VAISHNAVI INFRASTRUCTURE PRIVATE LIMITED,BANGALORE vs. THE ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE-1(2), BANGALORE

Brief facts of the case are as under: 2.1 The assessee, a Pvt. Ltd. Co. has filed the above appeal against the order passed u/s 153A r.w.s. 254 r.w.s143(3) of the I.T. Act for AY 2011-12 wherein a disallowance of Rs.56,89,037/- Page 2 728 & 695/Bang/2022 has been made U/s. 14A r.w rule 8D(2)(ii) and (iii) of the Income- tax Act, 1961 and a demand of Rs. 29,01,357/- is raised. 2.2 For the year, the assessee filed the return of income on 27.09.2011 vide e-filing acknowledgement No. 294020451270911 declaring an income of Rs. 11,62,01,190/-. 2.3 Thereafter, the assessee had filed the revised return of income electronically on 14-102011 vide e-filing acknowledgement No. 307704771141011 declaring an income of Rs.11,37,56,640/-. 2.4 A search u/s. 132 of the Act was conducted in the case of the assessee on 05.07.2011 and accordingly notice u/s. 153A of the Act dated 27.09.2011 was issued and served on the assessee. In response thereto, the assessee had filed return of income u/s.153A of the Act on 31.10.2011 declaring income of Rs.11,37,56,640/-. 2.5 The case was selected for scrutiny and notice u/s. 143(2) and 142(1) were issued and assessment was concluded vide order passed u/s. 153A r.w.s 143(3) dated 24.03.2014 assessing the income at Rs.11,75,79,395/- as against returned income of Rs.11,37,56,640/-. The addition made to returned income is as follows: Disallowance of Depreciation - Rs. 3,55,887/- Disallowance u/s. 14A r.w.r 8D (Rs. 29,68,522/- + Rs.4,98,346/-) - Rs. 34,66,868/- Total Rs. 38,22,755/- 2.6 In the course of assessment proceedings u/s 143(3) r.w.s 153A of the Act, the assessee had submitted that its own capital and reserves were more than investments in firms and mutual funds and that the assessee had not incurred any expenditure in Page 3 728 & 695/Bang/2022 relation to exempt income earned with respect to investment in firms and mutual funds, and hence no disallowance was made u/s. 14A of the Act. However, not accepting the contention of the assessee, interalia, the disallowance u/s 14A was made by the learned Assessing Officer as stated above. 2.7 Against the assessment order, the assessee had preferred an appeal before honourable CIT(A)-11, Bangalore on 03.04.2014 only against disallowance made u/s. 14A r.w.r 8D of the Act of Rs. 34,66,868/-. The assessee did not prefer any appeal for disallowance made of depreciation of Rs. 3,55,887/-. Ld.CIT(A) confirmed the addition made by Ld.AO for years under consideration. A perusal of chart filed in the appellate proceedings would show that there was a partial utilization or borrowed funds towards exempt investments 2.8 Against the order of Ld.CIT(A), the assessee filed appeal before this Tribunal. Coordinate Bench of this Tribunal passed consolidated order in ITA No. 1007, 1028 to 1031/Bang/2016 dated 28.04.2017 for Assessment Years 2008-2009, 2009-10, 2010-2011, 2011-2012 and 2012-2013. This Tribunal allowed the appeals filed by the assessee for Assessment Years 2008-2009 and 2010-2011. For the remaining 3 years i.e., Assessment Years 2009-2010, 2011- 2012 and 2012-2013, this Tribunal set aside the order of CIT(A)- 11 and restored the issue to the file of Ld.AO with the following remarks in Para 7 of the order. "3. So far as remaining disallowances are concerned, the issue was not examined by the lower authorities in the light of details furnished by the assessee. Apparently it is Page 4 728 & 695/Bang/2022 evident that the assessee has made the investments in mutual fiends through management consultant and earned some exempted income. The assessee has also demonstrated that he has sufficient interest free personal funds which were also invested in mutual funds to earn the exempt income. Therefore, AO ought to have examined this aspect whether, the investment in mutual funds were made out of borrowed funds or personal funds. If personal funds, the issue of disallowance should have been adjudicated in the light of judgment of Hon'ble Apex Court in the case of Munjal Sales Corporation v. CIT 298 ITR 298(SC) and CIT v. Microlabs Ltd., 383 ITR 490 (Kar.) Therefore, we are of the view that the issue requires proper verification and examination by the AO. Accordingly, we set aside the order of the CIT(Appeals) in this regard and restore the issue to the file of Assessing Officer to readjudicate the issue in the light of relevant provisions of the Act afresh, after affording opportunity of being heard to the assessee." ………….. "7. So far as disallowance u/s. 14A of the Act is concerned, our attention was invited that during the AYs 2008-09 and 2010-11, the assessee did not earn any exempted income, therefore no disallowance u/s.14A can be made. With respect to other assessment years, the Id. Counsel for the assessee has contended that he has received exempted on account of investment in mutual funds. Moreover, it was done through management consultant by investing its personal funds. Therefore, no disallowance u/s.14A can be made by blindly applying Rule 8D of the I.T. Rules. The ld. Counsel for the assessee further placed reliance upon the judgement of Hon'ble Karnataka High Court in the case of CIT v. Microlabs, 383 ITR 490 (Kar) and the judgement of Hon'ble Apex Court in the case of Munjal Sales Corporation v. CIT, 298 ITR (CS) in support of his contention that if the investments were made out of mixed funds and own funds and own are sufficient to cover the tax free investments, then presumption will be only that the investments were made out of own funds. Since, the assessee was having sufficient personal finds, the AO ought to have examined this aspect." 2.9 During remand proceedings, the assessee furnished relevant details called for and demonstrated that own funds were more than the investment made which had yielded exempt income.

