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Income Tax Appellate Tribunal, MUMBAI BENCH “F” MUMBAI
Before: SHRI C.N. PRASAD & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
This is an appeal filed by the assessee. The relevant assessment year is 2013-14. The appeal is directed against the order of the Commissioner of Income Tax-4, Mumbai [in short ‘CIT(A)’] and arises out of the assessment completed u/s 143(3) of the Income Tax Act 1961, (the ‘Act’).
The grounds of appeal filed by the assessee read as under :
1. The AO was not justified in disallowing the interest expenditure of Rs.1,64,30,025 merely because the interest was paid on borrowing utilized for investments. The AO ought to have appreciated that the investment have yielded taxable and non-taxable income. Disallowance had already been made by appellant under Rule 8D.
2. Alternately, if the AO was to disallow the balance interest of Rs.1,64,30,025 on borrowing used for taxable interest bearing investments, he ought to have allowed the expenditure against such interest.
3. Alternatively, if he was to consider it a capital expenditure, he ought to have allowed it to be added to the cost of investments.
2. Briefly stated, the facts are that the assessee filed its return of income for the assessment year (AY) 2013-14 on 25.11.2013 declaring total income of Rs.26,60,74,530/-. The nature of business of the assessee is trading in commodities. During the course of assessment proceedings, the AO observed that the assessee has incurred interest expenses on borrowings amounting to Rs.2,24,73,535/- and processing charges of Rs.39,03,100/-. In response to a query raised by the AO to show cause as to why the interest expenses should not be disallowed as the same was not incurred for the purpose of carrying on business activities, the assessee filed a reply stating that it has borrowed funds during the year under consideration from M/s Barclays Investment & Loan (India) Ltd. and interest cost pertained to such loan and hence the borrowing was utilized for making investments only. However, the AO was not convinced with the said reply of the assessee and made a disallowance of Rs.1,64,30,025/- (Rs.2,24,73,535/- minus Rs.60,43,510/-). The reason given by the AO for allowing Rs.60,43,510/- is that the assessee has itself disallowed and added back the above sum as per Rule 8D of the Income Tax Rules, 1962 (the Rules).
3. In appeal, the CIT(A) observed that in the computation of income though there is a line item under the head ‘income from other sources’ as ‘less : expenses u/s 57’, the same has been claimed as ‘-‘ which means that the assessee has claimed no expenses u/s 57 of the Act in the return of income. Further, it is noted by him that the investments could have been made in interest yielding and dividend yielding is not definitive in nature and whether actually any investment was made in the instrument which were interest yielding in nature, has not been spelt out with facts and figures. Regarding the contentions of the assessee that it had placed Rs.15 crores in bonds with Barclays which had earned interest of Rs.1,24,91,507/- in AY 2013-14 and these bonds were kept as margin against the borrowings and therefore, the interest expenses should be allowed against this income, the CIT(A) observed that there is no claim of expenses by the assessee in its return of income u/s 57 of the Act. Further, he observed that no such claim has been made either before the AO or during the appellate proceedings before him. In view of the above reasons, the Ld. CIT(A) confirmed the disallowance of Rs.1,64,30,025/- made by the AO.
4. Before us, the Ld. counsel for the assessee submits that the funds could have been utilized only in two kinds of investments i.e. interest yielding and dividend yielding. The former i.e. interest yielding has resulted in interest income and to such extent the interest expense is allowable. It is further submitted that the latter i.e. dividend yielding has resulted in exempt income for which interest disallowance has already been taken. In this regard, the Ld. counsel refers to the details of interest received and paid to Barclays Investment and Loan (India) Ltd., which were filed before the AO. Summarizing the above, the Ld. counsel submits the following details : Particulars Amount (in Rs) interest paid to Barclays Investment & Loan (India) Rs.2,24,55,719/- Limited Interest earned from Barclays Investment & Loan Rs.1, 24,91, 507/- (India) Limited Net Interest expense to Barclays Investment & Loan Rs.99,64,212/- (India) Limited Disallowance as per rule 8D Rs. 60,43, 51 0/- Net interest claimed Rs. 39,20,702/- Processing Charges claimed Rs.39,03,100/-
Thus the Ld. counsel submits that the disallowance of Rs.1,64,30,025/- made by the AO be deleted.
On the other hand, the Ld. Departmental Representative (DR) refers to para 6.3 of the order dated 08.03.2018 passed by the Ld. CIT(A) and submits that the same may be confirmed.
We have heard the rival submissions and perused the relevant materials on record. We find that the funds invested by the assessee in interest yielding investments has resulted in interest income. To such extent, the interest expense is allowable. Also the funds used by the assessee in dividend yielding investments have yielded exempt income for which interest disallowance has been taken by the assessee. The borrowings were partly used for interest bearing investments, wherein the interest has been included in the computation of income. We further find that the assessee has placed Rs.15 crores in bonds with Barclays which has earned interest of Rs.1,24,91,507/- in the impugned assessment year. This was in the nature of bonds which were kept as margin against the borrowing. Obviously, this interest expense is allowable against the interest income. As far as the borrowings used partly for investments yielding exempt income are concerned, the assessee has suo motu taken an addition of Rs.60,43,510/- by working out as per Rule 8D of the Rules. In view of the aforesaid facts, we delete the disallowance of Rs.1,64,30,025/- made by the AO.