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Income Tax Appellate Tribunal, MUMBAI BENCHES “H”, MUMBAI
Before: SHRI SHAMIM YAHYA (AM) & SHRI RAM LAL NEGI (JM)
O R D E R
PER RAM LAL NEGI, JM
This appeal has been filed by the revenue against the order dated 29/10/2015 passed by the Ld. Commissioner of Income Tax (Appeals)-33, Mumbai, for the assessment year 2010-11, whereby the Ld. CIT (A) has partly allowed the appeal filed by the assessee against assessment order passed u/s 143 (3) of the Income Tax Act, 1961 (for short ‘the Act’).
Brief facts of the case are that the assessee an individual engaged in the business of share trading and also partner of M/s Prince marketing, M/s Aditya Developers and Director in M/s Prince Pipes and Fitting Pvt. Ltd., filed its return of income declaring the total income of Rs. 4,31,351/-. In response to the notices u/s 143 (2) and 142 (1), the authorized representative of the assessee attended the proceedings and filed the details called for from time to time. It was noticed that assessee had made investments in Mutual Funds and shares etc. and earned exempt income of Rs. 1,52,455/-during the previous 2 Assessment Year: 2010-11 year . The assessee had voluntarily disallowed a sum of Rs. 3,700/-u/s 14A of the Act. Accordingly, the AR was asked to explain as to why disallowance u/s 14A read with rule 8D should not be made. The AR worked out the disallowance u/s 14A of the Act at Rs. 40,664/- i.e. expenditure directed related to such income Rs. 7,620/- average value of total asset Rs. 31,548/- and 0.5% of average value at Rs. 1,496/-. The AO rejecting the contention of the assessee determined the total amount of disallowance at Rs. 48,08,541/- and added the said amount to the income of the assessee. Accordingly, after making certain other additions/disallowances, AO determined the total income of the assessee at Rs. 47,05,530/-. 3. The assessee aggrieved by the assessment order challenged the same before the Ld. CIT (A) inter alia on the ground that the AO has wrongly made addition of Rs. 48,08,541/-u/s 14A read with Rule 8D. The Ld. CIT (A) after hearing the assessee partly allowed the said ground and directed the AO to include investments in shares, PPF and Mutual Funds only as eligible investments for the purpose of computing average investments as laid down under rule 8D(2)(ii) (iii), after verifying the actual investments made in Mutual Funds. The revenue is in appeal against the said findings of the Ld.CIT(A). 4. The revenue has challenged the impugned order passed by the Ld. CIT (A) on the following effective grounds:- 1. “On the facts and circumstances of the case and in law Ld. CIT (A) has erred in deleting the addition made u/s 14A of the Income-tax Act 1961 without appreciating the fact that the disallowance u/s 14A of the IT Act, 1961 has been made as prescribed under Rule 8D of the Income Tax Rules, 1962.” 2. On the facts and circumstances of the case and in law Ld. CIT (A) has erred in holding that interest bearing loans have been utilized for the purpose of business without bringing anything on record to establish the same.”
3 Assessment Year: 2010-11
Before us, the Ld. Departmental Representative (DR) relying on the assessment order submitted that since the AO has computed the disallowance u/s 14A of the Act read with rule 8D of the Income Tax Rules, the Ld. CIT (A) wrongly directed the AO to include investments in shares, PPF and Mutual Funds only as eligible investments for the purposes of computing average investment laid down in Rule 8D(ii)(iii); therefore the impugned order is liable to be set aside.
On the other hand, the Ld. counsel for the assessee submitted that the Ld. CIT (A) has rightly directed the AO to compute the disallowance by including eligible investments for the purpose of computing average investments as laid down in rule 8D. The Ld. CIT(A) has rightly held that the loans and deposits cannot be included within the definition of investment for computing the disallowance u/s 14A of the Act. The Ld. counsel further relying on the decision of the Hon’ble Delhi High Court in the case of Joint Investments Pvt. Ltd. vs. CIT, dated 25.02.2015 submitted that the disallowance u/s 14A cannot exceed the exempt income earned by the assessee. 7. We have heard the rival submission and also perused the material on record including the cases relied upon by the Ld. counsel of the assessee. The Ld. CIT (A) has based his findings on the decision of Mumbai Tribunal in the case of DH Securities Pvt. Ltd. (2014) 41 Taxman.com 352 (Mum Trib), in which it has been held that disallowance u/s 14A of the Act can be made in conformity with the law even in case where dividend income has been earned on the shares held as stock-in-trade. So far as computation of disallowance under rule 8D(2)(ii)(iii) is concerned, only those investments from which the appellant earned exempt income should be taken into consideration, however, in the present case, the AO has failed to appreciate this aspect. Further, the Hon’ble Delhi High Court has held in the case of Joint Investments Pvt. Ltd. vs. 4 Assessment Year: 2010-11 CIT (supra) that by no stretch of imagination can section 14A or rule 8D be interpreted so as to mean that the entire tax exempt income is to be disallow.
