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Income Tax Appellate Tribunal, JAIPUR BENCHES “A”, JAIPUR
Before: SHRI RAMESH C SHARMA, AM & SHRI VIJAY PAL RAO, JM vk;dj vihy la-@ITA No. 697/JP/2018
jktLo dh vksj ls@ Revenue by : Shri J.C. Kulhari (JCIT) fu/kZkfjrh dh vksj ls@ Assessee by : Shri Rohan Sogani & Shri Rajiv Sogani (CA) lquokbZ dh rkjh[k@ Date of Hearing : 22/01/2019 mn?kks"k.kk dh rkjh[k@ Date of Pronouncement : 04/02/2019 vkns'k@ ORDER PER: VIJAY PAL RAO, J.M.
This appeal by the revenue is directed against the order dated 26/3/2018 of ld. CIT(A)-I, Jaipur for the A.Y. 2010-11. The revenue has raised following grounds: “
1. Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) was justified in restricting the addition of Rs. 66,26,803/- made by the A.O. on account of disallowance of interest expenses on OD facilities to Rs. 77,733/- even not appreciating that the OD account was used for making investment in mutual funds?
2. Whether on the facts and in the circumstances of the case and in law, the ld. CIT(A) was justified in restricting the disallowance made by the A.O. U/s 14A of the IT Act, 1961 of Rs. 1,62,04,699/- to Rs.
ITA 697/JP/2018_ 2 ACIT Vs. M/s Mahindra World City (Jaipur)Ltd.
1,81,392/- without appreciating the fact that the Statute provide special provisions for computation of disallowance which can be more than that of exempt income claimed by assessee?”
Ground No. 1 of the appeal is regarding the disallowance made by the Assessing Officer on account of interest expenditure of Rs. 66,26,803/- was restricted by the ld. CIT(A) to Rs. 77,732/-.
The assessee filed its return of income on 13/10/2010 declaring total income of Rs. 3,27,35,724/- while completing the scrutiny assessment U/s 143(3) of the Income Tax Act, 1961 (in short the Act) on 26/3/2013, the Assessing Officer made disallowance of Rs. 66,26,803/- U/s 36(1)(iii) of the Act on account of investment made by the assessee in the mutual fund units from the borrowed funds. The Assessing Officer also made disallowance U/s 14A of the Act of Rs. 1,62,04,699/-. On appeal, the ld CIT(A) deleted the addition by considering some fresh evidence without giving an opportunity to the Assessing Officer. The matter was carried to this Tribunal by the revenue and the Tribunal vide order dated 04/8/2016 remitted the matter back to the record of the Assessing Officer for deciding the issue afresh after verification and examination of the additional evidence as well as giving an opportunity of hearing to the assessee. In the set aside proceedings, the Assessing Officer has repeated the addition as made in the original assessment. The ld. CIT(A) in the second round has again deleted the addition except the disallowance of ITA 697/JP/2018_ 3 ACIT Vs. M/s Mahindra World City (Jaipur)Ltd.
interest to the extent of Rs. 77,733/- and disallowance U/s 14A was restricted to the dividend income at Rs. 1,81,392/-. Thus, this is second round of appeal. Here the revenue has again challenged the order of the ld. CIT(A) deleting the additions made by the Assessing Officer.
The ld DR has submitted that the Assessing Officer noted that the assessee has made an investment of Rs. 130,31,56,964/- in the mutual fund units. The source of the same was found other than the redemption of earlier units of mutual funds. The assessee has invested in the said units from OD account in the SBI. The Assessing Officer has noted that a debit balance of Rs. 5,25,93,672/- occurred in the OD account due to the investment in the mutual funds. Accordingly, the Assessing Officer has made a proportionate disallowances of interest U/s 36(1)(iii) of the Act amounting to Rs. 66,26,803/-. The ld DR has contended that the Assessing Officer has considered the debit balance in the OD account to find out the funds used by the assessee from the said account for making investment in the mutual funds and not for making the proportionate disallowance of interest only in respect of OD account as the assessee might have transferred the other borrowed funds in the OD account. The ld DR has thus, submitted that once the assessee was having interest expenditure of more than 28.00 crores, then the interest on OD account alone is not relevant but the overall interest expenditure of the assessee is to be ITA 697/JP/2018_ 4 ACIT Vs. M/s Mahindra World City (Jaipur)Ltd.
considered for the purpose of disallowance U/s 36(1)(iii) of the Act. He has relied upon the order of the Assessing Officer and contended that the ld. CIT(A) has committed an error while restricting the disallowance only to the amount of interest on the OD account and ignoring the other interest expenditure as debited by the assessee in the books of account. He has relied upon the order of the Assessing Officer.
