SRI KISHAN GOPAL MOHTA,KOLKATA vs. A.C.I.T.,CIRCLE-35, KOLKATA

The sole issue involved in this case is against the action of the Ld. CIT(A) in holding that the provision of Rule 8D(2)(ii) of the Income Tax Rules, 1962 (hereinafter referred to as the “Rules”) were applicable in the facts of the case.

Brief facts of the case on this issue are that the assessee had earned dividend income to the tune of Rs.1,57,61,357/-, which was exempt from tax. The AO noted that the assessee had made suo moto disallowance to the tune of Rs.16,32,210/-. The AO after giving an opportunity to the assessee was of the opinion that the disallowance u/s. 14A read with Rule 8D is applicable in the facts of the case and has computed the disallowance at Rs.87,84,059/- (Rs.1,04,16,269/- - Rs.16,32,210/-). Aggrieved, the assessee preferred an appeal before the Ld. CIT(A) who was pleased to partly allow the appeal of the assessee but didn’t hold that Rule 8D(2)(ii) was not applicable in the case of the assessee. Not satisfied by the aforesaid action of the Ld. CIT(A), the assessee is before us agitating only the addition/disallowance made invoking Rule 8D(2)(ii) of the Rules.

According to the Ld. AR, the assessee’s investment in earning the dividend income is from interest free source meaning that assessee had its own fund for investment for earning the exempt income. Therefore, according to him, Rule 8D(2)(ii) will not be applicable in the facts of the assessee’s case. For that he drew our attention to the fact that the assessee had credit balance in capital account to the tune of Rs.75,87,14,540/- at the beginning of the year as against which he held investment in various forms to the tune of Rs. 36,90,93,546/-. And at the end of the year as on 31.03.2013, the assessee’s capital Account showed a credit balance of Rs.78,76,47,193.25 as against which his investments in various assets which are exempted or otherwise were held at the cost of Sri Kishan Gopal Mohta, AY: 2013-14 Rs.30,22,78,525/-. So, from these facts according to Ld. AR, it would be clear that the investments have been made by the assessee out of his own capital, so no disallowance under Rule 8D(2)(ii) of the Rules were warranted. According to Ld. AR, the AO on the basis of surmises and conjectures have attributed the interest expenditure to the tune of Rs.2,99,02,007/- for earning the exempt income mainly because assessee was not maintaining separate books for earning exempt/taxable income. According to Ld. AR, the Ld. CIT(A) erred in confirming this action of AO. Therefore, he wants us to delete the disallowance/addition made by AO under Rule 8D(2)(ii) of the Rules. Per contra, the Ld. DR Smt. Ranu Biswas opposed the submission of the Ld. AR and contended that assessee had interest expenditure of more than Rs.2 crores and was not maintaining separate books/accounts, so the AO inferred that borrowed funds might have been utilized by the assessee for earning exempt income, so he rightly applied Rule 8D(2)(ii) of the Rules, which action has been rightly upheld by the Ld CIT(A). So she does not want us to interfere with the impugned action of Ld CIT(A).

We have heard both the parties and perused the records. We note that the assessee had earned dividend income to the tune of Rs.1,57,61,357/-, which was exempt from tax. And the assessee had made suo moto disallowance to the tune of Rs.16,32,210/- for earning of this exempt income. The AO noted that assessee had interest expenditure to the tune of Rs.2,99,02,007/- and was not maintaining separate books/accounts, so the AO inferred that borrowed funds might have been utilized by the assessee for earning exempt income, so he inter-alia applied Rule 8D(2)(ii) of the Rules, and made disallowance to the tune of Rs 88,40,333/- which action has been upheld by the Ld CIT(A). According to assessee the assessee’s investment in earning the dividend income is from interest free source meaning that assessee had its own fund for investment for earning the exempt income. Therefore, according to assessee, Rule 8D(2)(ii) will not be applicable in the facts of the assessee’s case. So, we have to examine the veracity of this claim of tha assessee and in this regard we note that the assessee had credit balance in capital account to the tune of Rs.75,87,14,540/- at the beginning of the year as against which he held investment in various forms to the tune of Rs. 36,90,93,546/-. And at the end of the year as on 31.03.2013, the assessee’s capital Account showed a credit balance of Rs.78,76,47,193.25 as against which his investments in various assets which are exempted or otherwise were Sri Kishan Gopal Mohta, AY: 2013-14 held at the cost of Rs.30,22,78,525/-. So, from these facts it is discernable that the assessee had enough capital to make investments which yielded exempt income. In the light of the aforesaid facts as discerned from the records, we safely infer that since assessee had own fund which was sufficient to make investment fund which yielded exempt income, no disallowance of interest invoking Rule 8D(2)(ii) of the Rules was warranted. For that we rely on the ratio of the decision of the Hon’ble Bombay High court in the case of Reliance Utilities & Powers Ltd. Vs. CIT 313 ITR 340 wherein the Hon’ble Bombay High court held that when the assessee is possessed of mixed funds which includes its own funds in sufficient quantity, the presumption is that its own funds were utilised for the advances is to be drawn. The aforesaid view of the Hon’ble Bombay High Court has been approved by the Hon’ble Supreme Court in the case of South Indian Bank Vs. CIT in Civil Appeal No. 9606/2011 dated 9th September, 2021. From the facts as discerned above in the instant case we infer that the assessee has earned exempt income from its own fund and not from borrowed funds. Therefore, Rule 8D(2)(ii) is not applicable in this case. Ergo the assessee succeeds and therefore, the disallowance made by the AO applying Rule 8D(2)(ii) is deleted.

In the result, the appeal of the assessee is allowed.