THE ACIT, WARD-3(1),, AHMEDABAD vs. M/S. NIRMA CREDIT & CAPITAL P. LTD.,, AHMEDABAD

PER S. S. GODARA, JUDICIAL MEMBER

These three Revenue’s appeals for assessment years 2010-11 to 2012-13 arise against the CIT(A)-9, Ahmedabad’s orders dated 08.02.2016 (in former two cases) and 09.02.2016 (in last one) passed in case nos. CIT(A)-9/104/ACIT, Cir- 5/13-14, CIT(A)-9/168/ACIT-Cir-5/13-14 & CIT(A)-9/633/ITO.wd.3(1)(1)/14-15; respectively, reversing Assessing Officer’s identical action(s) invoking Section 14A disallowance(s) of Rs.1,13,02,712/-, Rs.53,76,180/- & Rs.59,55,852/- in normal computation as well as MAT purposes, in proceedings u/s. 143(3) of the Income Tax Act, 1961; in short “the Act”.

ITA Nos. 1057 to 1059/Ahd/16 [ACIT vs. M/s. Nirma Credit & Capital P. Ltd. ] A.Y. 2010-11 - 2 -

“5.2 I have carefully considered the facts of the case, contentions of the appellant as well as the case laws relied upon by the appellant and the order of A..O. The A.O has made an addition of Rs. 1,13,02,712/- on account of disallowance u/s.14A r.w. rule 8D of the I.T.Rules. The appellant has received dividend of an amount of Rs.42,53,607/-. During the year under consideration the appellant has also made new investment by purchase of Debentures of Shree Rama Multitech Ltd. of Rs. 54.50 lacs and equity shares of Kalupur Cooperative Bank Ltd. of Rs.0.02 lac. Against the same the appellant had received consideration of Rs.11.99 lacs of HPCL, Rs.6.40 lacs F.C.S. Software Solutions Ltd., ONGC Rs.143.10 lacs and Steel Authority of India Ltd. Rs.28.99 lacs. The addition to the investment is less than the sales consideration of the shares. During the assessment proceedings the appellant has explained the source of these investments to the A.O.. The appellant is claiming that it has not incurred any expenditure in order to earn the said exempt income. During the assessment proceedings as well as appellate proceedings the appellant had submitted that it had Share Capital and Reserves of Rs. 25,33 crores as on 31/3/2010.; During the appellate proceedings the appellant has also submitted that the dividend which was received was credited directly to the banks. Further, the appellant has also relied on various judgments discussing the availability of non-interest bearing funds and disallowance u/s.14A of the Act. It is a matter of :fact that-the appellant had the Share Capital and Reserves amounting to Rs: 25.33 crores against the investment of Rs.21.65 crores which is more than the investment. It is seen from this explanation that these investments have not been made out of any borrowed funds. The appellant has placed its reliance on 'the judgment of jurisdictional High Court in the case of UTI Bank Ltd. 32 Taxman.com 370 (Guj.) and CIT vs Suzlon Energy Ltd. 354 ITR 630 (Guj). In both the cases it has been held that where the assessee has sufficient interest free funds to meet its tax free investment yielding exempt income then it can be presumed that the investments were made from interest free funds and not loaned funds .as well as there exist no direct nexus between interest bearing borrowed funds and such investments. Therefore, no disallowance u/s.14A is warranted. The appellant has also relied upon various other case laws as mentioned in the submission of the appellant. I agree with the principles laid down in the case law of UTI Bank Ltd. and Suzlon Energy Ltd(supra) and various other judgments of jurisdictional High Court. Considering the availability of non-interest bearing funds in the hands of the appellant for making investments and earning exempt income, I am of the considered opinion that no disallowance under sub- section 14A is warranted in this case. Accordingly, the A.O is directed to delete the disallowance of Rs,1,13,02,712/- made u/s.14A of the Act. Thus, this ground of appeal is allowed.”

ITA Nos. 1057 to 1059/Ahd/16 [ACIT vs. M/s. Nirma Credit & Capital P. Ltd. ] A.Y. 2010-11 - 3 -

“7.2 It was thus canvassed that the Coordinate Bench of ITAT has held in the earlier year in assessee's own case that the assessee is entitled to set off of interest received against the interest incurred by the assessee and only surplus interest incurred is susceptible to Rule 8D of the Income Tax Rules, 1962. The reasons for holding so by the co-ordinate bench is not far to seek. The sacrosanct underlying principle to enable such set off is that cost of average borrowed funds to the extent of corresponding interest generating funds requires to be first nullified and only differential borrowed funds over and above corresponding funds generating interest income can be deemed to have been deployed for investments and other purposes. There can be no quarrel to such underlying salutary principle. The interest on borrowed funds equivalent to corresponding funds giving rise to interest income needs to be set off and may be treated as used for generating interest income.

