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The present appeal is filed by the Revenue against the order of the CIT (A) -4, Bengaluru, dt.26.04.2016, for the assessment year 2012-13, on the following effective grounds :
2. On facts of the case, the Ld. CIT (A) has erred in holding that in case the nexus between the investment and interest bearing funds is not established, section 14A r.w.r 8D has not applicability at all, when it is stated in Circular No.5/2014 dated 11/02/2014 that the disallowance u/s.14A r.w.r 8D has to be made even when the tax payer on a particular year has not earned any exempted income.
3. On facts of the case, the Ld. CIT(A) is not justified in deleting the 14A addition made under Rule 8D when the AO has rightly made the disallowance after analysing the investment portfolio and the balance sheet given by the assessee.
02. Brief facts are, the assessee is engaged in the business of Real Estate Property development. The AO disallowed an amount of Rs.62,38,066/- by invoking the provisions of section 14A r.w.r 8D. Feeling aggrieved by the disallowance, the assessee filed appeal before the CIT (A), who has allowed the ground of appeal of the assessee vide the impugned order. Therefore the Revenue is in appeal before us.
03. The Ld. DR has submitted that the order passed by the CIT (A) is in contradiction of the circular No.5/2014, dt.11.02.2014, and has submitted that the order passed by the CIT (A) is without any merit and is liable to be set aside.
04. No appearance was made on behalf of the assessee. Therefore we decide this appeal in the absence of any assistance by the assessee.
05. We have heard the Ld. DR. The AO had made two disallowances as follows :
i) Rs.55,77,766/- being indirect interest worked out under Rule 8D(2)(ii)
ii) Rs.6,66,300/- being 0.5% of average amount of tax exempt investment under Rule 8D(2)(iii).
06. We will first deal with the ground pertaining to Rule 8D(2)(ii). In this regard the CIT (A) has reproduced the fund-flow of the term loan in his order which is as follows : Besides that it was the case of the assessee before the CIT (A) that the assessee was having surplus funds and no evidence was brought on record to prove that the borrowed funds were diverted towards the investment.
The Hon’ble Karnataka High Court in the matter of Microlabs Ltd.*  79 taxmann.com 365 (Karnataka)
“5. For the second question, the observations made by the Tribunal in the impugned order reads as under: "32. Ground No.2 raised by the assessee reads as follows:-
"2. The learned Commissioner of Income Tax (Appeals) has erred in sustaining the additions made by the assessing officer u/s. 14A read with rule 8D on the ground that the appellant has not produced the evidentiary support in relation to dispersal of loan and utilization of loan. Whereas the appellant has produced the evidence that the amount invested was out of positive bank balance and no borrowings were utilized for the purpose of investment."
33. The assessee earned dividend income of Rs.38,75,857. It quantified a sum of Rs.3,22,426 as expenditure incurred in earning tax free income dividend income which does not form part of the total income and which is to be disallowed u/s. 14A of the Act.
34. The break-up of the sum of Rs.3,22,426 is not specifically given, but is stated to be relating to management fee, legal & professional charges, security transaction charges and NSDL charges. It is thus clear that the assessee by implication had claimed that there was no expenditure incurred by way of interest, either directly or indirectly, which is attributable to the borrowed funds which were used for the purpose of investment which yielded tax free income.
35. The AO observed that Schedule G to the Financial Statements of the assessee had shown investment to the tune of Rs.28,45,29,937 in shares mutual funds of various companies He was of the view that such investments cannot be made routinely. No prudent businessman would make any investment without applying the resources wisely. Obviously this entails expen iture, direct as well as indirect. He thereafter proceeded to make disallowance u/s. 14A of the Act, which is given as annexure to the assessment order and enclosed as ANNEXURE-II to this order.
36. Aggrieved by the assessment order, the assessee preferred appeal before the CIT(Appeals).
37. Before CIT(A), the assessee submitted that interest bearing loans were borrowed for specific purposes and not for investment purposes and in support of the above contention, the Assessee filed copies of balance sheets as on 31.03.2003 upto 31.03.2009 to show that the various loans availed from banks were all taken for specific purposes and could not have been utilized for making any investments out of which exempt income was earned. These loans
include short term loans from IDBI Bank, Exim Bank, Barclays Bank and Standard Chartered Bank in respect of which it was explained that the loans could not have been used for making any long term investment. Copies of some communications from banks regarding sanction of the loans were also filed before me to substantiate the nature of the loan. In respect of IDBI loan, it was submitted that the same had been returned back before the year end, thus bringing the balance to Nil.
38. On consideration of the above submissions and on perusal of the relevant documents, the CIT(A) was of the view that the claim of the Assessee was not evidenced from the documents submitted in view of the loans and other sources of funds being mixed up in the common pool of funds. The CIT(A) further held that the burden of proof in this matter clearly continues to rest with the Assessee and that it was not enough to merely show that surplus funds were available or that bank loans had been availed for specific purposes including short term reasons. A one-to-one correlation must also be established to prove that the loans were absolutely utilized for the purpose for which they were claimed. The CIT(A) also held that there was no utilization certificate from the bank filed before the AO nor was such evidence furnished before the CIT(A). The CIT(A) also held that the documents submitted from the bank during the course of appeal only refer to the disbursal of the loan and even these specify certain conditions required to be met. The date-wise actual disbursal and
utilization is not proved from the ledger copies as submitted. The CIT(A) also referred to the decision of Mumbai ITAT in the case of Hercules Hoists Ltd. (ITA No.7944, 7946, 2255 & 7943/mum/2011), wherein it was held that with the introduction of Rule 8D the burden of proof on the assessee has become "more stringent, so that rather than showing existence of sufficient capital, the matter would be required to be examined from the stand point of utilization of the
borrowed interest bearing funds." In the absence of categorical utilization cer ificate from the bank, the CIT(A) was of the view that there was no evidentiary support of the assessee's claim. Hence, the disallowance u/s.14A of the Act as made by the AO was upheld by the CIT(A).
39. Aggrieved by the order of CIT(A), the assessee has raised ground No.2.
40. We have heard the rival submissions. A copy of the availability of funds and investments made was filed before us which is at pages 38 to 42 of the assessee's paper book and the same is enclosed as ANNEXURE-III to this order. It is clear from the said statement that the availability of profit, share capital and reserves & surplus was much more than investments made by the assessee which could yield tax free income.