KOHINOOR DEVELOPMENTS CORPORATION,PUNE vs. INCOME-TAX OFFICER, WARD - 3(2), PUNE

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ITA 2137/PUN/2017Status: DisposedITAT Pune11 December 2018AY 2010-116 pages
AI SummaryPartly Allowed

What did the Tribunal hold?

The Tribunal held that since the assessee had sufficient interest-free funds exceeding its investments, the disallowance of interest expenditure was deleted. However, the disallowance computed under Rule 8D(2)(iii) was set aside for re-computation.

What were the facts?

The assessee earned exempt dividend income. The AO disallowed a sum under Section 14A read with Rule 8D, which was confirmed by the CIT(A). The assessee appealed the disallowance.

What were the issues?

Whether disallowance under Section 14A is justified when interest-free funds are sufficient, and how to compute disallowance under Rule 8D(2)(iii).

Which sections of the Income-tax Act were involved?

Section 14A

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Cases cited in this judgment(4)Show list

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Income Tax Appellate Tribunal, PUNE BENCH “SMC”, PUNE

Before: SHRI R.S. SYAL

For Appellant: Shri S.N. Puranik
For Respondent: Shri M.K. Verma

आदेश / ORDER

PER R.S.SYAL, VP :

This appeal by the assessee is directed against the order passed by the CIT(A)-3, Pune on 31-05-2017 in relation to the assessment year 2010-11.

2.

The only issue raised in this appeal is against confirmation of disallowance of Rs.15,47,743/- made by the Assessing Officer (AO) u/s. 14A of the Income-tax Act, 1961 (hereinafter also called as ‘the Act’).

2 ITA No.2137/PUN/2017 Kohinoor Developments Corporation

3.

Briefly stated, the facts of the case are, that the assessee

earned exempt dividend income of Rs.15,03,090/-. In the

absence of the assessee having suo motu disallowed any sum

as relatable to the exempt income, the AO invoked the

provisions of section 14A read with Rule 8D to work out the

disallowance at Rs.15,47,743/-, comprising of two amounts

viz., Rs.8,64,161/- under Rule 8D(2)(ii) and Rs.6,83,582/-

under Rule 8D(2)(iii). The ld. CIT(A) sustained the

disallowance.

4.

Having heard both the sides and perused the relevant

material on record, it is noticed from the assessee’s balance

sheet that the total amount of partners’ capital is

Rs.34,06,58,098/- as against the amount of Investments at

Rs.14,41,48,818. Capital of Rs.34.06 crores is held by

partners on which no interest was paid. Thus, it becomes

apparent that the capital of the firm, which is not liable for any

interest payment, is far in excess of the amount of investments

in securities yielding exempt income. The Hon'ble Bombay

High Court in the case of CIT vs. Reliance Utilities & Power

Ltd. 313 ITR 340, has held that where an assessee possesses

sufficient interest free funds of its own which were generated

3 ITA No.2137/PUN/2017 Kohinoor Developments Corporation

in the course of relevant financial years, apart from substantial

shareholders’ funds, presumption stands established that the

investment in sister concerns were made out of interest free

funds and, therefore, no part of interest on borrowing could be

disallowed. In holding so, the Hon'ble Bombay High Court

relied on the judgment of the Hon'ble Supreme Court in the

case of East India Pharmaceuticals Works Ltd. vs. CIT 224

ITR 627 (SC). The Hon'ble Karnataka High Court has applied

such a proposition in the context of section 14A by holding in

CIT vs. Micro Labs 383 ITR 490 (Kar), that where

investments are made from common pool, and non-interest

bearing funds are more than the investments in tax free

securities, then, no disallowance of interest expenditure u/s

14A can be made. As capital of the firm is much more than

the amount of Investments, respectfully following the

precedents, I order to delete the disallowance of Rs.8,64,161/-.

5.

The second component of the disallowance which has

been assailed in the instant appeal is Rs.6,83,582/-, that has

been computed by the AO under Rule 8D(2)(iii), being, 1/2

percent of the average of the value of investments. In this

regard, it is relevant to note that the Hon’ble Delhi High Court

4 ITA No.2137/PUN/2017 Kohinoor Developments Corporation

in ACB India Ltd. vs. ACIT (2015) 374 ITR 108 (Del), has

held that value of tax exempt investments should be

considered instead of total investments for adopting average

value of investments of income which is not part of the total

income. The effect of this decision is that while making

disallowance under Rule 8D(2)(iii), it is only the average of

those investments which have yielded exempt income are to be

taken into consideration and not the average of all investments

as has been done by the AO in this case. In the given

circumstances, I set-aside the impugned order on this score

and remit the matter to the file of AO for re-computing the

disallowance under Rule 8D(2)(iii) in the light of the judgment

of Hon’ble Delhi High Court in ACB India

(supra) after allowing reasonable opportunity of being heard

to the assessee.

6.

In the result, the appeal is partly allowed.

Order pronounced in the Open Court on 11th December, 2018.

Sd/- (R.S.SYAL) उपा�य� उपा�य�/ VICE PRESIDENT उपा�य� उपा�य� पुणे Pune; �दनांक Dated : 11th December, 2018 सतीश

5 ITA No.2137/PUN/2017 Kohinoor Developments Corporation

आदेश क� क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत / Copy of the Order is forwarded to : अ�ेिषत आदेश आदेश आदेश अपीलाथ� / The Appellant; 1. ��यथ� / The Respondent; 2. आयकर आयु�(अपील) / 3. The CIT (Appeals)-3, Pune आयकर आयु� / The Pr. CIT-2, Pune 4. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे “SMC” / 5. DR ‘SMC’, ITAT, Pune; गाड� फाईल / Guard file. // True copy // 6.

आदेशानुसार आदेशानुसार/ BY ORDER, आदेशानुसार आदेशानुसार // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune

ITA No.2137/PUN/2017 Kohinoor Developments Corporation

Date 1. Draft dictated on 10-12-18 Sr.PS 2. Draft placed before author 11-12-18 Sr.PS 3. Draft proposed & placed before the JM second member 4. Draft discussed/approved by Second JM Member. 5. Approved Draft comes to the Sr.PS/PS Sr.PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order.

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