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Income Tax Appellate Tribunal, MUMBAI‘H’ BENCH, MUMBAI
Per Pramod Kumar, VP: This appeal, filed by the Assessing Officer, is directed against the order dated 3rd July 1. 2018 passed by the CIT(A) in the matter of assessment under section 143(3) of the Income Tax Act, 1961, for the assessment year 2014-15.
Grievances raised in the appeal are as follows:
Whether on the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the disallowance of Rs. 4,32,55,457 made by the Assessing Officer under section 14A r.w.r. 8D ignoring that the provisions clearly provide for the method of computing the disallowance vis-à-vis the investments and interest expenses?
2. On the facts and circumstances of the case and in law, the learned CIT(A) has erred in deleting the disallowance under section 36(1)(iii) of Rs 2,87,27,734 which was reduced by the AO from the WIP merely on the presumption that the assessee has interest free loans and own funds.
On the facts and circumstances of the case and in law, the learned CIT(A) has erred in deleting the disallowance under section 36(1)(iii) without having
Assessment year: 2014-15 Page 2 of 3 examined the cash flow of the assessee company at the time of making interest free advances.
3. To adjudicate on these grievances, only a few material undisputed facts need to be taken note of. The assessee is said to engaged in the business of development and construction of real state and generation of electricity. In the course of the assessment proceedings, it was noticed by the Assessing Officer that the assessee has offered suo motu disallowance under section 14A at Rs 3,51,228. Not satisfied with the same, the Assessing Officer proceeded to make disallowance under section 14A read with rule 8D by including entire amount of interest paid of Rs 9,18,18,962 as income directly relatable to earning of tax exempt income. The amount disallowable so worked out to Rs 4,36,06,685. Taking note of suo motu disallowance of Rs 3,51,228, the Assessing Officer made further disallowance of Rs 4,32,55,457. Aggrieved, assessee carried the matter in appeal before the CIT(A). Learned CIT(A) noted that the total tax exempt income in the hands of the assessee, during the relevant period, was only Rs 1,34,606, which was even less than suo motu disallowance offered by the assessee, and the disallowance under section 14A, in the light of the settled legal position, cannot exceed the related tax exempt income. For this short reason, he deleted the disallowance of Rs 4,32,55,457 The Assessing Officer is aggrieved and is in appeal before us. In these assessment proceedings, the Assessing Officer made a disallowance of Rs 2,87,27,734, out of interest expenses, on the ground that while the assessee has borrowed funds on interest, the assessee has also allowed interest free loans of Rs 20,51,98,100 to Pallai Developers Pvt Ltd. This disallowance was also deleted by the CIT(A) on the ground that the assessee had sufficient interest free funds, by way of capital and accumulated profits, and such interest fee funds adequately covered the interest free advances. The Assessing Officer is also aggrieved of the relief so granted by the CIT(A) and is in appeal before us on this point as well.
We have heard the rival contentions, perused the material on record and duly considered facts of the case in the light of the applicable legal position.
On both the issues, as learned representatives fairly agree, the legal position is settled in favour of the assessee. The disallowance under section 14A cannot exceed the tax exempt income itself. It has been so held by a series of orders by various Hon’ble High Courts, including Hon’ble Delhi High Court in the case of Joint Investments Pvt Ltd vs CIT [(2015) 372 ITR 694 (Del)]. Similarly, as held by Hon’ble Bombay High Court in the case of CIT Vs Reliance Utilities & Power Limited [ (2009) 313 ITR 340 (Bom)], if there are funds available both, interest-free and overdraft and/or loans are taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds are sufficient to meet the investments. On both the counts, therefore, the conclusions arrived at by the learned CIT(A) are correct and in consonance with the settled legal position.
Assessment year: 2014-15 Page 3 of 3
In view of the above discussions, as also bearing in mind entirety of the case, we approve the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter. In the result, the appeal is dismissed. Pronounced in the open court today on the 2nd 7. day of March, 2020.