Loading judgment…
Facts
The assessee, Aura Securities Private Ltd., filed its ITR for AY 2018-19 declaring Nil income, but the AO made a disallowance of Rs. 99,18,279/- u/s 14A. The CIT(A) dismissed the assessee's appeal. The assessee had suo moto disallowed Rs. 3,12,761/- u/s 14A and Rs. 40,73,658/- u/s 36 for interest, contending that borrowed funds were for its painting business and not for investments yielding exempt income. The AO also made a pro-rata disallowance of Rs. 19,83,058/- for common expenses, which the assessee challenged, arguing stock-in-trade should be considered as part of total revenue.
Held
The Tribunal held that the amendment to Rule 8D, effective from 02.06.2016, made the reliance on the Gujarat High Court decision (Nirma Credit) otiose for interest disallowance. However, it found the AO's disallowance of finance charges was based on presumption without fully appreciating the facts regarding the utilization of borrowed funds for advances, thereby remanding this issue back to the AO for re-adjudication. For the common expenses, the Tribunal confirmed the AO's pro-rata disallowance of Rs. 19,83,058/-, rejecting the assessee's argument to include stock-in-trade as part of total revenue for calculation purposes, as the assessee's primary activity was investment.
Key Issues
Whether the disallowance of interest expenditure u/s 14A read with Rule 8D was correct, and whether the pro-rata disallowance of common expenses was justified considering the assessee's primary activity.
Sections Cited
143(3), 144B, 14A, Rule 8D, 36(1)(iii)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “B” BENCH, AHMEDABAD
Before: SHRI TR SENTHIL KUMAR & SHRI NARENDRA PRASAD SINHA
PER NARENDRA PRASAD SINHA, ACCOUNTANT MEMBER:
This appeal is filed by the assessee against the order of National Faceless Appeal Centre(NFAC), Delhi [hereinafter referred to as ‘CIT(A)’], dated 29.07.2024 for the Assessment Year (A.Y.) 2018-19 in the proceeding u/s 143(3) of the Income Tax Act.
The brief facts of the case are that the assessee had filed its return of income for A.Y. 2018-19 on 31.10.2018 declaring total income of Rs. Nil. The case was selected for complete scrutiny under the e-assessment scheme. In the course of assessment, the AO had made addition of Aura Securities Private Limited Vs. DCIT, AY-2018-19 2 Rs.99,18,279/- on account of disallowance u/s 14A of the Act. The assessment was completed u/s. 143(3) r.w.s. 144B of the Act on 25.09.2021 at total income of Rs.99,18,279/-
Aggrieved with the order of the AO, the assessee had filed an appeal before the First Appellate Authority which was decided by Ld. CIT(A) vide the impugned order and the appeal of the assessee was dismissed.
Now the assessee is in second appeal before us. The following grounds have been taken in this appeal.
In law and in the facts and circumstances of the Appellant’s case, the learned CIT(A) has erred in confirming the disallowance u/s. 14A read with Rule 8D of the Act amounting to Rs. 96,05,518/- as per the provisions of section 14A of the Act when no such is disallowance is called for, without appreciating the facts of the case.
The appellant company craves leave to add, alter or amend and/or withdraw any ground or grounds of appeal either before or during the course of hearing of the appeal.
