CARBORUNDUM UNIVERSAL LTD.,CHENNAI vs. DCIT, CHENNAI

This appeal by the assessee is arising out of order of the Commissioner of Income Tax (Appeals), Large Taxpayer Unit, Chennai, in order dated 20.03.2014. The assessment was framed by the DCIT(LTU), Chennai for the assessment year 2008-09 u/s.143(3) of the Income Tax Act, 1961 (hereinafter the ‘Act’) vide order dated 20.12.2011.

The ld.counsel for the assessee at the time of hearing stated that in first round, the Tribunal has deleted the disallowance made by AO in regard to expenses relatable to exempt income u/s.14A of the Act. Aggrieved, Revenue preferred appeal before Hon’ble High Court of Madras in Tax Case Appeal No.456 of 2021 and the Hon’ble High Court vide order dated 16.09.2021 remanded only one issue on disallowance of expenses u/s.14A of the Act and the Hon’ble High Court remanded this matter vide para 8 as under:- “8.In our considered view, this issue requires to be discussed and conceded after the Revenue places appropriate materials to show that the case would fall within the ambit of the Circular issued by CBDT or whether the case has to be pursued by the Revenue in the event of any Audit objection or it is one of the exceptions mentioned in the Circular issued by the CBDT. Therefore, we are inclined to remand the matter to the Tribunal to decide the issue, which was raised in substantial questions of law Nos.1 and 2.”

In light of above decision of Hon’ble High Court of Madras remanding this issue back to the file of the Tribunal, the ld.counsel for the assessee first of all took us through the assessment order

The short point remains before us is disallowance under Rule 8D(2)(ii) i.e., interest disallowance amounting to Rs.35,38,990/-. The ld.counsel for the assessee stated that the assessee has more interest free funds in the shape of share capital and Reserves & Surplus amounting to Rs.35.18 crores and the investments are only to the extent of Rs.16.97 crores. For this, he produced balance sheet as on 31.03.2008, from where these amounts are verified.

On the other hand, the ld.Senior DR stated that the assessee has nowhere proved the nexus by filing cash flow statement that the assessee has invested the funds in the instruments giving rise to exempt income out of interest free funds. The ld.Senior DR further stated that the assessee has not taken this plea before AO or before CITA(). In counter, the ld.counsel for the assessee took us through the order of CIT(A) para 4.2.2, wherein the CIT(A) has discussed this issue of own funds and noted borrowed funds used for investment giving rise to earning of exempt income and CIT(A) has not accepted the same without giving any reason.

We have heard rival contentions and gone through the facts and circumstances of the case. The facts are clear that the assessee’s interest free funds in the shape of Share Capital, Reserves & Surplus to the tune of Rs.35.18 crores as on 31.03.2018 are available with it and investments are to the tune of Rs.16.97 crores. We have gone through the assessment order, the order of CIT(A) and now the arguments of ld. Senior DR and find no material that the authorities below have found out nexus of the investments made by assessee in the instruments giving raise to exempt income is out of interest bearing funds. In the absence of the same, we are of the view that the presumption will be that the assessee has made investment out of own fund i.e., interest free funds available with it in the form of Share Capital and Reserves & Surplus. This view is as support of Hon’ble High Court of Bombay in the case of HDFC Bank Ltd., supra, wherein the Hon’ble Bombay High Court following another decision of Hon’ble Bombay High Court in the case of CIT vs. Reliance Utilities and Power Ltd., 313 ITR 340 discussed this issue as under:- “We find that the facts of the present case are squarely covered by the judgment in the case of Reliance Utilities and Power Ltd. (supra). The finding of fact given by the ITAT in the present case is that the Assessee's own funds and other non-interest bearing funds were more than the investment in the tax-free securities. This factual position is not one that is disputed. In the present case, undisputedly the Assessee's capital, profit reserves, surplus and current account deposits were higher than the investment in the tax-free securities. In view of this factual position, as per the judgment of this Court in the case of Reliance Utilities and Power Ltd. (supra), it would have to be presumed that the investment made by the Assessee would be out of the interest-free funds available with the Assessee. We therefore, are unable to agree with the submission of Mr Suresh Kumar that the Tribunal had erred in dismissing the Appeal of the Revenue on this ground. We do not find that question (A) gives rise to any substantial question of law and is therefore rejected.” As the issue is covered in favour of assessee and facts are very clear, respectfully following the decision of Hon’ble High Court of Bombay and the in the given facts that the assessee is having own funds i.e., interest free funds available in the share of Share Capital and Reserves & Surplus more than the investments giving raise to exempt income, no disallowance can be upheld. Hence, we delete the disallowance and allow the appeal of assessee partly.

In the result, the appeal filed by the assessee is partly- allowed.