition of shares (which is within assessee's special knowledge), the assessing authority can make proportionate disallowance. | The Revenue urged application of this decision to support sustaining the AO's disallowance because the assessee did not establish the source of the share acquisitions. The Tribunal considered this argument but reached its conclusion on other factual and legal bases described in the order. |
| CIT v. Smt. Leena Ramachandran [2011] 339 ITR 296 / 199 Taxman 122 / 10 taxmann.com 109 (Kerala HC) | The opinion records that the Revenue relied upon this decision; the specific principle from the case is not detailed in the provided text. | The Revenue submitted that, in view of this decision, the CIT(A)'s reduction of the disallowance was liable to be reversed. The Tribunal noted the reliance but its reasoning and ultimate findings are set out in the text. |
| Asstt. CIT v. Champion Commercial Co. Ltd. [2012] 139 ITD 108 / 26 taxmann.com 342 (Kol. - Coordinate Bench) | The Coordinate Bench held that it is only where the assessee offers a disallowance under section 14A that the AO is required to record satisfaction; when no expenditure is offered by the assessee, the AO need not record such satisfaction (as reported in the opinion). | The D.R. cited this decision to argue that the AO need not record satisfaction when the assessee has not offered any expenditure. The Tribunal noted this submission but applied the view expressed in Balarampur Chini Mills Ltd. (see next row) in reaching its conclusion that the AO must record satisfaction before invoking Rule 8D. |
| Balarampur Chini Mills Ltd. v. Dy. CIT [2012] 20 taxmann.com 117 (Kol.) | Holds that section 14A and Rule 8D can be invoked only when the AO is not satisfied with the assessee's account that no expenditure has been incurred; where the assessee has explained investments were from own funds and linkage to borrowings is not established, no interest expenditure can be disallowed by mechanically applying Rule 8D. | The Tribunal relied on this Coordinate Bench decision to hold that, because the AO did not record the required satisfaction and the assessee adduced material showing use of own funds and business-linked borrowings, no disallowance under section 14A could be made (and consequently confirmed the CIT(A)'s deletion on that ground). |
Court's Reasoning and Analysis
The Tribunal's analysis proceeded in two related strands: (A) procedure (satisfaction requirement) and (B) merits (substance of the disallowance and correct computation under Rule 8D).
A. Procedural requirement under section 14A and Rule 8D
- The Tribunal examined section 14A(2) and section 14A(3) together with Rule 8D(1). It noted that when the AO is not satisfied with the correctness of the assessee's claim (including the claim that no expenditure has been incurred), the AO must determine the disallowable expenditure following the method in Rule 8D.
- Section 14A(3) makes subsection (2) applicable to cases where the assessee claims that no expenditure has been incurred; thus the AO must record satisfaction based on the assessee's accounts before invoking Rule 8D.
- The Tribunal found no such satisfaction recorded by the AO in this case. Relying on the Coordinate Bench decision in Balarampur Chini Mills Ltd., the Tribunal concluded that in the absence of the required satisfaction the AO could not make a disallowance under section 14A.
- Accordingly, on the procedural ground alone the Tribunal held that no disallowance under section 14A could be made by the AO (confirming the CIT(A)'s deletion on this point).
B. Merits — what investments and expenses are relevant; correct application of Rule 8D
- The Tribunal emphasized that section 14A applies "in relation to the income which does not form part of the total income" — here the exempt income was dividend of Rs.1,32,638/-. Therefore any disallowance must relate to expenditure incurred in relation to that specific exempt income.
- Not all investments in an assessee's portfolio are to be considered for Rule 8D calculations; only those investments that gave rise to the exempt income in question are relevant. The Tribunal held that the AO had incorrectly used the entire Rs.103 crore investment (which did not produce exempt income in the year) in the numerator for Rule 8D(2)(ii) computations.
- Rule 8D(2)(ii) covers interest expenditure "not directly attributable" to any particular income; the Tribunal observed that if interest is directly attributable to a particular income or receipt it should not be captured under 8D(2)(ii). The onus to show that interest is "not directly attributable" rests with the AO, consistent with the requirement of satisfaction in Rule 8D(1).
- On facts the Tribunal considered: the assessee's balance-sheet showed increases in share capital (+Rs.4 crore) and reserves (+Rs.112 crore), significant profits, and that loans were sanctioned for Letters of Credit and working capital with security tied to stock — all indicating borrowings were for business and not diverted to purchase investments in shares. Banks would not permit diversion of LC loans to make investments, the Tribunal noted.