Page 5 728 & 695/Bang/2022 Vide letter filed on 12.07.2018, the assessee submitted that as the own funds are sufficient to cover tax free income yielding investments, no disallowance is called for u/r 8D(2)(ii) of the Act. 2.10 The assessee with respect to disallowance u/r 8D(2)(iii) submitted that only those investments that yielded exempt income during the year could be considered for the purpose of calculating average investments in terms of Hon’ble Delhi Special Bench decision in the case of ACIT vs Vireet Investment (P) Ltd., 58 ITR (T) 313. 2.11 The Ld.AO however arrived at a sum of Rs.56,89,037/- as disallowance u/s14A r.w.rule 8D(2)(ii) & 8D(2)(iii) of the Act vide order passed order dated 22.10.2018, assessing the income at Rs. 11,98,01,564/-as against assessed income of Rs. 11,75,79,395/- in the earlier order passed u/s. 143(3) r.w.s 153A dated 24.03.2014 and as against returned income of Rs. 11,37,56,640/- as per revised return of income. Ld.AO while calculating the average investments for the purpose of disallowance u/s 14A of the Act, considered only those investments which yielded exempt income during the year. 2.12 The computation as done by the learned Assessing Officer is as under: Sr. No. Average assets yielding As on As on exempt income 31.03.2011 01.04.2010 1. Vaishnavi Infrastructure 9,91,75,354 4,36,74,421 2. Vaishnavi Projects I 1,799 I 1,799 3. Vaishnavi Villas 4,33,04,762 10,45,56,368 4. Valmark Vaishnavi 2,90,43,483 3,34,63,313 Ventures Total 14,54,03,179 18,17,05,899 Page 6 ITA Nos. 727, 728 & 695/Bang/2022 2.13 Being aggrieved by this order passed u/s. 143(3) r.w.s 254 as above, the assessee preferred appeal before the Ld.CIT(A). The Ld.CIT(A) considered the issue by observing as under:

The Ld.AR submitted that the details of free funds available with assessee for years under consideration are as under: Reserve & A.Y. Share Capital Total Surplus 2009-10 9,99,33,330 16,45,79,425 26,45,12,755 2011-12 9,99,33,330 26,55,22,040 36,54,55,370 2012-13 9,99,33,330 36,45,27,109 46,44,60,439 4. The Ld.AR further submitted that the investments made in Mutual funds and other partnership / companies are as under: Investment in Investment in A.Y. partnership / Mutual funds Co. 2009-10 24,93,80,359 - 2011-12 22,65,22,769 6,67,253 2012-13 11,78,26,312 - Page 12 ITA Nos. 727, 728 & 695/Bang/2022

The Ld.AR submitted that assessee had also received income from partnership firms in all the years under consideration and for A.Y. 2011-12 & 2012-13, assessee earned income from mutual funds also as under: Income from Income from A.Y. investment in mutual funds partnership 2009-10 61,75,244 - 2011-12 6,46,61,298 6,67,253 2012-13 8,34,81,498 4,73,396 6. It was thus submitted that own funds far exceeded the value of investments. She placed reliance on the following decisions:

