SUDARSHAN KUMAR PARAKH,CHENNAI vs. ITO CORPORATE WARD 4(4), CHENNAI

The ld AR submitted that the assessee has made reasonable apportionment and arrived the income in the respective assessment year whereas the disallowances made by the AO are far in excess of what has been deducted in the Total Income Statement the respective assessment year which are patently erroneous, based on misconception, incorrect appreciation of facts and incorrect application of formula prescribed under Rule 8D and the ld CIT(A) erred in sustaining such assessments. The Assessing Officer is factually incorrect in observing that the assessee has not furnished reasonable reply and failed to prove the genuineness of the transaction with M/s National Autoplast. The assessee made elaborate submissions explaining the source and application of funds and the allocation of Interest expenditure incurred under time heads business and Other Sources. Moreover all the transactions were routed through bank and statement of accounts from the firm/companies have been furnished. Hence, the Assessing ITA Nos.2453 & 2454/Chny/2017 :- 5 -: Officer is not justified in holding that the appellant has failed to prove the genuineness of the transactions, The Assessing Officer failed to notice that the appellant had a capital of Rs 6.38 Crores at the beginning of the year and had enough non-interest bearing funds for making investments that fetch exempt income. Courts have held that where the assessee has enough interest free funds available sufficient to meet investments, it can be presumed that the investments were from interest free funds available. Hence the invoking of section 14A is not at all justified. The claim for deduction of Interest expenditure u/s 36 in the computation of business income and the claim u/s 57 are justified since there is a clear nexus between borrowals and the advances made. The claim for deduction of interest (u/s 36 is justified on commercial expediency and the claim for deduction u/s 57 is justified having been incurred wholly and exclusively for the purpose of earning the gross interest admitted in the Total lncome. Hence, the claim made in the returns are just and fair and there is no justification for disallowance of any part under the head other sources. Without prejudice to the foregoing, even assuming but not admitting that the findings of the Assessing Officer are correct, yet the working of the disallowance u/s 14A under Rule 8D is erroneous in as much as he has failed to exclude interest expenditure in respect of advances on which interest has been admitted by the appellant. If the & 2454/Chny/2017 :- 6 -: interest expenditure in respect of advances for which interest is admitted by the appellant is excluded, there is no interest expenditure left to be disallowed under Rule 8D. The Assessing Officer is not justified in selectively excluding interest attributable to advances made to National Polyplast (Firm) and not failing to exclude interest attributable to other advances. Therefore, the ld AR submitted that the CIT (Appeals) also erred in sustaining the disallowance under section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 and also other disallowances by completely brushing aside the analysis of the financial statements to negate the diversion of borrowed monies and without assigning proper reasons and justification. The Ld AR relied on the decisions of the Hon’ble Madras High Court decision in the case of M/s Roca Bathroom Products Ltd Vs PCIT in TCA No 775 /2018 dt 04.12.2018.

Per contra, the Ld.DR submitted that the assessee primarily earns income from salary and a meager remuneration from the firm. He has borrowed from the Standard Chartered Bank at very heavy interest rates, say from 12.5% to 15% and advanced them to companies viz National Polyplast India Ltd & National Plastic Technologies Ltd wherein he is Director and from which he has admitted exempt income, i.e., ITA Nos.2453 & 2454/Chny/2017 :- 7 -: dividend, and to M/s National Autoplast, a firm wherein he is a partner, from which he has admitted a meager remuneration. During the assessment proceedings, the assessee has not filed any audit report as required u/s 44AB holding that no business has been carried out, even though the turnover shown as per the P&L account required compulsory audit. The assessee has not filed any cash flow statement for these years or for any earlier years. From the P & L account and other particulars filed etc, the AO found that the assessee has diverted the interest bearing funds for making the investments which fetched or could fetch exempt income and also diverted the interest bearing funds to the firm without charging interest. Therefore, the AO made due disallowances under Section 14 A r w r 8D and under sections 36 r w 37 & 57. Though, the assessee challenged the assessments before the ld CIT(A) and pleaded on the grounds of commercial expediency, availability of interest free funds etc , he has not laid any material in support of his contentions before him and hence the ld CIT(A) on due examination of the facts and circumstances of these cases held that the assessee has taken a secured loan of Rs.6.78 crores from M/s Standard Chartered Bank and has used the same for deposits, loans and advances as per the schedules mentioned in his orders. There has been a very clear design in taking loans from commercial banks and & 2454/Chny/2017 :- 8 -: advancing it to sister concern without charging interest. To this extent, assessee is attempting to reduce the taxes payable on interest incomes received as well as other incomes and after considering various case laws mentioned in his orders upheld the action of the AO and also held that the interest expenditure has no direct relation to the income declared under the head other sources. In spite of such findings, the assessee has not laid any material, but for the copies of returns and the computation statements, before this Hon’ble Tribunal to dislodge the findings recorded by the lower authorities and hence the ld DR pleaded that these appeals may be dismissed.

We heard the rival submissions. The assessee is the Director in two companies viz National Polyplast India Ltd & National Plastic Technologies Ltd and a partner in a firm viz National Autoplast . He has admitted income from salary and meager remuneration from the firm, interest income but claimed huge interest against the income under the heads business and other sources apart from the receipt of huge dividend income, being claimed as exempt. Though the onus lie on the assessee to establish such claims, the A O held that the assessee has not laid relevant material, however, on the basis of available material he found that the assessee has diverted the interest bearing funds for & 2454/Chny/2017 :- 9 -: making the investments which fetched or could fetch exempt income and also diverted the interest bearing funds to the firm without charging interest and therefore he has worked out the impugned disallowances. In the absence of relevant material, the Ld.CIT(A) has also confirmed the action of the AO. The assessee pleaded before us that he has furnished the relevant material before the AO and the entire transactions were routed through bank and statement of accounts from the firm/companies have been furnished etc and the Assessing Officer failed to notice that the assessee had a capital of Rs 6.38 Crores at the beginning of the year and had enough non-interest bearing funds for making the impugned investments etc. The interest disallowance is made on the loan taken from the bank which is stated to be a secured one, and loan amount are invested in the companies and firm. The nature of security offered for availing the loan, the nature of the impugned investments, the purpose and the percentage of investment in the companies and the firm, whether the assessee was entitled for any interest on the capital / advances as per partnership deed etc, it appears has not been enquired into. Further the assessee claimed commercial expediency too, however, on which there is no discussion at all. Considering the entire facts and circumstances, we deem it fit to remit these issues back to the AO for a fresh examination. The assessee ITA Nos.2453 & 2454/Chny/2017 :- 10 -: shall lay all material in support of his contentions before the AO and comply with the AO’s requirements in accordance with law. The AO is also free to conduct appropriate enquiry as deemed fit, but shall furnish adequate opportunity to the assessee on the material etc to be used against him and decide the matter in accordance with law.

In the result, both the appeals of the assessee are treated as partly allowed for statistical purposes.