DELITE INFRASTRUCTURE PRIVATE LIMITED,NEW DELHI vs. ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE 7(1), DELHI, NEW DELHI

That in the facts and circumstances of the case, the AO/CIT(A) erred in misconstruing the material placed on record and explanation offered by the Appellant in treating the sum of Rs. 1,25,84,314/- as expenditure incurred towards earning exempt income, when in fact the said sum was on account of payment of interest on loan taken for business activities and the same was duly accounted for while offering income to tax 7 That, in the facts and circumstances of the case, and without prejudice to the grounds taken above, the AO/CIT(A) grossly erred in treating the sum of Rs.1,25,78,349/- as the income of the Appellant for the year under consideration and aggregating the said amount with the sum of Ha. 1,29,85,292 as computed for the purposes of disallowance under section 14A of the Act to ascertain total income of the Appellant, whereas, in fact, the sum of Rs. 1,25,78,349 is the returned loss of the Appellant and disallowance, if any, can only result into total taxable income of the Appellant to be computed at Re 4,06,943/ 8. That in the facts and circumstances of the case and in law, the disallowance made and the observations made are unjust, unlawful and based on mere surmises and conjunctures. The disallowance made cannot be justified by any material on record and the computation of total income shows lack of application of mind and the perfunctory approach of the AO/CIT(A).

The AO has erred in initiating of proceedings under section 270A (1) r.w.s. 270(A) (9) of the Act.

That the Appellant craves leave to add, amend, alter and or delete any of the above grounds of appeal

The Ld. AR further submits that interest was paid during the period from November, 2016 to March, 2017 and dividend income was received during the period from April,2016 to August, 2016. He further submitted that investments in mutual funds were made out of the fund received from holding company and no borrowed funds were involved in such investments and, therefore, provisions of section 14A are not applicable. In support of this argument, ld. AR drew our attention to the ledger account of holding company available in the PB pages 140 to 143, according to which, funds received from holding Co. namely Martin and Harris Laboratories Ltd. were received by the assessee were transferred to Barclays Securities (India) Pvt. Ltd. for investment in mutual funds. The said funds were repaid in the month of August, 2016 upon redemption of Mutual funds. The Ld. AR submits that the AO has disallowed entire expenses claimed which include bank charges, audit fee and other office expenses and interest of loan totaling to Rs.1,25,84,314/-. The Ld. AR submits that loans taken were utilized in working in progress and further given to Barclays Securities (India) Pvt. Ltd. from where no

On the other hand, Ld. Sr. DR submits that AO in para 3.2 of the assessment order has specifically recorded the satisfaction wherein the AO observed that assessee there is direct nexus between borrowed funds utilized for earning exempt income. Regarding the judgment of Hon’ble High Court in case of Jagson International (supra), ld. SR. DR submits that in that case, AO had not examined the details and suo moto disallowance made by assessee and simply applied Rule 8D of the Income Tax Rules, 1962 (“the Rules”) whereas, in the instant case, since the AO has recorded his satisfaction after considering financials of the assessee, therefore, ratio laid down by the Hon’ble Jurisdictional High Court in case of DCIT vs. Jagson International Ltd (supra) are not applicable in the facts of the present case. The Ld. Sr. DR further submits that Ld. CIT(A) had followed the judgment of Hon’ble Supreme Court in the case of CIT vs. United General Trust reported in 200 ITR 455 (SC) wherein it is held that when the expenditure has been incurred by the assessee on earning of dividend income in absence of another better method, method suggested by Rule 8D of the Rules should be adopted. He further submits that as per Rule 8D, disallowance was worked out at Rs.1,53,94,154/-, however, the assessee has claimed expenditure of Rs.1,29,85,292/-, therefore, the AO has rightly restricted the disallowance to the extent of expenditure claimed. He thus prayed for the confirmations of the orders of the lower authorities.

Heard both the parties and perused the material available on records. Regarding first arguments of the assessee that no satisfaction was recorded by the Assessing Officer as provided in section 14A of the Act, it is observed that AO issued show cause notice to the assessee wherein it is proposed to invoke the Delite Infrastructure Pvt. Ltd. vs. DCIT provisions of section 14A of the Act and after considering the submissions made by the assessee, he recorded his satisfaction at page 4 of the order. The Assessing Officer has given four reasons for invoking the provisions of section 14A of the Act which are as under: (i) The assessee has no Revenue from operations. (ii) The only expenses shown are administrative expenses and financial costs. (iii) The assessee has shown an amount of Rs.62,76,70,161/- as borrowed funds (Rs.40 Crs. from Barclays Securities (India) Pvt. Ltd.) and (iv) borrowed funds have been invested in Barclays Securities.

It is therefore established that the AO has recorded proper satisfaction before invoking the provisions of section 14A of the Act that there is direct nexus between borrowed funds utilized for earning exempt income. In view of these facts, the argument of the assessee that no satisfaction was recorded by the AO before invoking the provisions of section 14A cannot be not accepted.

Further total dividend income of Rs.75,78,783/- from mutual funds was received during the period from 07.04.2016 to 16.08.2016 which is evident from the Ledger Account of dividend available at PB page 147 to 152. It is also seen that loan of Rs. 40 crores was taken on 15.11.2016 which was transferred to Barclays Securities (India) Pvt. Ltd. which is evident from PB page 162 and 165 to 178. It is further seen that during the year under appeal, assessee has made investments in mutual funds up to 16.08.2016 when the whole investment in mutual funds was redeemed. It is further seen that on these investments’ assessee has received dividend income as is evident from the copy of ledger Account of investments in mutual funds available at PB page 180 to 190.

In view of the above facts, we find that borrowed funds were not utilized for making investments in Mutual funds which yielded exempt income in the shape of dividend and, therefore, disallowance made by invoking section 14A is contrary to Delite Infrastructure Pvt. Ltd. vs. DCIT the facts available on record. It is further observed that assessee while computing income from short term capital gain/loss from redemption of mutual funds, claimed interest paid on loan as expenses. As observed above, since, loan taken from bank on which assessee has paid interest has no direct or indirect relation with the investments made in mutual funds, therefore, this claim of the assessee against the gain declared under the head short term capital gain from mutual funds cannot be allowed and the assessee entitled to carry forward the interest paid to next year and we order accordingly. Grounds of appeal No. 1 to 9 of the assessee are thus partly allowed.

Ground of appeal No.10 is regarding charging of interest u/s 234A, 234B and 234C which are consequential in nature.

Ground of appeal No.11 is regarding initiation of penalty proceedings which is premature.

In the result, appeal of the assessee is partly allowed. Order is pronounced in the Open Court 16.01. 2026.