Decision of Hon’ble Supreme Court in case of Munjul Sales Corpn. Vs CIT reported in 298 ITR 298 2. Decision of Hon’ble Bombay High Court in case of CIT vs Reliance Utilities & Power Ltd. reported in 313 ITR 340 3. Decision of Hon’ble Madras High Court in case of CIT vs Sambandham Spinning Mills Ltd. reported in 298 ITR 306 7. She also relied on the decision of Coordinate Bench of this Tribunal in case of DCIT vs. Bosch Ltd. reported in (2017) 87 taxmann.com 351 in support of her contentions.

We note that from the extract of the tables reproduced hereinabove, assessee has share capital and reserve & surplus more than the investment made during the respective assessment years. We refer to the view expressed by Coordinate Bench of this Tribunal in case of DCIT vs. Bosch Ltd. (supra) “27. We have considered the rival submissions as well as the relevant material on record. As regards the disallowance on account of interest expenditure, we find that the assessee has claimed interest free funds of morethan Rs.2,275 Crores in comparison to the total investment of Rs.910 Crores. There is no quarrel on the point that if the assessee's ownfunds are more than investment made then no disallowance is called for on account of interest expenditure under Section 14A of the Act. The Hon'ble jurisdictional High Court in the case of Microlabs Ltd. (supra) while dealing with an identical issue has observed at page 496 para 5 as under: 40. We have heard the rival submissions. A copy of the availability of funds and investments made was filed before us which is at pages 38 to 42 of the assessee's paper book and the same is enclosed as ANNEXURE-III to this order. It is clear from the said statement that the availability of profit, share capital and reserves & surplus was much more than investments made by the assessee which could yield tax free income.

We also refer to the decision of Hon’ble Karnataka High Court in case of CIT vs. Microlabs Ltd. reported in (2017) 79 taxmann.com 365 wherein Hon’ble Court held as under: “Section 14A of the Income-tax Act, 1961 - Expenditure incurred in relation to income not includible in total income - (Interest) - Assessment year 2009-10 - Where availability of profit, share capital and reserves and surplus was much more than investments made by assessee which could yield tax-free income, no disallowance of interest expenditure under section 14A could be made [In favour of assesse] Where the availability of profit, share capital and reserves and surplus was much more than investments made by the assessee which could yield tax-free income, no disallowance of interest expenditure under section 14A could be made.

We have heard the rival submissions. A copy of the availability of funds and investments made was filed before us which is at pages 38 to 42 of the assessee's paper book and the same is enclosed as AIVNEXURE-III to this order. It is clear from the said statement that the availability of profit, share capital and reserves & surplus was much more than investments made by the assessee which could yield tax free income.

The Hon'ble Bombay High Court in Reliance Utilities & Power Lt€L 313 ITR 340 (Born) has held that where the interest free funds far exceed the value of investments, it should be considered that investments have been made out of interest free funds and no disallowance u/s. 14A towards any interest expenditure can be made. This view was again confirmed by the Hon'ble Bombay High Court in CIT v. HDFC Bank Ltd., ITA No.330 of 2012, judgment dated 23.7.14, wherein it was held that when investments are made out of common pool of funds and non-interest bearing funds were more than the investments in tax free securities, no disallowance of interest expenditure u/s. 14A can be made.

In the light of above said decisions, we are of the view that disallowance of interest expenses in the present case of Rs.49,42,473 made under Rule 8D(2) (ii) of the I.T. Rules should be deleted. We order accordingly." The aforesaid shows that the Tribunal has followed a decision of the Bombay High Court in the case of CIT v. HDFC Bank Ltd. 120141 366 ITR 505/226 Taxman 132 (Mag.)/49 taxmann.com 335. When the issue is already covered by a decision of the High Court of Bombay with which we concur, we do not find any substantial question of law would arise for consideration as canvassed.

In view of the above observations, the appeal is dismissed.”

Admittedly, assessee has mixed funds but we also note that it has sufficient own funds to make investments during the relevant year under consideration. The Ld.CIT(A) observes that at no point of time, assessee was having sufficient own funds to make the entire investment, cannot be accepted. We therefore direct the Ld.AO to delete the addition made under Rule 8D(2)(ii). In respect of disallowance made under Rule 8D(2)(iii), we note that consistently this issue has been restricted only to