- Given these facts the CIT(A)'s finding that borrowings were not used to purchase shares was affirmed by the Tribunal; consequently no disallowance under Rule 8D(2)(ii) could be sustained.
- Regarding Rule 8D(2)(iii) (a fixed disallowance equal to 0.5% of the average value of the relevant investments), the Tribunal clarified that the base (numerator B) should be the average value of those investments "the income from which does not form or shall not form part of the total income" — i.e., investments that actually gave rise to exempt income — not the whole investment portfolio at the beginning and end of the year.
- The Tribunal found that the AO's computation under Rule 8D(2)(ii) and consequently the Rule 8D(2)(iii) computation suffered from a substantial error by including the Rs.103 crore investment which had not generated exempt income in the year.
- As to the assessee's specific appeal on Rule 8D(2)(iii), the Tribunal directed that the computation be restored to the file of the AO for recomputation in line with the principles articulated (i.e., consider only investments that gave rise to the exempt income and apply the satisfaction/attribution analysis). It also held that no disallowance under Rule 8D(2)(i) and (ii) can be made in this case on the facts before it.
Holding and Implications
Holding: Revenue appeal (ITA No.1423/Kol/2011): DISMISSED. Assessee appeal (ITA No.1331/Kol/2011): PARTLY ALLOWED (for statistical purposes) and remitted to AO for recomputation on a limited issue).
Implications / Consequences:
- The Tribunal confirmed the CIT(A)'s deletion of the AO's disallowance under section 14A to the extent that the AO had not recorded the required satisfaction under section 14A(2)/(3) and Rule 8D(1), and affirmed that no disallowance under Rule 8D(2)(i) and (ii) could be made on the present facts.
- For the specific fixed disallowance under Rule 8D(2)(iii), the Tribunal directed a recomputation by the AO confined to investments that actually produced the exempt income (dividend) and in accordance with the Tribunal's directions on attribution and the numerator (average value) to be used.
- Direct result for the parties: the Revenue's challenge failed; the assessee obtained relief from a large disallowance originally made by the AO, subject only to a recomputation limited to the Rule 8D(2)(iii) issue as directed.
- The order applies the Tribunal's understanding of section 14A and Rule 8D in the factual matrix before it; the opinion does not purport to lay down any novel principle beyond its application of the cited authorities and the statutory scheme. (The opinion considered several precedents in its reasoning and relied on the Coordinate Bench decision in Balarampur Chini Mills Ltd. in reaching the outcome.)
Result reported in the order: Revenue appeal dismissed; assessee appeal partly allowed for statistical purposes; matter remitted for limited recomputation as specified.
ORDER
George Mathan, Judicial Member - The ITA No.1331/Kol/2011 is an appeal filed by the Assessee and the ITA No.1423/Kol/2011 is an appeal filed by the Revenue against the order of the CIT(A), Central-I, Kolkata in appeal No.03/CC-XXVII/CIT(A),C-II/10-11 dated 2nd August, 2011 for the assessment year 2008-09.
2. Shri L.K.S. Dehiya, CIT,D.R appeared on behalf of the Revenue and Shri Ravi Tulsiyan. FCA appeared on behalf of the assessee.
3. In the assessee's appeal, the assessee has raised the following grounds:
3.1 In the Revenue's appeal, the Revenue has raised the following grounds:
"01. That in the facts and circumstances of the case and in law, the Learned CIT(A) has erred in law in deleting the disallowance of Rs.37727610/- in respect of interest made u/s.14A of the Act read with Rule 8D of IT rules by holding that the investment of shares was made out of own funds of the assessee without considering that the linkage between the funds borrowed and the investments, the income of which is exempt, was not established by the assessee.
02 That in the facts and circumstances of the case, the Ld. CIT(A) has erred in law in deleting the disallowance of Rs.3,77,27,610/- in respect of interest made u/s.14A r/w Rule 8D of the Act, in view of the decision of the Hon'ble Kolkata High Court in the case of Dhanuka & Sons v. CIT [2011] 201 Taxman 105 (Kol) (Mag)/12 taxmann.com 227 (Cal.) , wherein it has been held that in the absence of any material disclosing the source of acquisition of shares which is within the special knowledge of the assessee, the assessing authority can make proportionate disallowance.
03 That the Department craves leave to add, modify or alter any of the above ground(s) of appeal and/or adduce additional evidence at the time of hearing of the case."
