Interest cannot be disallowed if assessee had ample funds at the time of investing in subsidiary companies

Interest paid on borrowed funds cannot be disallowed when the assessee had ample funds at the time of investing in the equity of subsidiary companies

Mid- Day Multimedia Ltd Vs Dy. CIT (ITAT Mumbai)- The provisions of rule 8D of the Rules which have been notified with effect from March 24, 2008, would apply with effect from assessment year 2008-09. Even prior to assessment year 2008-09, when rule 8D was not applicable, the AO had to enforce the provisions of sub-section (1) of section 14A. For that purpose, the AO is duty bound to determine the expenditure which has been incurred in relation to income which does not form part of the total income under the Act. The AO must adopt a reasonable basis or method consistent with all the relevant facts and circumstances after furnishing a reasonable opportunity to the assessee to place all germane material on the record.

The proceedings for assessment year 2002-03 would stand remanded to the AO. The AO should determine as to whether the assessee had incurred any expenditure (direct or indirect) in relation to dividend income/income from mutual funds which does not form part of the total income as contemplated under section 14A. The AO can adopt a reasonable basis for effecting the apportionment. While making that determination, the AO should provide a reasonable opportunity to the assessee of producing its accounts and relevant or germane material having a bearing on the facts and circumstances of the case. In view of the ratio laid down by the Honourable jurisdictional High court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra), we remit the matter back to the file of the AO with a direction decide the issue afresh in the light of the said judgement of the Honourable Jurisdictional High court after providing reasonable opportunity of being heard to the assessee.