On the other hand, the ld AR of the assessee has submitted that the investment was made from the OD account whereas the total interest expenses in respect of OD account during the year under consideration is only Rs. 77,732/- and therefore, the ld. CIT(A) has rightly restricted the addition to the interest expenditure incurred on OD account. He has further contended that the other loan and borrowed amounts were for specific purpose and were not used for the purpose of investment in mutual funds. The ld AR has further submitted that the assessee’s own interest free fund is more than the investment made during the year under consideration and therefore, no disallowance is called for u/s 36(1)(iii) of the Act. He has filed the balance sheet as on 31/3/2010 and submitted that the assessee was having its own interest free funds of more than the investment made in the mutual funds during the year under consideration.
The ld AR has further submitted that the profit in the year under ITA 697/JP/2018_ 5 ACIT Vs. M/s Mahindra World City (Jaipur)Ltd. consideration is also more than the investment made in the mutual funds.
He has relied on the order of the ld. CIT(A).
We have considered the rival submissions as well as relevant material on record. The Assessing Officer has made disallowance on account of interest expenditure by considering the debit balance in the OD account of Rs. 5,25,93,672/- and then applied average interest rate of 12.6% on the said debit balance to arrive the amount of Rs. 66,26,803/-.
On appeal, the ld. CIT(A) has restricted the said disallowance to Rs. 77,733/- being the actual interest charged on the OD account during the year under consideration. The relevant finding of the ld. CIT(A) in para 3.1.2 is as under:
“3.1.2 Determination:
I have duly considered the submissions of the appellant, assessment order, remand report of the AO and its rejoinder by the appellant and the material placed on record. In the assessment order, it has been observed by the AO that the appellant has made investment of Rs. 130.31 Crore in mutual funds. It was also observed by the AO that other than redemption of earlier years of mutual funds, the appellant had invested in mutual funds from its OD account in SBI. It was observed by the AO that the total debit balance of Rs. 5,25,93,672/- in its OD account was occurred on account of investment in mutual funds and consequently, the AO has disallowed a sum of Rs. 66,26,803/- u/s 36(1)(iii) of the Act. In its submissions, as made earlier, before the Ld. CIT(A), it was stated by the appellant that it has incurred only interest expenses of Rs. 77,732/- on its OD account. However, in the remand report, it was stated by the AO that no specific detail can be matched with the bank account
ITA 697/JP/2018_ 6 ACIT Vs. M/s Mahindra World City (Jaipur)Ltd. statements provided by the appellant and hence, in the absence of specific details, i.e. bank account statement reflecting such entries on interest on OD, the contention of the appellant that it had incurred interest expenses to the tune of Rs. 77,732/- cannot be accepted. It is noted from the details submitted by the appellant, as also furnished before the first appellate proceedings that the total interest payment of Rs. 28,05,45,911/- was consist of interest of Rs. 27,68,51,857/- on term loan, Rs. 17,50,926/- on account of inter corporate deposits, Rs. 16,73,620/- on account of financial charges, Rs. 1,87,343/- on account of bank charges, Rs. 77,733/- on account of OD interest and Rs. 4,432/- on account of others. It is also noted that the appellant has also furnished account wise details of the interest expenses incurred on its three OD bank accounts and in fact, has stated the date wise details of interest debited in these bank accounts along with copies of relevant bank statements, which appears to be totally ignored by the AO in its remand report. It is evident that the interest on account of OD account was to the tune of Rs. 77,733/- only and the disallowance u/s 36(1)(iii) of the Act cannot exceed Rs. 77,733/-. It is an admitted fact that the OD account was used for making investment in mutual funds and therefore, in view of the above discussion and looking to the totality of facts and circumstances of the case, the disallowances of Rs. 66,26,803/- made by the AO u/s 36(1)(iii) of the Act is hereby restricted to Rs. 77,733/-.”
Thus, the ld. CIT(A) has not examined the actual moment and flow of funds in the OD account and has considered only the actual interest charged by the bank to the OD account of the assessee. There is no dispute that the assessee has made the investment of Rs. 130.31 crores in the mutual funds and the said investment was made through the OD account. However, since the debit balance in the OD account did not remain for a long period as there was a corresponding deposits in the OD
ITA 697/JP/2018_ 7 ACIT Vs. M/s Mahindra World City (Jaipur)Ltd. account, therefore, the interest charged on the OD account is very less.