4. At the time of hearing, it was submitted by the ld. D.R. that the assessee is a company which is doing the business of rice processing, power generation and retail sale. It was a submission that during the year, the assessee had received dividend income of Rs.1,32,638/-, which was claimed as exempt. The assessee had not debited any expenses in respect of expenditure incurred for earning such exempt income. The AO has invoked the provisions of section 14A read with rule 8D of the Act and has made a disallowance of an amount of Rs.4,03,36,996/-. It was a submission that on appeal, the ld. CIT(A) had reduced the disallowance under section 14A to Rs.26,09,386/-. It was a submission that against the relief granted of Rs.4,03,36,996/-, the Revenue has filed the appeal in ITA No.1423/Kol/2011 and in respect of disallowance confirmed by the CIT(A) to the extent of Rs.26,09,386/-, the assessee has filed the appeal in ITA No.1331/Kol/2011. It was a submission that the ld. CIT(A) had considered the various case laws to come to the conclusion that no disallowance under section 14A would be made. It was a submission that the case laws relied on by the ld. CIT(A) related to the period prior to the assessment year 2008-09, being the assessment year from which the provisions of Rule 8D came into application. It was a submission that the assessee had invested Rs.103 crores in shares during the relevant assessment year. It was a further submission that there was no increase in the share capital during the relevant assessment year. It was a submission that however, the assessee's loan account had increased by Rs.122 crores. It was, thus, the submission by the ld. D.R. that the investment in the shares was out of interest bearing funds. It was a submission that the ld. CIT(A) had in his order in para 4.1 held that the assessee was having a common pool in respect of its own fund as also its loan fund. It was a submission that as the assessee had used interest bearing fund for purchasing shares and the assessee had paid interest on the same, the disallowance as made by the AO by invoking the provisions of section 14A read with Rule 8D was liable to be upheld. It was a further submission that though the AO has in his assessment order specifically held that there is no disallowance liable to be made under rule 8D(i), disallowance under rule 8D(ii) had been made on the basis of the computation provided thereunder, as also under Rule 8D(iii). It was a submission that in view of the decision of the Hon'ble Jurisdictional High Court in the case of Dhanukha & Sons v. CIT [2011] 201 Taxman 105 (Mag.)/12 taxmann.com 227 (Cal.) , it was for the assessee to show the source of acquisition of the shares by production of the materials that those were acquired from funds available in the hands of the assessee at the relevant point of time without taking benefit of any loan. The assessee having not shown such availability of funds, the disallowance was liable to be upheld.
4.1 He also relied upon the decision of the Hon'ble Kerala High Court in the case of CIT v. Smt. Leena Ramachandran [2011] 339 ITR 296/199 Taxman 122 (Mag.)/10 taxmann.com 109 . It was a submission that the order of the ld. CIT(A) was liable to be reversed to the extent that he has reduced the disallowance.
5. In reply, the ld. A.R. submitted that as per the provisions of section 14A(2), the AO was to determine the amount of expenditure incurred in relation to such income which does not form part of the total income, in accordance with such method as may be prescribed. It was a further submission that there was also supposed to be satisfaction to the correctness of the claim of the assessee. It was a submission that at the outset, the AO has not shown that the claim of the assessee that there is no amount disallowable was wrong nor is there any satisfaction recorded to such effect. On this point, the ld. D.R. submitted that the Coordinate Bench of this Tribunal has, in the case of Asstt. CIT v. Champion Commercial Co. Ltd. [2012] 139 ITD 108/26 taxmann.com 342 (Kol.) , held that it is only where the assessee offers a disallowance under section 14A, the AO is required to record satisfaction. When no expenditure is offered by the assessee, the AO need not record such satisfaction.
