KRISHNA MOHAN P.LTD,NEW DELHI vs. ADDL.CIT, SPECIAL RANGE-5, NEW DELHI

This appeal filed by the assessee is directed against the order dated 09.03.2018 of the Commissioner of Income Tax (Appeals)-36, New Delhi relating to Assessment Year 2014-15.

The relevant facts as culled from the material on records are as under :

Assessee is a company which is stated to be running two cinema theatres namely Delite & Delite Diamond besides a restaurant running alongside the theatres. Assessee filed its return of income for A.Y. 2014-15 on 13.12.2014 declaring total income of Rs.58,16,839/-. The case was selected for scrutiny and thereafter assessment was framed u/s 143(3) of the Act vide order dated 27.12.2016 and the total income was determined at Rs.79,08,992/-. Aggrieved by the order of AO, assessee carried the matter before CIT(A) who vide order dated 09.03.2018 in Appeal No.371/16-17 granted partial relief to the assessee. Aggrieved by the order of CIT(A), assessee is now in appeal and has raised the following grounds of appeal: “1. That on the facts and circumstances of the case and in law, the order passed by CIT(A)-36, New Delhi (hereinafter referred to as CIT(A)), is bad in law.

During the course of assessment proceedings, on perusing the details, AO noticed that assessee had earned dividend income of Rs.7,18,506/- from investments in equity/Mutual funds. He also noted that assessee had debited interest expenses of Rs.10,17,357/- paid to Directors and interest of Rs.1,00,204/- paid to the Bank. Assessee was therefore asked to explain why disallowance of expenses not be made u/s 14A r.w. Rule 8D of the Act. Assessee inter alia submitted that the investment of Rs.1.04 crore (rounded off) has been made out of surplus funds of Rs.4.30 crore (rounded off) and no expenses has been incurred by the assessee to earn exempt income. The submissions of the assessee was not found acceptable to AO. AO, thereafter, by invoking the provision of Rule 8D of the Income Tax Rules worked out the total disallowance u/s 14A at Rs.2,98,657/-. When the matter was carried before CIT(A), CIT(A) upheld the order of AO and dismissed the appeal of the assessee.

Aggrieved by the order of CIT(A), assessee is now in appeal before us.

Before us, Learned AR reiterated the submissions made before the AO and CIT(A) and further submitted that interest free funds available with the assessee are much more than the investments made and in such a situation, no disallowance u/s 14A of the Act is warranted. In respect of the aforesaid contentions, he pointed to the copy of the Balance Sheet placed at page 18 of the paper book. From the aforesaid Balance Sheet, he pointed to the availability of interest free funds in the form of Share Capital and Reserve & Surplus to the extent of Rs.4.30 crore (rounded off) and investments of Rs.1.04 crore. He therefore submitted that when the interest free funds available with the assessee are more than the investment, than it will be presumed that the investments were made from interest free funds and for this proposition, he relied on the decision of Hon’ble Apex Court in the case of CIT (LTU) vs. Reliance Industries Ltd. (2019) 410 ITR 466 (SC). He also placed reliance on the decision of Hon’ble Apex Court in the case of South Indian Bank Ltd. vs. Commissioner of Income Tax [2021] 130 taxmann.com 178 (SC).

Learned DR on the other hand did not controvert the submissions made by Learned AR but however pointed to the findings of AO wherein he has noted that assessee had failed to substantiate that the investments are out of interest free funds. He thus supported the order of lower authorities.

We have heard the rival submissions and perused the materials available on record. The issue in the present ground is with respect to the disallowance u/s 14A r.w. Rule 8D of the Income Tax Rules. The perusal of the audited Balance Sheet as at 31st March 2014 placed by the assessee demonstrate that the availability of interest free funds in the form of Share Capital and Reserve and Surplus to the extent of Rs.4.30 crore (rounded off) and the investments of Rs.1.04 crore meaning thereby that the interest free funds available with the assessee to be much more than the investments. We find that Hon’ble Apex Court in the case of Reliance Industries Ltd. (supra) has held that where the interest-free funds available with the assessee are sufficient to meet its investment, it will be presumed that the investments are made from the interest-free funds. We further find that Hon’ble Apex Court in the case of South Indian Bank Ltd. (supra) has observed that the proportionate disallowance of interest is not warranted u/s 14A of the Act where interest free owned funds available with the assessee exceeds the investments. Before us, no contrary binding decision in its support has been pointed out by Revenue. In such a situation, we are of the view that no disallowance of proportionate interest is called for in the present case. We therefore direct its deletion. Thus ground of assessee is allowed.

In the result, appeal of the assessee is allowed.