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Facts
The Revenue filed appeals against the orders of the CIT(A) for Assessment Years 2013-14 and 2014-15. The appeals relate to the deletion of disallowances made by the Assessing Officer under Section 14A read with Rule 8D, and disallowance of interest expenditure under Section 36(1)(iii). The assessee is engaged in the business of dealing in shares and securities.
Held
The Tribunal held that the CIT(A) was justified in deleting the disallowance under Section 14A r.w. Rule 8D(2)(ii) based on the principle that the assessee had sufficient interest-free funds. For disallowance under Rule 8D(2)(iii), the CIT(A) correctly restricted it to the actual expenses. The Tribunal also held that for disallowance of interest expenditure under Section 36(1)(iii), there is a legal presumption that interest-free advances are made out of interest-free funds available with the assessee, and the CIT(A) correctly deleted the disallowance.
Key Issues
1. Whether the disallowance under Section 14A r.w. Rule 8D was justified when the assessee had sufficient interest-free funds? 2. Whether the disallowance of interest expenditure under Section 36(1)(iii) was justified given the availability of interest-free funds?
Sections Cited
14A, 8D, 36(1)(iii), 10(34), 143(3)
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Income Tax Appellate Tribunal, “C” BENCH MUMBAI
Before: SHRI SANDEEP GOSAIN & SHRI GIRISH AGRAWAL
Present for: Assessee : Shri Devendra Jain, Advocate Revenue : Shri Virabhadra Mahajan, Sr. DR Date of Hearing : 01.10.2025 Date of Pronouncement : 31.10.2025 O R D E R PER GIRISH AGRAWAL, ACCOUNTANT MEMBER: These two appeals filed by Revenue are against the order of ld. CIT (A) 51, Mumbai vide order nos.- i) ITBA/APL/S/250/2025-26/1075771899(1) dated 23/04/2025 passed against the assessment order by ITO, Ward – 2(2)(4), Mumbai, u/s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 28.03.2016 for Assessment Year 2013-14 and ii) ITBA/APL/S/250/2025-26/1075772203(1), dated 23/04/2025 passed against the assessment order by ACIT, Circle-2(2)(2), Mumbai, u/s. 143(3) of Act, dated 30.12.2016 for Assessment Year 2014-15.
A. Whether on the facts and the circumstances of the case and in law, the the Ld. CIT(A) was justified in deleting the disallowance of Rs.65,88,017/- made u/s 14A r.w. Rule 8D(ii) and restricting the disallowance made u/s 14A r .w. Rule 8D(iii) to Rs.83,708/-? B. Whether on the facts and the circumstances of the case and in law, the the Ld. CIT(A) was justified in deleting the disallowance u/s 14A read with Rule 8D(2)(ii) stating that the asses see' s own funds are far more than the investments made by the assessee yielding dividend income by relying on the decision of the Hon 'ble Bombay High Court in the case of CIT v. HDFC Bank Ltd. (366 ITR 505), whereas the Hon'ble Supreme Court in paras 42 & 43 of their decision in the case of Maxopp Investments Ltd. v. CIT in Civil Appeal No. 104-109 of 2005 dated 12/02/2018 have upheld the principle of apportionment in cases where the assessee has mixed funds and interest has been paid? C. Whether on the facts and the circumstances of the case and in law, the the Ld. CIT(A) was justified in deleting the disallowance u/s 36(1)(iii) of the I. T. Act of Rs. 5,71,88,880/- on account of diversion of borrowed funds for non- business purposes without appreciating the fact that the assessee failed to discharge the onus of establishing the nexus of own funds with interest free loan and advances made ?
A. Whether on the facts and the circumstances of the case and in law, the the Ld. CIT(A) was justified in deleting the disallowance of Rs. 90,49,166/- made u/s 14A r.w. Rule 8D(ii) and restricting the disallowance made u/s 14A r .w. Rule 8D(iii) to Rs.48,742/-? B. Whether on the facts and the circumstances of the case and in law, the the Ld. CIT(A) was justified in deleting the disallowance u/s 14A read with Rule 8D(2)(ii) stating that the asses see' s own funds are far more than the investments made by the assessee yielding dividend income by relying on the decision of the Hon 'ble Bombay High Court in the case of CIT v. HDFC Bank Ltd. (366 ITR 505), whereas the Hon'ble Supreme Court in paras 42 & 43 of their decision in the case of Maxopp Investments Ltd. v. CIT in Civil Appeal No. 104-109 of 2005 dated 12/02/2018 have upheld the principle of apportionment in cases where the assessee has mixed funds and interest has been paid? C. Whether on the facts and the circumstances of the case and in law, the the Ld. CIT(A) was justified in deleting the disallowance u/s 36(1)(ii) of the I. T. Act of Rs. 6.73,83.986/- on account of diversion of borrowed funds for non- business purposes without appreciating the fact that the assessee
Common issues are involved in both the appeals except for variation in quantum of addition. Accordingly, both the appeals are taken up together for adjudication by passing this consolidated order. Facts are extracted from the appeal from Assessment Year 2013-14.
Assessee is engaged in the business of dealing in shares and securities. It filed its return of income on 01.10.2013 reporting the total income at Rs.23,19,774/-. Assessment was completed by making disallowance u/s.14A of Rs.69,50,988/- and u/s.36(1)(iii) of Rs.5,71,88,880/- amongst other additions, for which the assessee is in appeal before us.