5.1 It was submitted by the ld. A.R. that as per the provisions of section 14A(3), the provisions of sub-section (2) also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to the income which does not form part of the total income under the Act. In the return filed by the assessee, there is no provision for making a claim that there is no expenditure. The fact that the assessee did not make any disallowance under section 14A, in the return filed itself was the claim that no expenditure has been incurred. The ld. A.R. further drew our attention to P&L a/c. of the assessee for the year ended on 31.03.2008 as also the balance-sheet, which were at pages 78 to 95 of the paper book. It was a submission that the shareholders' funds in the balance-sheet showed that the share capital had increased by Rs.4 crores during the relevant assessment year and the Reserves and Surplus had gone up by Rs.112 crores. The loan fund had increased by Rs.122 crores. It was a submission that the loan funds were used for the acquisition of assets as also towards working capital and in fact the fixed assets net block increased by Rs.116 crores, after considering a depreciation of 57 crores. It was, thus, a submission that the actual increase in the fixed assets when compared to the net block for the year ended on 31.03.2007 was 174 crores. It was a submission that the profits available to the assessee before taxation for the assessment year 2008-09 was Rs.130 crores and the profit, after taxation, was Rs.109 crores. The amount available for appropriation for the assessment year 2008-09 was Rs.128 crores. He further drew our attention to the investments during the year, which is shown at page 84, being the investment in Varrsana Ispat Limited at Rs.103 crores. It was a submission that the other investments, which were there as on the beginning of the assessment year was to an extent of Rs.58,27,282/-. It was a submission that it is out of the shares of this investment of Rs.58,27,282/-, the assessee had received the dividend income and not on the investment of Rs.103 crores. The ld. A.R. further drew our attention to page 362 of the paper book, which was the copy of the loan sanction document from the State Bank of Bikaner and Jaipur dated 22.12.2007 for letter of credit of Rs.175 crores. It was a submission that this was on the security of the stock available with the assessee. He further drew our attention to page 370 of the paper book, which was the letter from Allahabad Bank for reviewing and enhancing the limits for working capital from the existing Rs.250 crores to Rs.500 crores. It was a submission that this was also enhanced working capital limit, which was to be released only after the tie-up of the entire limit of Rs.1800 crores from the Consortium. This was also for the Letter of Credit purpose. He further drew our attention to pages 372, 374 and 381, which were all credit sanction advices given by the various banks, being United Bank of India, Indian Overseas Bank. It was a submission that all these were for L.C. only. It was a submission that all the loans were directly related to the business of the assessee. The ld. A.R. further drew our attention to the decision of the Coordinate Bench of this Tribunal in the case of Balarampur Chini Mills Ltd. v. Dy. CIT [2012] 20 taxmann.com 117 (Kol.) , wherein the Tribunal has held that section 14A and Rule 8D can be invoked only when the AO is not satisfied with regard to the account of the assessee that the claim of expenditure made by the assessee is not correct and the claim made by the assessee that no expenditure has been made in relation to income, which does not form part of total income under the Act. Where the assessee has explained that the share capital and reserves, that is its own funds, were utilized for the purpose of investment in shares for earning dividend income which has not been negated by lower authorities and there is no linkage or nexus between the funds borrowed by the assessee and the impugned investments, no interest expenditure can be disallowed by mechanically applying the provisions of rule 8D. It was a submission that the decision of the Hon'ble Jurisdictional High Court in the case of Dhanuka & Sons (supra) would not apply in so far as in that case the assessee was not able to show that the investment was made out of its own independent non-interest bearing funds. It was a submission that no disallowance under section 14A could be made.
6. We have considered the rival submissions. A perusal of the provisions of section 14A, more specifically sub-section (2), shows that if the AO is not satisfied with the correctness of the claim of the assessee, then the AO shall determine the amount of expenditure incurred in relation to such income, which does not form part of total income under the Act. For this the method is prescribed in rule 8D. The provision of section 14A, sub-section (3) specifies the provision of section 14A(2) would also apply where the assessee makes a claim that there is no expenditure incurred. This is because if the assessee does not make a disallowance under section 14A in its computation of total income, when filing the return, then if sub-section (3) was not available, the AO might not be able to make a disallowance under section 14A. Thus, where the assessee makes a claim that only a particular amount is to be disallowed under section 14A or where the assessee does not make a disallowance under section 14A, if the AO proposes to invoke section 14A, he is to record a satisfaction on that issue. This satisfaction cannot be a plain satisfaction or a simple note. It is to be done with regard to accounts of the assessee. In the present case, there is no satisfaction by the AO and consequently, in view of the decision of the Coordinate bench of this Tribunal in the case of Balarampur Chini Mills Ltd. (supra), no disallowance under section 14A can be made.