5. Shri Biren Shah, the ld. A.R of the assessee explained that the assessee had suo moto made disallowance of Rs. 3,12,761/- u/s 14A of the Act, in respect of management fees, carpediem fund operating expense and demat charges. Further interest paid in respect of borrowed fund to the extent of Rs. 40,73,658/- was also disallowed by the assessee u/s 36 of the Act in the computation of income. The Ld. AR submitted that the AO had made pro-rata disallowance of Rs.19,83,058/- in respect of common expenses which was not correct considering the fact that the Aura Securities Private Limited Vs. DCIT, AY-2018-19 3 assessee himself had identified the expenses pertaining to earning of exempt income and disallowed the same. He explained that the assessee was also engaged in business of trading of paintings and art-work and most of the common expenses were required to be incurred irrespective of investment activity carried on by the assessee. The Ld. AR contended that the expenses considered for pro-rata disallowance by the AO did not have any nexus with the investment activity yielding exempt income. The Ld. AR further submitted that the AO while making the pro-rata disallowance did not consider the stock-in-trade of the assessee as part of total revenue, which was not correct. According to him, the stock-in- trade was also required to be considered as part of total revenue for working out the pro-rata disallowance. As regards disallowance of finance charge of Rs. 79,35,221/-, the Ld. A.R submitted that the AO did not consider the explanation that the loan obtained from Bajaj Finance Limited and Inter-Corporate Deposits (ICDs) were not utilised towards investments for earning of exempt income, rather these amounts were deployed in the painting business. The Ld. AR further submitted that the AO was not correct in disallowing the interest expenditure without taking into account the interest income earned by the assessee. According to the Ld. AR, only the net amount of interest expenditure should have been considered for disallowance. In this regard, he relied upon the decision of Hon’ble Gujarat High Court in the case of Nirma Credit and Capital (P) Ltd. (85 taxmann.com 72), (Guj.).
6. Per contra, Shri Abhijit, Ld. SR-DR submitted that the assessee did not bring any evidence on record in support of its contention that the loans taken from Bajaj Finance Limited and ICDs were utilised for painting Aura Securities Private Limited Vs. DCIT, AY-2018-19 4 business or for advancing fund to M/s. Amazon Textiles Pvt Ltd., from whom interest income was received. He explained that out of total revenue of Rs. 29.29 crores, the assessee had earned exempt income of Rs.23.52 crores. Thus the primary activity of the assessee was investment activity and the activity of trading in painting was only a subsidiary activity. As regarding disallowance of net interest expense, the Ld. SR-DR submitted that the decision of Hon’ble Gujarat High Court was given in the context of old provisions of Rule 8D(2)(ii), wherein disallowance of interest not directly attributable to any particular income or receipt was involved. He explained that, with the amendment of Rule 8D with effect from 02.06.2016, no disallowance on account of interest expenditure not directly attributable to any income or receipt, is now made. As per the revised Rule 8D only the expenditure directly attributable to the exempt income is required to be disallowed. The Ld. Sr. DR submitted that under the revised scheme of disallowance under Rule 8D, the decision of Hon’ble Gujarat High Court, as relied upon by the assessee, was no longer relevant. As regards disallowance of common expenses the Ld. Sr. DR supported the order of the AO and submitted that since the assessee was primarily engaged in investment activity, the AO had correctly made the proportionate disallowance of common expenses.
7. We have considered the rival submissions. We will first take up the issue of disallowance of interest expense. One of the contention of the assessee is that the AO was not correct in disallowing the entire interest expenditure, considering the fact that the assessee had earned interest income of Rs. 85,24,215/- during the year. According to the assessee only the net interest i.e. interest paid minus taxable interest income earned, Aura Securities Private Limited Vs. DCIT, AY-2018-19 5 should have been considered for making the disallowance under Rule 8D of the IT Rules. We have considered the submission of the assessee and also carefully gone through the decision of Hon’ble Gujarat High Court in the case of Nirma Credit and Capital Pvt. Ltd. (supra) relied upon by the assessee in this regard. The decision to consider the net interest expenditure was given by the Hon’ble High Court while interpreting the sub-clause (ii) of the old Rule 8D(2) of the IT Rules. It will be relevant here to reproduce the said Rule.
8D (2) The expenditure in relation to income which does not form part of the total income shall be the aggregate of following amounts, namely:— i. the amount of expenditure directly relating to income which does not form part of total income; ii. in a case where the assessee has incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt, an amount computed in accordance with the following formula, namely :— A x B C Where A = Amount of expenditure by way of interest other than the amount of interest included in clause (i) incurred during the previous year; B = The average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; C = The average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year; iii. an amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year.
