SMT. D. SAILAJA,CHENNAI vs. DCIT, CHENNAI

Brief facts of the case are that the assessee has filed the return of income for the assessment year 2012-13 admitting total income of ₹.57,61,340/-. The case of the assessee was selected for scrutiny and against the statutory notices, the assessee furnished the details as called for. After verification of the details furnished by the assessee, the assessment under section 143(3) of the Act was completed by assessing total income of the assessee at ₹.70,89,668/- after making disallowance under section 36(1)(iii) of the Act and disallowance under section 14A of the Act. On appeal, the ld. CIT(A) upheld the disallowances made by the Assessing Officer.

On being aggrieved, the assessee is in appeal before the Tribunal. With regard to the disallowance under section 36(1)(iii) of the Act, by relying upon the decision in the case of S.A. Builders Ltd. v. CIT 288 ITR 1(SC) and the decision in the case of CIT v. Reliance Communications Infrastructure Ltd. [2012] 21 taxmann.com 118 (Bom.), the ld. Counsel for the assessee has prayed for deleting the disallowance. On the other hand, the ld. DR strongly supported the orders of authorities below.

We have heard both the sides, perused the materials available on record and gone through the orders of authorities below. In this case, the Assessing Officer has observed that the assessee had obtained loan of

Apart from this, the Assessing Officer has also found that the sum of ₹.5,00,000/- borrowed by the assessee from Daggolu Rajeswaramma on 02.08.2010, which carried interest @ 18% was lent by the assessee to Ms. Nithya Reddy, on which no Interest was charged by the assessee. The loan advanced to Ms. Nithya Reddy was received back by the assessee on 08.06.2011. Thus, Assessing Officer worked out the disallowance of interest under section 36(1)(iii) of the Act for the period from 01.04,2011 to

Further, the Assessing Officer found that a sum of ₹.1,00,000/ - borrowed by the assessee from Mr. N. Sailesh Reddy on 02.04.2005, @ 12% was utilized for giving interest - free advance to one Mr. Srinivasan. Since interest bearing borrowed funds have been diverted for making interest free advances, the quantum of interest paid to Mr. N. Sailesh Reddy during the year amounting to ₹.24,000/- was disallowed under section 36(1)( iii) of the Act and brought to tax.

On appeal, in view of the decision in the case of SA Builders Ltd. v. CIT (supra), the ld. CIT(A) has observed that M/s. Centwin Estates, the firm of which the assessee was originally a partner [M/s. Centwin Estates was later converted into a company] utilized the money for its own business purposes, then the assessee, who had a deep interest in the Firm as its partner, would have been justified in lending the borrowed money at a lower rate of interest to the firm. However, since M/s. Centwin Estates chose to transfer the entire borrowed money to Olive Beach Promoters, in the absence of ‘deep interest’ of the assessee in Olive Beach Promoters, being established, it was really immaterial that Olive Beach Promoters had generated income of ₹.1.05 crores (for itself) during the relevant previous

Before us, in the grounds of appeal, the assessee has heavily relied on the decision in the case of SA Builders Ltd. v. CIT (supra) in support of its contention. Even though the assessee failed to establish the nexus between the huge amount of borrowed funds and its own business expediency, in view of the decision in the case of SA Builders Ltd. v. CIT(supra), subsequently, we find that in the case of Addl. CIT v. Tulip Star Hotels Ltd. [2012] 21 taxmann.com 97, the Hon’ble Supreme Court has observed that the decision in the case of SA Builders Ltd. v. CIT & Another, reported in 288 ITR 1, needs reconsideration. Otherwise also, vide order dated 23.11.2016 in I.T.A. No. 1146/Mds/2015 in assessee’s own case for the assessment year 2010-11 confirmed the disallowance by observing as under: “4. We have heard both the parties and perused the material on record. In our opinion, the assessee borrowed the funds at a higher rate of interest i.e.15% per annum and lend the same at a very low rate at 6% per annum. No shrewd businessman would do so. More so, the assessee borrowed the fund from Ranjini C. Reddy on a particular day and the same was advanced to sister concern at a lower rate of interest. In our opinion, there is no reason for advancing borrowed funds at such a lower rate of interest and that expenditure cannot be said to be wholly and exclusively incurred for the purpose of business and the assessee tried to divert the entire borrowed funds to a sister concern with a sole intention of reducing its profits and this kind of

The next ground raised in the appeal relates to confirmation of disallowance under section 14A of the Act. The Assessing Officer observed that the assessee was in receipt of share of profit from various partnership firms amounting to ₹.1,01,02,703/-, which are exempted under section 10(2A) of the Act. However, in the computation of income, the assessee has not undertaken any disallowance under section 14A of the Act as prescribed

Before us, the ld. Counsel for the assessee has submitted that the receipt of share of profit from various partnership firms amounting to ₹.1,01,02,703/- is nothing but salary and taxable under ‘income from salary’, which cannot be treated as exempt income. It was further submission that the assessee has voluntarily disallowed ₹.1,29,921/- under section 14A of the Act and therefore, the disallowance made by the Assessing Officer is unwarranted and prayed for deleting the same. On the other hand, the ld. DR has submitted that the assessee has not established as to how she has computed the disallowance and more particularly, the assessee has not adopted the correct method prescribed under Rule 8D in determining the disallowance under section 14A of the Act.

We have heard rival contentions, perused the materials available on record and gone through the orders of authorities below. In the grounds of appeal, the assessee contended that the Assessing Officer has not recorded satisfaction with the amount of the disallowance made by the assessee

Further, the submissions of the assessee that she has voluntarily disallowed ₹.1,26,921/- under section 14A of the Act, appears to be not determined the disallowance as per the method prescribed under Rule 8D. No evidence was brought on record as to how the assessee has arrived at a sum of ₹.1,26,921/- while disallowing under section 14A of the Act.

On perusal of the computation of disallowance under section 14A of the Act, we find that that by applying third limb of Rule 8D(2) and calculated 0.5% of the average total investment and disallowed ₹.6,66,212/-. The Assessing Officer noted that the assessee was in receipt of share of profit from various partnership firms amounting to ₹.1,01,02,703/-, which is

As contended by the assessee that the receipt of share of profit from various partnership firms amounting to ₹.1,01,02,703/- is nothing but salary and taxable under ‘income from salary’, which cannot be treated as exempt income, in case, if it is so and in the absence of any exempt income, the decision in the case of Redington (India) Ltd. v. Addl. CIT 392 ITR 633 (Mad) and CIT v. Chettinad Logistics (P) Ltd. reported in [2017] 80 taxmann.com 221 (Madras) and subsequent decision of the Hon’ble Supreme Court in dismissing the SLP filed by the Department in the case of CIT v. Chettinad Logistics (P) reported in [2018] 95 taxmann.com 250 (SC) would come to the rescue of the assessee. Thus, the above submission requires verification. Under these facts and circumstances, we remit the matter back to the file of the Assessing Officer to examine and decide the issue afresh in view of the

In the result, the appeal filed by the assessee is partly allowed for statistical purposes in the manner indicated above.