7. Now coming to the merits of the issue. A perusal of the provision of section 14A(1) clearly shows the wordings, "in relation to the income which does not form part of the total income under this Act". In the present case, this income, which does not form part of the total income under the Act, is the dividend income of Rs.1,32,638/-. Therefore, if any disallowance is to be made in respect of expenditure incurred, it should be in relation to this dividend income of Rs.1,32,638/-. If an assessee has invested in shares, which could get dividend or there is investment which generates dividend income or exempt income as also investment which does not generate exempt income, it is only such investments in respect of which the dividend income or exempted income has been earned which can be considered when computing the disallowance under section 14A read with rule 8D. A perusal of the provisions of rule 8D also talks of satisfaction in sub-rule (1). Rule 8D(2) has three sub-parts. The first sub-part i.e. (i) deals with the amount of expenditure directly relating to the income which does not form part of the total income. That issue is not in dispute here and therefore, we do not go into it in this case. In second sub-part i.e.(ii), it is a computation provided in respect of expenditure incurred by the assessee by way of interest during the previous year which is not directly attributable to any particular income or receipt. This clearly means that if there is any interest expenditure, which is directly relatable to any particular income or receipt, such interest expenditure is not to be considered under rule 8D(2)(ii). In the assessee's case here the interest has been paid by the assessee on the loans taken from the banks for its business purpose. There is no allegation from the banks nor the AO that the loan funds have been diverted for making the investment in shares or for non-business purposes. Further rule 8D(2)(ii) clearly is worded in the negative with the words "not directly attributable". Thus for bringing any interest expenditure, claimed by the assessee, under the ambit of rule 8D(2)(ii) it will have to be shown by the AO that the said interest is not directly attributable to any particular income or receipt. Why we say here that it is to be shown by the AO is on account of the words in Rule 8D(1) being
"(1) Where the Assessing Officer, …… is not satisfied with—
| (a) to (b)** | ** | ** |
in relation to income……., he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule (2).
In the assessee's case, admittedly, the assessee has substantial capital. The increase in the capital itself is to an extent of Rs.4 crores and in respect of reserves and surplus, the increase is Rs.112 crores. The loans taken during the year admittedly are for the letters of credit and the assessee is bound to provide the bank stock statement and other details to show the utilization of the loans. No bank would permit the loan given for one purpose to be used for making any investment in shares. The ld. CIT(A), it is noticed that after considering these facts that the assessee had not used any of its borrowings for purchasing the shares, has deleted the disallowance. On this ground itself, the deletion as made by the ld. CIT(A) is liable to be confirmed and we do so.
7.1 In any case, the working of the disallowance under sub-part (ii) of sub-clause (2) of rule 8D as made by the AO also suffers from a substantial error in so far as in the said rule in regard to the numerator B, the words used are the average value of the investment, income from which does not form or shall not form part of the total income as appearing in the balance-sheet as on the first day and in the last day of the previous year. Here the AO has taken into consideration the investment of Rs.103 crores made this year, which has not earned any dividend or exempt income. It is only the average of the value of the investment from which the income has been earned which is not falling within the part of the total income that is to be considered. This is why the question of satisfaction is provided in section 14A and rule 8D(1), that relates to the accounts of the assessee. Thus, it is not the total investment at the beginning of the year and at the end of the year, which is to be considered but it is the average of the value of investments which has given rise to the income which does not form part of the total income which is to be considered. A question may arise as to why the term "average of the value of investment" is then used. The term average of the value of investment would be to take care of cases where there is the issue of dividend striping. In any case, as we have already held that the assessee has not incurred any expenditure by way of interest during the previous year, which is not directly attributable to any particular income, the findings of the ld. CIT(A) on the issue stand confirmed and consequently the appeal filed by the Revenue stands dismissed.
8. In respect of provisions of rule 8D(2)(iii), which is the subject-matter of the appeal in the assessee's hand, a perusal of the said provision shows that what is disallowable under rule 8D(2)(iii) is the amount equal to ½ percentage of the average value of investment the income from which does not or shall not form part of the total income. Thus, under sub-clause (iii), what is disallowed is ½ percentage of the numerator B in rule 8D(2)(ii). Again this is to be calculated in the same line as mentioned earlier in respect of Numerator B in rule 8D(2)(ii) of the Act.
8.1 Thus, not all investments become the subject-matter of consideration when computing disallowance under section 14A read with rule 8D. The disallowance under section 14A read with rule 8D is to be in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income. Under the circumstances, the computation of the disallowance under section 14A read with rule 8D(2)(iii), which is issue in the assessee's appeal, is restored to the file of the AO for recomputation in line with the direction given above. No disallowance under section 14A read with rule 8D(2)(i) and (ii) can be made in this case.
9. In the result, the appeal filed by the Revenue stands dismissed and the appeal filed by the assessee stands partly allowed for statistical purposes.
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