DHIREN NAVINCHANDRA KAPADIA,AHMEDABAD vs. THE DCIT, CIRCLE-1(3), VADODARA

The assessee, in the present case, is an individual who filed his return of income for the year under consideration on 29.01.2016 declaring total income of Rs.74,91,950/-. The said return was selected for limited scrutiny; and, during the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee had made an investment of Rs.6.39 crores and Rs.1.93 crores in various mutual funds and shares - the income of which was exempt from tax. He also noticed that interest expenditure of Dhiren Navinchandra Kapadia Vs. DCIT AY : 2015-15 2 Rs.38,85,059/- was claimed by the assessee. In this regard, the assessee was called upon by the Assessing Officer to explain as to why the disallowance under Section 14A by applying Rule 8D should not be made on account of interest and other expenses which were incurred in relation to earning of exempt income. In this regard, it was explained by the assessee that his own funds, available in the form of capital, were to the tune of Rs.13.18 crores which were sufficient to make the investment in various mutual funds and shares. It was also submitted by the assessee that interest expenditure to the extent of Rs.32,79,498/- was incurred in respect of funds borrowed from Bajaj Finance Ltd. which were utilized for capital contribution in the partnership firm Varsha Fashion LLP and the interest paid was claimed as deduction from the interest earned from the said LLP. It was contended that there was no utilization of borrowed funds for making investments in mutual funds & shares and there was no question of any disallowance on account of interest under Section 14A of the Act. The stand of the assessee was not found acceptable by the Assessing Officer as, according to him, the same was not supported by any documentary evidence. He accordingly invoked Rule 8D and worked out the disallowance to be made under Section 14A at Rs.19,16,305/-, comprising of interest expenses of Rs.15,20,769/- and other expenses of Rs. 3,95,536/-.

The disallowance made by the Assessing Officer under Section 14A read with Rule 8D was challenged by the assessee before the learned CIT(A) and the submissions made before the Assessing Officer were reiterated on behalf of the assessee before the learned CIT(A) in support of his case that the disallowance made by the Assessing Officer under Section 14A read with Rule 8D was not sustainable. After considering the submissions made by the assessee as well as the material available on record, the learned Dhiren Navinchandra Kapadia Vs. DCIT AY : 2015-15 3 CIT(A) decided this issue vide paragraph Nos. 5 to 6.4 of his impugned order which read as under:-

The learned CIT(A) thus restricted the disallowance of Rs.19,16,305/- made by the Assessing Officer under Section 14A read with Rule 8D to Rs.4,18,543/-. Aggrieved by the order of the learned CIT(A), the assessee has preferred this appeal before the Tribunal.

We have heard the arguments of both the sides and also perused the relevant material available on record. The learned Counsel for the assessee has invited our attention to the balance-sheet of the assessee as on 31.03.2014 placed at page nos. 12-13 of the paper-book to show that sufficient funds, in the form of own capital of Rs.13.17 crores and interest free loans of Rs.3.49 crores, were available with the assessee at the relevant Dhiren Navinchandra Kapadia Vs. DCIT AY : 2015-15 5 time to make investment in mutual funds and shares. He has also submitted that the interest bearing funds, on the other hand, were utilized by the assessee mainly for making investment in the partnership firm Varsha Fashion LLP as partner’s capital and since no exempt income in the form of share profit from the said firm was received during the year under consideration, the disallowance on account of interest under Section 14A was not called for. He has further submitted that the assessee had received interest from Varsha Fashion LLP and the same was offered for tax after deducting the interest paid on borrowed loans. He has contended that it was thus a case of net interest income earned by the assessee and there being non-deduction claimed by the assessee on account of any expenses, the disallowance made by the Assessing Officer and sustained by the learned CIT(A) under Section 14A read with Rule 8D is not sustainable. We find merit in this contention raised by the learned Counsel for the assessee. As is evident from the balance-sheet of the assessee as on 31.03.2014, the assessee had sufficient interest free funds in the form of own capital and unsecured loans available in the year under consideration; and, since the same were sufficient to make investments in mutual funds and shares, there was no utilization of interest bearing borrowed funds by the assessee in mutual funds and shares. On the other hand, the interest bearing borrowed funds were utilized by the assessee for making investment in M/s. Varsha Fashion LLP in the form of partner’s capital; and, since there was no exempt income received by the assessee during the year under consideration as share of profit from the said firm which was exempt from tax and the interest earned by the assessee from the said firm was offered for tax after deducting the interest paid, it was a case where the assessee had actually earned net interest income. Moreover, as pointed out by the learned Counsel for the assessee from the income and expenditure account of the assessee for the year under consideration, no deduction on account of any Dhiren Navinchandra Kapadia Vs. DCIT AY : 2015-15 6 other expenditure was claimed by the assessee. Keeping in view all the facts and circumstances of the case, which have remained unrebutted and uncontroverted by the learned Departmental Representative, we are of the view that the disallowance made by the Assessing Officer under Section 14A read with Rule 8D, as sustained by the learned CIT(A), is not justified and deleting the same, we allow this appeal of the assessee.

In the result, the appeal filed by the assessee is allowed.