Aura Securities Private Limited Vs. DCIT, AY-2018-19 6 8. As per the old Rule-8D, the interest expenditure directly relating to exempt income was covered in clause (i). At the same time, clause (ii) provided for disallowance of interest expenditure which was not directly attributable to any particular income or receipt. The clause (ii) of Rule 8D(2) was deleted vide amendment of the Rule with effect from 02.06.2016 and no disallowance under this clause is now required to be made. The Hon’ble High Court had given the decision while interpreting old Rule-8D(2)(ii), which is no longer on the statute. Therefore, the reliance of the assessee on the decision of Hon’ble Gujarat High Court vis-à-vis the old provision of Rule 8D(2)(ii) has become otiose. As per the amended Rule 8D, only the amount of expenditure directly relating to income, which does not form part of total income, is require disallowed. It is in this context that the assessee was required to explain the source of fresh investments made by the assessee during the year, which would result in earning of exempt income.
During the year the assessee had disclosed exempt income of Rs. 23,52,15,488/- the break-up of which was as under:
Particulars of Income Amount (in Rs.) Dividend from companies 23,04,40,344 Dividend from units 8,703 Business Income from Amplus-I 10(23FBB) 1,62,445 Total 23,52,15,488 Aura Securities Private Limited Vs. DCIT, AY-2018-19 7 As per provision of Rule 8D(1) of IT Rules, the amount of expenditure directly relating to income which does not form part of total income is liable to be disallowed. From the copy of balance sheet brought on record it is found that the non-current investments had increased from Rs.235.88 crores as on 31st March, 2016 to Rs. 298.77 crores as on 31st March, 2017. There was fresh investment in equity instrument of Arvind Smartspaces Limited by Rs. 26.09 crores and in share warrants of Arvind Smartspaces Limited by Rs. 38.33 crores during the year. At the same time, there was no substantial increase in short-term borrowings, as reflected in Schedule-4 of the accounts, as under: i. HDFC Bank overdraft – Rs.34.00 crores ii. Borrowings from Bajaj Finance Limited – Rs.33.50 crores iii. Increase in ICDs during the year – Rs.9.81 crores
The assessee had debited finance cost Rs.1,20,10,879/- in the P&L account. In the course of assessment proceeding the assessee had explained the utilisation of the borrowed funds as under:
Particulars Amount (in Finance Utilization of borrowed funds Rs. Cost
Secured 34,00,02,569 40,73,658 The said loan has been utilized loan from for acquiring the share warrants HDFC of Arvind Smartspaces Limited Secured 33,50,00,000 11,97,055 The said loan has been utilized loan from for making the Bajaj payment/advancing the funds for Finance painting business and for advancing funds to M/s. Amazon Textiles Private Limited, from Aura Securities Private Limited Vs. DCIT, AY-2018-19 8 whom the taxable interest income has been received during the year. The working of movement of borrowed funds, interest cost thereon and ledger accounts duly showing the utilization of borrowed funds is attached herewith vide Annexure-1(b). Unsecured 9,81,95,974 67,38,166 The said loan has been utilized loan (ICD) for advancing the funds for painting business. The working of movement of borrowed funds, interest cost thereon and ledger accounts duly showing the utilization of borrowed funds is attached herewith Annexure – 1(c). Total 77,31,98,543 1,20,08,879
So far as secured loans from HDFC is concerned there is not dispute. The assessee itself had disallowed the entire interest expense of Rs. 40,73,658/- u/s. 36(1)(iii) as this amount was utilised for making investment in share warrants of Arvind Smartspaces Limited. However, the assessee did not explain the source of investment of Rs. 26.09 crores made in equity instrument of Arvind Smartspaces Limited. The contention of the assessee is that the secured loan taken from Bajaj Finance Limited and ICD was utilised for advancing funds for painting business and to M/s. Amazon Textiles Pvt Ltd. However, no such investment