We first take up issue relating to disallowance u/s.14A r.w.r. 8D(2)(ii) and (iii). During the year, assessee had received dividend income of Rs.74,77,421/-, claiming it exempt u/s.10(34). Assessee did not make any disallowance u/s.14A in respect of exempt income so received. Ld. Assessing Officer computed the disallowance u/r 8D as under: and 4317/MUM/2025 Pasha Finance Pvt. Ltd. AYs 2013-14 and 2014-15 5.1. Claim of the assessee is that it had sufficient interest free funds available with it which exceeded the value of shares held by it. Details of net worth position vis-à-vis value of shares held is tabulated below: As at 31.03.2013 As at 31.03.2012 Rs. Rs. Share Capital 1,00,000 1,00,000 Reserves & Surplus 21,42,48,438 20,42,23,632 Share Application Money 85,00,000 85,00,000 Net Worth 22,28,48,438 21,28,23,632 Book value of shares held 7,03,44,150 7,48,44,150 as 'Investments' 5.2. From the above table, it was contended that the interest free funds available was Rs.22,28,48,438/- whereas the value of shares held by it as investments is only Rs.7,48,44,150/- (opening). In respect of disallowance u/r. 8D(2)(iii), it was contended that no such expense was incurred for earning the said dividend income. Assessee had debited the following three expenditure to its profit and loss account, out of which amount of Rs.2 lakh towards donation was suo moto added back while computing the business income: i) Auditor's Remuneration Rs.28,090/- ii) Donation Rs.2,00,000/- iii) Professional Fees Paid Rs. 55,618/- ----------------- Rs.2,83,708/- ============ and 4317/MUM/2025 Pasha Finance Pvt. Ltd. AYs 2013-14 and 2014-15 5.3. Assessee placed reliance on the decision of Hon'ble Jurisdictional High Court of Bombay in the case of CIT vs. HDFC Bank Ltd. [2014] 366 ITR 505 (Bom) which held that where an assessee possesses sufficient own funds to cover investments, no disallowance u/s.14A r.w.r. 8D(2)(ii) can be made.
Ld. CIT(A) after considering the factual position and submissions made by the assessee as well as the judicial precedents relied upon, deleted the disallowance made u/r. 8D(2)(ii) in respect of interest expenditure. For the disallowance u/r. 8D(2)(iii), by noting the principle that disallowance u/r. 8D(2)(iii) cannot exceed the actual expenses claimed, he restricted the said disallowance to the amount of actual expense debited to the profit and loss account, i.e., Rs.83,708/- since assessee had already suo moto made a disallowance of Rs. 2 lakhs on account of donation. Thus, partial relief was given by ld. CIT(A) in respect of disallowance u/s.14A r.w.r. 8D(2)(iii).
We have perused the material on record and gone through the order of the authorities below as well as paper book filed by the assessee along with synopsis. Admitted position of fact narrated above remains uncontroverted as nothing cogent is brought on record by the Revenue and the issue is covered by the judicial precedent relied upon. Accordingly, we do not find any reason to interfere with the findings arrived at by ld. CIT(A) on this issue. Ground raised by the Revenue in this respect is dismissed.
On the second issue relating to disallowance u/s. 36(1)(iii) towards interest expenditure claimed by the assessee, ld. Assessing Officer observed that interest income on loans and advances was not comparable to interest expenditure in terms of amount of borrowings and 4317/MUM/2025 Pasha Finance Pvt. Ltd. AYs 2013-14 and 2014-15 and loans and advances given by the assessee. According to him, assessee had diverted higher rate of interest bearing funds to either interest free loans/advances or at lower interest to related parties. Negating the submissions made by the assessee, he made a disallowance of Rs.5,71,88,880/- towards interest expenditure for which assessee went in appeal before the ld. CIT(A). Claim of the assessee is that it had interest free funds amounting to Rs.22,51,39,838/- as on 31.03.2013, out of which Rs.15,47,95,688/- were available after accounting for non-current investments for Rs.7,03,44,150/- in shares, for making interest free advance of Rs.9,50,83,909/-.
8.1. Similar issue had come up before the Tribunal in assessee own case in Assessment Year 2009-10 in order dated 06.10.2016 wherein on similar set of facts, by applying the principles laid down by Hon'ble Jurisdictional High Court of Bombay in the case of Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom) and Hon'ble Supreme Court in the case of CIT vs. Reliance Industries Ltd. [2019] 410 ITR 466 (SC), relief was granted to the assessee. The law laid down in these judicial precedents is that there is legal presumption about interest free advances are made out of interest free funds available with the assessee. Ld. CIT(A) placed reliance on the decision of the Coordinate Bench in assessee’s own case for Assessment Year 2009-10 (supra) and took into account the factual position in respect of interest free funds available with the assessee and deleted the disallowance made by the ld. Assessing Officer.
We have perused the material in this respect placed before us along with orders of the authorities below. In addition to the factual and 4317/MUM/2025 Pasha Finance Pvt. Ltd. AYs 2013-14 and 2014-15 position stated above, ld. Counsel for the assessee referred to the statement showing allocation of interest funds as on 31.03.2013 placed in the paper book in page-19 which is extracted below to demonstrate availability of interest free funds.
9.1. Having considered the factual position, law laid down by judicial precedents referred above and position of the Coordinate Bench in assessee’s own case (supra), we do not find any reason to interfere and 4317/MUM/2025 Pasha Finance Pvt. Ltd. AYs 2013-14 and 2014-15 with the findings arrived at by ld. CIT(A) on this issue. Accordingly, ground raised by the Revenue in this respect is dismissed.
Identical fact pattern exists in the appeal for Assessment Year 2014-15 for which similar submissions are made and placed on record. Ld. CIT(A) has given similar findings, giving relief to the assessee on both the issues in similar manner. Accordingly, grounds raised by the Revenue on both the issues in appeal for Assessment Year 2014-15 are dismissed.
In the result, both the appeals by the Revenue are dismissed.