The main legal point established in the judgment is the requirement for the Assessing Officer to establish a nexus between the expenditure and the earning of dividend income, and the need for a satisfaction with regard to the correctness of the claim of the assessee in the context of disallowing interest expenditure under Section 14A.

JUDGMENT

Kamal R. Khata, J. - This appeal is against the impugned order dated 5th April 2017 passed by the Income Tax Appellate Tribunal (ITAT) whereby the respondent's appeal was partly allowed and the revenue / appellant's appeal was dismissed.

STATEMENT OF FACTS:

2. The assessee filed its return for income for A.Y. 2011-12 on 21.11.2011 declaring total income at Rs.358,47,29,328/- under normal provisions and book profit of Rs.431,48,93,079/- under section (u/s) 115JB of the I.T. Act. The return was processed u/s 143(1) of the Act on 23.03.2012. The case was selected for scrutiny and notice u/s 143(2) of the I.T. Act 1961 was issued to the assessee on 01.08.2012. The AO made various additions/disallowances - which includes disallowances u/s.14A r.w. Rule 8D amount to Rs.5,11,85,000/- The AO completed assessment vide order dated 03.03.2014.

3. Being aggrieved by order dated 03.03.2014, the assessee company filed an appeal before the CIT(A).

4. The Ld. CIT (A) by his order dated 17.04.2015 partly allowed the assessee company's appeal.

5. Being aggrieved by order dated 17.04.2015, the Assessee company and the Revenue filed an appeal before the Hon'ble ITAT.

6. The Hon'ble ITAT vide order dated 05.04.2017, allowed the appeal of the Assessee company and dismissed the appeal filed by the Revenue.

7. The questions of law averred in the appeal and placed for our consideration are as under:

a. Whether in law and on the facts of the instant case, was the Tribunal correct in holding that the AO has not recorded any satisfaction that the working of inadmissible expenditure u/s.14A is incorrect having regard to the books of accounts of the assessee, whereas in para 5 of Assessment order, the AO has clearly mentioned that the assessee has set off interest costs in respect of dividend income against other taxable income which is against the matching concept of income and expenditure.

b. Whether in law and on the facts of the instant case, was the Tribunal right in endorsing the CIT(A)'s order of presumption of own interest free funds thereby overlooking the changed law w.e.f. 2007-08 followed by introduction of rule 8D in 2008-09 provides for a method of calculation as a result of which there would be no need to rely on any presumption of own funds. c. Whether on law and in the facts of the instant case, was the Tribunal right in deleting the addition of interest disallowed by the AO, in the absence of any evidence that indicated that borrowed funds were not used for the purpose of making investments that yielded exempt.

d. Whether on law and in the facts of the instant case, was the Tribunal justified in not considering interest expenses while calculating disallowance u/s.14A r.w. Rule 8D although assessee has not maintained separate account for the investment related to exempt income.

8. Mr. Suresh Kumar the learned counsel for the appellant submitted that the Assessing Officer (AO) had clearly mentioned in paragraph no.5 of the assessment order that setting-off interest costs of dividend income against other taxable income is against matching concept of income and expenditure. He submitted that there was no need to rely on any presumption of own funds on account of the changed law that came into force from 2007-08 followed by introduction of rule 8D in 2008- 9 which provides for a method of calculations. It is submitted that in view of the above, the ITAT erred in endorsing the CIT(A)'s order which drew presumption of own interest free funds. He further submitted that the ITAT ought not to have deleted the addition of interest disallowed by the AO, in the absence of any evidence that indicated that borrowed funds were not used for the purpose of making investments that yielded exemption. He further submitted that the ITAT ought not to have been considered interest while calculating disallowance u/s. 14A read with Rule 5D since the assessee had not maintained a separate account for the investment related to exempt income.

9. Mr. Pardiwalla, learned s