is appearing in the balance sheet of the assessee. The total purchase disclosed in P&L account is Rs. 3.39 crores and increase in the closing stock during the year was to the extent of Rs.1.52 crores only. Therefore, the entire Aura Securities Private Limited Vs. DCIT, AY-2018-19 9 borrowed funds couldn’t have been utilized for painting business. In view of this factual position the contention of the assessee that loan of Rs. 33.50 crores from Bajaj Finance Limited and ICD of Rs. 9.81 crores was utilised for painting business and for advancing fund to Amazon Taxtiles Pvt Ltd. was not correct as no such advance was appearing in the balance sheet. Before us also no evidence in respect of any such advance has been brought on record. However, it is found from schedule 11 of the Balance-sheet that there was fresh “Advances for Leasing Right” to the extent of Rs. 30.09 crores and also fresh advance of “Other loans” of Rs.2.91 crores. Considering this fact, the funds borrowed during the year being deployed towards these advances cannot be ruled out. The disallowance made by the AO is found to be more on presumption than on correct appreciation of facts of the case. In fact, the AO had given a finding that the utilisation of funds borrowed by the assessee was opaque. Before us also the assessee has not brought on record the complete facts vis-à-vis the utilization of fresh funds borrowed during the year. We, therefore, deem it proper to set aside the matter to file of the AO with a direction to allow another opportunity to the assessee to explain the utilisation of borrowed funds. The assessee is also directed to make compliance before the AO and explain the source of investment in the equity instrument of Arvind Smartspaces Limited and also explain the deployment of funds borrowed during the year with documentary evidences. Thereafter, the AO may re-adjudicate the matter as per the provisions of law.
As regarding the common expenses, there is no dispute to the fact that the assessee is primarily engaged in investment activities and the trading is only subsidiary in nature. As per Rule 8D an amount equal to Aura Securities Private Limited Vs. DCIT, AY-2018-19 10 one per cent of the annual average of the monthly averages of the opening and closing balances of the value of investment, income from which does not or shall not form part of total income, was liable to be disallowed. The AO has been fair enough to identify the common expenses and thereafter make only pro-rata disallowance. We do not find anything wrong with the disallowance of common expenses as made by the AO. The contention of the assessee that pro-rata disallowance should have been made after considering the stock-in-trade as part of total revenue is also not correct. The stock-in-trade can’t be considered as part of total revenue. The stock is not part of revenue as per accounting principle. Further, the same stock may continue in the books for a number of years and by including the stock as part of revenue, it would give distorted result. Therefore, the contention of the assessee to include stock-in-trade as part of revenue is rejected and the addition of Rs.19,83,058/- on account of common expenses is confirmed.
In the result, the appeal of the assessee is partly allowed for statistical purpose.
Order pronounced in the Court on 12/02/2026 at Ahmedabad.
Sd/- Sd/- (TR SENTHIL KUMAR) (NARENDRA PRASAD SINHA) Judicial Member Accountant Member Dated - 12th February, 2026 True Copy Neelesh आदेश आदेश क� आदेश आदेश क� क� �ितिलिप क� �ितिलिप �ितिलिप अ�ेिषत �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order forwarded to : अ�ेिषत 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबंिधत आयकर आयु� / Concerned CIT
आयकर आयु�(अपील) / The CIT(A) 5. िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण / DR, ITAT, 6. गाड� फाईल /Guard file. आदेशानुसार/BY ORDER, आदेशानुसार आदेशानुसार आदेशानुसार
पंजीकार (Dy./Asstt.Registrar) उप/सहायक उप सहायक पंजीकार उप उप सहायक सहायक पंजीकार पंजीकार आयकर आयकर अपीलीय आयकर आयकर अपीलीय अपीलीय अिधकरण अपीलीय अिधकरण अिधकरण, अहमदाबाद अिधकरण अहमदाबाद अहमदाबाद / ITAT, Ahmedabad अहमदाबाद