When assessee had substantial mixed funds comprising of internal and external funds to take care of the investments, no disallowance can be made under Rule 8D(2)(ii).

Income—Expenditure incurred in relation to income not includible in total income—Assessee made investment in shares in AY 2009-10 and 2010-11, out of which assessee earned dividend income—Thus, AO observed that assessee was required to disallow expenditure in relation to such investment, income from which does not form part of total income—Assessee contended that since all investments were made out of deployment of internal accruals of the company, no expenditure was incurred by assessee for earning exempt income, as no borrowed funds were utilized in such investments—However, AO concluded that assessee had made substantial investment for maintenance of which, it was essential to incur expenditure and hence, disallowed expenditure u/s 14A r/w Rule 8D—CIT(A) deleted disallowance calculated under Rule 8D(2)(ii), but confirmed disallowance calculated under Rule 8D(2)(iii) in both years—Held, from CIT(A)’s order, it was noticed that assessee had invested in shares etc., income from which does not form part of total income—It was also noticed from assessee’s submissions made before CIT(A) that assessee had also earned an amount as profit from partnership firm, namely M/s. O from investment in AY 2009-10—Share of profit from firm falls u/s 10 and exempt from tax—This fact was not considered by CIT(A) while examining contention of assessee that he had earned exempt income—However, assessee had not declared in his written submission before CIT(A) whether said exempt income was received by assessee in AY 2010-11 or not—Once, assessee had earned substantial exempt income out of investments made in partnership firm, assessee’s contention that he had earned exempt income was nothing but misleading one—Assessee had substantial mixed funds comprising of internal and external funds to take care of impugned investments—Therefore, CIT(A) was justified to delete disallowances made as per Rule 8D(2)(ii)—However, while going through calculation of disallowance made under Rule 8D(2)(iii) by AO, it was not clear whether average value of investment taken pertains to such investment, from which assessee had earned exempt income or not—It was also not clear whether investment made in partnership firm for earning exempt income was considered in it or not—In presence of these facts, this issue also deserved to be remitted back to AO for deciding same afresh after examining true facts and figures of investments—Matter Remanded.

OZONE PHARMACEUTICAL LTD. & ANR. vs. ADDITIONAL COMMISSIONER OF INCOME TAX & ANR.

(2019) 55 CCH 0425 DelTrib