In view of the aforesaid observations, we uphold the order of the Ld. CIT (A) on this issue and remit the matter to the file of AO with the direction to decide the issue afresh in accordance with the observations of the Ld. CIT (A) and also in accordance with the law laid down by Hon’ble High Court in the Joint Investments Vs. CIT (supra).
Vide Ground No. 2 of the revenue has challenged the action of the Ld. CIT (A) in holding that interest bearing loans have been utilized for the purpose of business without bringing anything on record to establish the same. The Ld. counsel submitted that during the year under consideration no fresh loans were taken and the loan funds have reduced. It is not the case where the appellant has availed loans at the higher rate of interest and advanced loan at the lower rate of interest. The investments in the partnership firms were made for earning income, there is no justification in making disallowance of interest u/s 36(1)(iii) of the Act.
On the other hand, the Ld. DR relying on the findings of the AO submitted that the Ld. CIT(A) has deleted the addition by wrongly holding that the assessee has utilized interest bearing funds for the purpose of business. The operative part of the findings of the Ld. CIT(A) reads as under:
“4.3 I have carefully considered the findings made by the AO in the assessment order, submissions made by the Appellant and the case laws cited therein. I intend to agree with the detailed submissions & explanation made by the Appellant. It is observed that till AY 2008-09, the interest-free loans of Rs. 9.85 crores was more than the interest bearing loans of Rs. 1.85 crores. As per the details of investments made the loans were utilized for the purpose of introducing capital in M/s Aditya Developers, conducting the Share Trading business and 5 Assessment Year: 2010-11 for giving interest free loans to family members and outsiders to the tune of Rs. 30 lakh. However, in AY 2009-10, the loan funds increased by only Rs. 86,00,000/- (approximately) and the same was utilized for increasing capital in Aditya Developers and Share trading business only. The only change in the loan funds was that one of the entities Mr. Jayant Chedda, who has given interest free loans in earlier years started charging interest on the balance amount. Thus the interest expenditure from AY 2008-09 increased from 33,60,000/- to Rs. 1,16,42,552/- in AY 2009-10 and then to Rs. 1,31,62,173/- in AY 2010-11. During the year under consideration i.e. AY 2010-11, no fresh loans have been taken. The loan funds also reduced from 11.23 crores to Rs. 10.72 crores, which has also been observed by the A.O. 4.4 The AO has reached to the conclusion that only Rs. 3,20,36,344/- was utilized for business purpose i.e., share trading business out of interest bearing loans of Rs. 10,72,20,830/- contradicts his own observation in the assessment order that the capital balance in Aditya Developers, during the year was Rs. 6,79,92,091/-. Thereafter, he has proceeded to compute the interest disallowance on the difference amount of Rs. 7,51,84,486/- (Rs. 10,72,20,830 – Rs. 3,20,36,344). He has also completely disregarded the fact that during the year, investment in another firm Prince Marketing was Rs. 54 lacs. As a result of these investments in the two firms that the Appellant has received interest income of Rs. 75,02,500/- from Aditya Developers during the year. Although no interest was received from Prince Marketing, it will not make any difference as the said firm has also paid tax @ 30% on its total taxable income, a fact also noted by the AO in his order. The AO has also disregarded the fact that the Appellant had an interest free loan of Rs. 1,27,35,500/- out of which interest free advances of Rs. 72,66,000/- was given. All the aforesaid facts have been completely disregarded by the AO. 4.5 Looking to the above facts and circumstances of the case, I hold that there is no justification in the stand of the AO that interest bearing loans have been utilized for advancing interesting free advances. Hence, A.O’s computation of interest 6 Assessment Year: 2010-11 not utilized for business purpose of Rs. 92,13,521/- & disallowance of Rs. 46,22,623/- is deleted. In effect, this ground of the Appellant is allowed.”