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Income Tax Appellate Tribunal, PUNE BENCH, ‘B’ PUNE
Before: SHRI R.S. SYAL & SHRI S.S. VISWANETHRA RAVI
आदेश / ORDER
PER R.S. SYAL, VP :
This appeal by the assessee is directed against the order dated 04-03-2021 passed by the Pr.CIT, Nashik u/s.263 of the Income-tax Act, 1961 (hereinafter also called ‘the Act’) in relation to the assessment year 2015-16.
Briefly stated, the facts of the case are that the assessee is an individual, who furnished his return declaring total income of Rs.97,53,630/-. The case was selected for limited scrutiny under Computer Aided Scrutiny Selection (CASS), inter alia, on the ground of high interest expenditure relatable to exempt income u/s.14A of the Act. The Assessing Officer (AO) finalized the assessment at the returned income. The ld. Pr.CIT, invoking his jurisdiction u/s.263 of the Act, found that the assessee earned exempt income totaling to Rs.77.93 lakh inclusive of share of income from firms/AOP/BOI etc. at Rs.76,25,867/- and dividend income of Rs.1.68 lakh. He observed from the assessee’s balance sheet that at the end of the preceding year, that there was balance of `Other liabilities’ at Rs.1.16 crore, which at the end of the year under consideration, grew up to Rs.9.93 crore, with a new entry of investment – firms credit balance of Yash Muthiyan Developers amounting to Rs.8.43 crore. He further noted that the assessee had paid interest of Rs.33.03 lakh to Yash Muthiyan Developers.
He also noticed that the assessee’s investment in the firm increased from Rs.2.64 crore in the preceding year to Rs.11.92 crore in the current year, which comprised of new investment of Rs.9.93 crore in the firm Yash Muthiyan Infrastructure. Since the assessee had withdrawn money from Yash Muthiyan Developers and invested the same into another firm Muthiyan Infrastructure, the ld. Pr.CIT held that money invested in Muthiyan Infrastructure was not interest free and hence section 14A was applicable. As the AO had not examined the issue, he set-aside the assessment order by declaring it to be erroneous and prejudicial to the interest of the Revenue and remitted the matter to the file of the AO. Aggrieved thereby, the assessee has come up in appeal before the Tribunal.
We have heard the rival submissions and perused the relevant material on record. The ld. Pr.CIT has held the assessment order to be erroneous and prejudicial to the interest of the Revenue only on the ground that the assessee withdrew certain money from one firm in which he was partner and invested the same in another firm in which he was partner. On the withdrawal, the assessee had paid interest. In his opinion, the assessee’s share in profits from the partnership firms, being exempt from tax, should have warranted disallowance of interest u/s.14A of the Act at the hands of the AO. We have examined the Profit and loss account of the assessee, copy placed at page 33 of the paper book, from which it can be seen that though the assessee paid interest totalling to Rs.42.63 lakh, simultaneously the assessee also earned interest of Rs.66.77 lakh. The ld. Pr. CIT has examined only the interest on ‘expenditure side’ and not the interest on ‘income side’, which shows the corresponding income much higher than the interest expenditure.
Be that as it may, it is seen from the assessee’s balance sheet, copy placed at page 35 of the paper book, that his capital balance stands at Rs.17.37 crore. The ld. Pr.CIT has disputed the withdrawal of amount of Rs.8.43 crore from Yash Muthiyan Developers on which interest was paid. As against that, the assessee’s own capital (which is interest free, being an individual) is much more than the amount withdrawn from the partnership firm.
The Hon'ble Bombay High Court in CIT vs. Reliance 5.
Utilities and Power Ltd. (2009) 313 ITR 340 (Bom), has held that where an assessee possessed sufficient interest free funds of its own which were generated in the course of relevant financial year, apart from substantial shareholders’ funds, presumption gets established that the investments in sister concerns were made by the assessee out of interest free funds and, therefore, no part of interest on borrowings can be disallowed on the basis that the investments were made out of interest bearing funds. In reaching this conclusion, the Hon’ble High Court relied on the judgment of the Hon’ble Supreme Court in the case of East India Pharmaceutical Works Ltd. Vs. CIT (1997) 224 ITR 627 (SC). More recently, the Hon’ble Supreme Court in CIT(LTU) VS. Reliance Industries Ltd. (2019) 410 ITR 466 (SC) has reiterated the same view.
When we examine the amount of Investments at Rs.8.43 crore as against the availability of assessee’s share capital at Rs.17.37 crore, it becomes evident that the amount of such Investments is much less than the amount of assessee’s own capital. In such circumstances, it has to be inferred that the fresh investment came out of the assessee’s own interest free capital and not from any borrowed funds. In view of the foregoing discussion, we are satisfied that the order passed by the ld. Pr.CIT u/s.263 cannot be sustained. We, therefore, overturn the same.
In the result, the appeal is allowed. Order pronounced in the Open Court on 24th August, 2022.