TULASI RAMACHANDRA PRABHU,GUNTUR vs. THE CIT(A)-1, GUNTUR

The AO has disallowed the sum of Rs.2,53,70,031/-, interest relatable to earning of dividend income u/s 14A r.w.s.36(1)(iii) of the Act for diversion of funds for non business purposes. During the assessment proceedings, the AO found that the assessee had made the investments in the shares of sister concerns as well as other business concerns to the tune of Rs.29,47,66,972/-. The AO further observed that the assessee has accepted the loans of Rs.38,70,27,806/- and paying the interest. During the year under consideration, the assessee has incurred the interest expenditure of Rs.4,53,58,948/- on loans aggregating to Rs.38,70,27,806/-, out of which investment made in shares was Rs.29,47,66,972/-, hence, the AO disallowed the proportionate interest of Rs. 2,53,70,031/- u/s 14A r.w.s. 36 (1)(iii) of the Act.

Aggrieved by the order of the Ld.CIT(A), the assessee is in appeal before us. During the appeal hearing, the Ld.AR submitted that the total investments made by the assessee was Rs.29,47,66,972/-, out of which the assessee has own funds of Rs.28,32,95,736/-, thus, leaving the balance of Rs.1,14,71,236/- which was invested out of the borrowed funds. Therefore, submitted that there is no case for disallowance of interest relatable to earning of dividend income. Accordingly, requested to set aside the order of the Ld.CIT(A) and allow the appeal of the assessee.

On the other hand, the Ld.DR argued that the assessee has claimed the own funds of Rs.28.32 crores, out of which the advances received against the sale of land and sale of godown constitute Rs.20.50 crores for which the assessee failed to furnish the documentary evidence in support of his claim. Hence, the AO has not considered the said amount of Rs.20.50 crores as source of funds. The Ld.DR further argued that since the assessee failed to furnish the documentary evidence, the expenditure required to be disallowed on the total amount of investment and accordingly, requested to uphold the order of the Ld.CIT(A) and dismiss the appeal of the assessee.

We have heard both the parties and perused the material placed on record. The ITAT, in it’s order dated 29.05.2019 has given a clear finding that the assessee had own funds of Rs.28.33 crores, representing the opening balance of Rs.7.82 crores, agricultural land of Rs.15.50 crores and sale advance of godown amounting to Rs.5 crores aggregating to Rs.28.32 crores in para no.6 of the order dated 29/05/2019. The ITAT held that there is no case for disallowance of interest u/s 36(1)(iii) of the Act for the diversion of funds. Therefore, it is established that the assessee has own funds to the extent of Rs.28.33 crores, which the assessee is free to withdraw and invest in securities, thus, there is no case for disallowance of interest representing the investments made out of own funds to the extent of Rs.28.33 crores and the net amount invested out of borrowed funds was only Rs.1,14,71,236/-. Hence, the disallowance of interest attracts only on interest bearing funds of Rs.1,14,71,236/- proportionately which works out to Rs.17,65,201/- approximately. Accordingly, we direct the AO to workout the correct amount of proportionate interest on the sum of Rs.1,14,71,236/- which was made out of interest bearing funds and make the disallowance. Thus, we set aside the order of the Ld.CIT(A) and remit the matter back to the file of the AO for limited purpose of making the

In the result, appeal of the assessee is allowed partly Order pronounced in the open court on 22nd November, 2019.