7.3 However, to appreciate the issue in perspective, let us illustrate the point by way of an example. Suppose the assessee holds borrowed funds of say Rs.100/- and paid interest thereon say Rs.12/-. The assessee simultaneously has given advance of say Rs.80/- wherefrom the assessee has earned same interest of Rs.12/- owing to higher rate. The net interest expenditure incurred after set off thus is zero. However, as can be seen, the assessee has placed balance sum of Rs.20/- out of borrowed funds for purposes other than impugned financing. The assessee thus is clearly not entitled to set off of interest expenditure in respect of remaining borrowed funds not deployed in activity generating interest income. As a consequence, the assessee cannot escape the clutches of section 14A read with Rule 8D in respect of interest costs incurred on differential borrowed funds of Rs.20/- unless he is able to demonstrate that the surplus borrowed funds have found way in some other business activity in commercial spirit. Thus, in essence, it is the borrowed funds and the corresponding advance which is required to be matched

ITA Nos. 1057 to 1059/Ahd/16 [ACIT vs. M/s. Nirma Credit & Capital P. Ltd. ] A.Y. 2010-11 - 4 -

and not mere interest costs and income arising therefrom. However, pertinent here to say, once an assessee is able to broadly show that the interest free funds available at its disposal, own or borrowed, is equivalent to or in excess of investment and some other non- business deployments, the presumption of usage of interest bearing borrowed funds for business activities would operate favourably. However, presumption in favour of the assessee would be available taking into consideration total fund position at a given point of time. Hence, the onus rests on the assessee to prima facie demonstrate its case with reference to the overall fund position.

7.4 In the light of above, we now examine the facts of the present case. Financial year 2008-09 relevant to assessment year 2009-10 is under scrutiny. On perusal of financial statement for the year ending 2008-09 qua 2007-08, we note that borrowed funds during the year has gone up by nearly 47.48 crores. The corresponding investment in shares has gone up by nearly Rs. 10.70 crores and remaining additional borrowed funds appears to be have been parked in loans and advances during the year (Rs. 10.33 crore) and in cash and bank balance (Rs. 24.50 crores). Thus, apparently some part of fresh borrowed funds appears to hold proximate relationship with the increase in the investments. However, We seek to clarify that the fund flow and total facts in this regard are not available before us.

7.5 Needless to say, the assessee is privy to facts concerning overall source of funds at its disposal and application thereof at a given point of time. Thus, the primary onus would lie with the assessee to demonstrate that its cumulative own funds together with non-interest bearing funds are in excess of cumulative investments (giving rise to tax-free income) together with other form of non business investments/ utilisations. Once the primary onus is discharged by the assessee, the onus will shift to the Revenue to demonstrate the cause for disallowance under Rule 8D. The benefit of presumption would be available to the assessee provided the overall non interest bearing fund position equals to or exceeds investment and other non business utilizations in aggregate. Thus, while we are in parity with the underlying proposition laid down in assessee's own case in the earlier year in admitting set off of interest expenditure, the governing facts to determine the issue needs elaboration from assessee. The presumption of interest bearing borrowed fund deemed to be utilized for business purposes and thus out of ambit of section 14A would operate only to the extent of interest free funds available to meet the investment and other non business activities in aggregate. The proportionate interest on that portion of borrowed funds which seeks to cover the shortfall in investment would thus be amenable to S. 14A read with Rule 8D(2)(ii) of the IT Rules. Thus, in order to examine the relevant facts, it would be expedient to remit the issue back to the file of AO. The AO shall grant reasonable opportunity to enable the assessee to demonstrate whether own funds together with interest free funds surpasses corresponding investments in shares etc. and other non business investments in aggregate. In the light of above discussion, the Assessing officer is directed to examine the issue afresh in accordance with law after giving proper opportunity of being heard.

ITA Nos. 1057 to 1059/Ahd/16 [ACIT vs. M/s. Nirma Credit & Capital P. Ltd. ] A.Y. 2010-11 - 5 -

sufficient to cover the corresponding investments and other non-business utilization of funds. The disallowance of interest, if any, would thus be restricted in proportion to the shortfall in own funds and non interest bearing fund in cumulative qua aggregate of investments and other personal or non business utilizations as noted above.”

Sd/- Sd/- (AMARJIT SINGH) (S. S. GODARA) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad: Dated 16/02/2018