The Assessing Officer while disallowing the proportionate interest has considered the average interest rate by considering the overall interest liability of the assessee, we find that the assessee’s total interest expenditure during the year under consideration is Rs. 28,05,45,911/- consisting of interest on term loan, interest on inter corporate deposits, financial charges, bank charges, interest on OD account etc.. We further note that the OD account of the assessee has been credited from time to time and some of the credits at the time of investment in the mutual funds was of Rs. 8.14 crores, 9.25 crores, 7.40 crores. etc. However, neither the Assessing Officer nor the ld. CIT(A) has verified the source of these credits in the OD account whether these transfers in the OD account were made from the other loan account or assessee’s own fund. If these transfers in the OD account are made from the assessee’s own fund then certainly the disallowance to the extent of the interest charged on the OD account can be considered for the purpose of investment made in the mutual funds but if the said transfer of fund in the OD account is from other loan account or any part of fund is from some other loan account then the disallowance has to be calculated based on the actual borrowed fund utilized for investment in mutual funds. However, since the Assessing Officer has considered the amount of Rs. 5,25,93,672/-, therefore, the disallowance
ITA 697/JP/2018_ 8 ACIT Vs. M/s Mahindra World City (Jaipur)Ltd. should not exceed the amount which was disallowed by the Assessing Officer in the impugned order. Hence, in the facts and circumstances, we find that despite the second round, the assessee has not produced the relevant details to show the moment of the fund in the OD account and specifically the credit/deposits made in the OD account so as to support its contention that the assessee’s own fund was utilized for investment in mutual funds and not the borrowed funds. In absence of the relevant details and evidence, the issue cannot be decided conclusively. Hence, we are constrained to remand the matter again to the record of the Assessing Officer for verification of the source of fund which is deposited in the OD account from where the investment in mutual funds has been made and then decide the issue after giving an opportunity of hearing to the assessee. The assessee is directed to furnish the necessary details and record for verification of the Assessing Officer.
Ground No. 2 of the revenue’s appeal is regarding the disallowance U/s 14A of the Act, which was restricted by the ld. CIT(A) to Rs. 1,81,392/- as against Rs. 1,62,04,699/-.
The Assessing Officer after considering the interest disallowance U/s 36(1)(iii) of the Act has taken the balance interest expenditure of Rs.27,39,19,108/- for the purpose of disallowance U/s 14A of the Act read
ITA 697/JP/2018_ 9 ACIT Vs. M/s Mahindra World City (Jaipur)Ltd. with Rule 8D of the Income Tax Rules, 1962 (in short the Rules). Thus, the Assessing Officer worked out the disallowance on account of interest expenditure U/s 14A of the Act at Rs. 1,48,51,556/- and the disallowance of indirect administrative expenditure being .5% of average investment in mutual funds was made of Rs. 13,53,143/-. Thus, the Assessing Officer has made total disallowance U/s 14A of the Act at Rs. 1,62,04,699/-. The said disallowance made by the Assessing Officer was challenged before the ld. CIT(A). The ld CIT(A) held that the investment in mutual funds was made by the assessee from his own funds and therefore, no disallowance is called for on account of interest expenditure U/s 14A of the Act. As regards the disallowance of common administrative expenditure, the ld. CIT(A) has restricted the same to the dividend income earned by the assessee of Rs. 1,81,392/-.
Before us, the ld DR has submitted that as far as the investment made by the assessee from his own funds, the ld. CIT(A) has not examined the correct source of funds for making investment in mutual funds. This issue is common as the disallowance made by the Assessing Officer U/s 36(1)(iii) of the Act, therefore, the finding of the ld. CIT(A) is not based on the correct facts. The disallowance made on account of indirect/common administrative expenditure, the ld DR has relied upon the order of the Assessing Officer.
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On the other hand, the ld AR of the assessee has submitted that the assessee is having its own interest free funds more than the investment made in the mutual funds and therefore, no disallowance can be made on account of interest expenditure U/s 14A of the Act. He has reiterated its contention as raised in ground No. 1 of the appeal and submitted that even the profit for the year under consideration is more than the investment made in the mutual funds. Further the ld. AR has placed reliance on the series of decisions on the point that the disallowance U/s 14A of the Act cannot be more than the exempt income, therefore, the ld. CIT(A) has rightly restricted the disallowance to the extent of the exempt income of Rs. 1,81,392/- which was earned as dividend during the year under consideration. He has supported the order of the ld. CIT(A).
We have considered the rival submissions as well as relevant material on record. As regards the disallowance U/s 14A of the Act on account of interest expenditure, this issue is common to the disallowance of interest expenditure made by the Assessing Officer U/s 36(1)(iii) of the Act in ground No. 1 of the appeal. Hence, in view of our finding and observation on ground No. 1 of the revenue’s appeal, this issue is set aside to the record of the Assessing Officer on same terms for verification of the moment of the fund and actual source of investment in the mutual funds.
ITA 697/JP/2018_ 11 ACIT Vs. M/s Mahindra World City (Jaipur)Ltd. 12. The disallowance on account of common/indirect administrative expenditure being 0.5% of the average investment as per Rule 8D(2)(iii) of the Rules. Since the dividend income during the year is only Rs. 1,81,392/-, therefore, in view of the binding precedents on this issue, the disallowance made U/s 14A read with Rule 8D(2)(iii) of the Rules, cannot be more than the exempt income. The Hon’ble Delhi High Court in the case of Cheminvest Ltd. v. Commissioner of Income-tax-IV 378 ITR 33 has held that if there is no exempt income earned by the assessee during the year, no disallowance can be made on account of administrative expenditure, therefore, we find that the disallowance restricted by the ld. CIT(A) to the extent of exempt income is proper and justified.
In the result, appeal of the assessee is partly allowed for statistical purposes only. Order pronounced in the open court on 04th February, 2019.