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No S. 14A disallowance in absence of nexus between investment in tax-free securities & borrowed funds. S. 14A disallowance cannot exceed exempt income
In AY 2007-08, the assessee received dividend of Rs. 4 lakhs in respect of investment in shares made in earlier years. No investments were made during the year. It was claimed that the investment in the earlier years was made out of reserves & surplus and that there was no expenditure incurred during the year to earn the dividend. The AO held that as in the earlier years, the assessee had borrowed funds, s. 14A applied. He applied the rate of interest paid on the borrowings and disallowed Rs. 12.73 lakhs. This was deleted by the CIT (A). On appeal by the department, HELD dismissing the appeal:
(i) If there is no nexus between borrowed funds and investments made in purchase of shares, disallowance u/s 14A is not warranted (Winsome Textiles 319 ITR 204 (P&H) & Hero Cycles 323 ITR 518 followed);
(ii) As the total dividend income received was Rs.4 lakhs, a disallowance of Rs.12 lakhs by invoking s.14A is not warranted.
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