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A.C.I.T. Circle - V Sigma Cartons (P) Ltd. ITA No.

769/Chd/2011 Assessment Year: 2008-09 ITAT CHANDIGARH

1) Assessee has made investment of Rs. 51,02,000/- and Rs. 1,53,52,000/- as on 31.3.2007 and 31.3.2008. The income from investments was found to be exempt. Since the assessee has incurred interest expenses the Assessing Officer invoked Section 14A of the Act along with Rule 8D of IT Rules and calculated the disallowance u/s 14A at Rs. 4,75,974/-.CIT(A) it was mainly stated that there was no nexus between the investments made and the loan taken by the assessee, therefore, no addition can be made u/s 14A.
Though the ld. CIT(A) deleted the addition by observing that investment in mutual fund is out of current account but it was not denied before us that all the receipts are being credited to the current account which means current account is dealing with the combined fund of the assessee-company. The assessee has nowhere shown that the interest free funds were available for investment in mutual fund.

2) In fact the Hon'ble Bombay High Court has noted this position and thenconfirmed that theory of
apportionment of expenses is very much applicable in Section14A. In fact at placitum 28 it has observed as under: During the course of this judgment, it would be necessary to revisit the decision of Hon'ble Supreme Court in Walfort. At this stage, however, it needs to be emphasized that the provisions of section 14A were construed in Walfort to evince Parliamentary intent not to allow deduction in respect of any expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act against taxable income. Section 14A is clarificatory of the position that expense can be allowed only to the extent that they are relatable to the earning of taxable income. Only those expenses whichare in respect of the earning of taxable income can be allowed. The section14A broadens the theory of apportionment of expenditure between taxable andnon-taxable income is evident from the following observations of the Hon'ble Supreme Court:The theory of apportionment of expenditure between taxable and non taxable has, in principle, been now widened u/s 14A. Reading section14 in juxtaposition with sections 15 to 59, it is clear that the words expenditure incurred in section 14A refers to expenditure on rent ,taxes, salaries, interest, etc., in respect of which allowances are provided for (see sections 30 to 37).

3) Thus on the basis of above, it was held that after introduction of Section 14A, it was possible to
apportioned the expenditure between taxable income and exempted income.

4) This theory of apportionment as approved by the Hon'ble Supreme Court in case of CIT V.
Walfort Share and Stock Brokers P Ltd (2010) 326 ITR 1 (S.C) was also approved by the Hon'ble Jurisdictional Punjab & Haryana High Court in ITA 565 of 2006 in case of PSIDC order dated 18.7.2011 and disallowance u/s 14A/80M held to be justified.

5) Held that rule 8D of IT Rules is applicable in the year before us and accordingly disallowance has been worked out as per Rule 8D of IT Rules.