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Income Tax Appellate Tribunal, “H” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAMIT KOCHAR
O R D E R
PER RAMIT KOCHAR, Accountant Member:
This appeal, filed by assessee, being is directed against appellate order dated 01.07.2016 passed by learned Commissioner of Income Tax (Appeals)-30, Mumbai (hereinafter called “the CIT(A)”), for assessment year 2010-11 which appellate order was later rectified by learned CIT(A) vide order dated 30-09-2016, the appellate proceedings had arisen before learned CIT(A) from assessment order dated 31.12.2012 passed by learned Assessing Officer (hereinafter called “the AO”) u/s 143(3) of the Income-tax Act, 1961 (hereinafter called “the Act”) for AY 2010-11.
The grounds of appeal raised by the assessee in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called “the tribunal”) read as under:-
“1. IN FACTS AND CIRCUMSTANCES OF CASE LEARNED CIT APPEAL HAS ERRED IN NOT ADJUDICATING ADDITIONAL GROUND BEEN INTEREST PAID TO LIC ON BORROWED MONEY BEING USED FOR BUSINESS.
2. THE LEARNED CIT APPEAL HAS FAILED TO APPRECIATE THAT INTEREST PAID TO LIC ON LOAN IS DISCUSSED IN DETAIL IN OUR LETTER DATED 06/06/2016 AND RELEVANT DOCUMENTS ARE FILED AND MATTER DISCUSSED WITH CIT APPEAL.
THE LEARNED CIT APPEAL HAS INCORRECTLY REJECTED APPLICATION FOR RECTIFICATION.
THE LEARNED CIT APPEAL HAS ERRED IN CONFIRMING THE DISALLOWANCE OF INTEREST EXPENSE ON GROUND THAT SAME IS USED TO EARN THE TAX FREE DIVIDEND IN AS MUCH AS ASSESSEE HAS INVESTED HIS OWN MONEY IN SHARE INVESTMENT.
5. THE LEARNED CIT APPEAL HAS INCORRECTLY HELD THAT BUSINESS IS COMPOSITE AND INDIVISIBLE AND AS SUCH APPLICATION OF SECTION 14A IS ILLEGAL.
THE LEARNED CIT APPEAL HAS FAILED TO APPRECIATE THAT ASSESSEE HAS USED HIS OWN CAPITAL FOR INVESTMENT IN SHARES AND HAS NOT USED BORROWED MONEY AND AS SUCH APPLICATION OF SECTION 14A IS ILLEGAL.
THE LEARNED CIT APPEAL HAS FAILED TO APPRECIATE THAT ASSESSEE HAS NOT CLAIMED ANY EXPENDITURE TO EARN TAX FREE DIVIDEND INCOME AND AS SUCH APPLICATION OF SECTION 14A IS ILLEGAL.
THE CIT APPEAL HAS ERRED IS CONFIRMING THE PRESUMPTIVE INTEREST INCOME TO THE TUNE OF RS. 4,22,202/- ON INTEREST FREE LOAN WITHOUT PROPERLY APPRECIATING THE FACTS OF THE CASE.
THE LEARNED CIT APPEAL HAS FAILED TO APPRECIATE THE FACT ASSESEE HAS LEGAL RIGHT TO ADVANCE HIS OWN CAPITAL AS INTEREST FREE.
THE LEARNED CIT APPEAL HAS FAILED TO APPRECIATE THAT ASSESSEE HAS NOT USED BORROWED MONEY TO ADVANCE INTEREST FREE LOANS.
THE LEARNED CIT APPEAL HAS FAILED TO APPRECIATE THAT ASSESSEE HAS RAISED ADDITIONAL GROUND FOR INTEREST PAID ON LOAN AND AS SUCH PARAGRAPH NO. 8 OF HIS ORDER IS INCORRECT AND ILLEGAL.
12. THE LEARNED CIT APPEAL HAS FAILED TO APPRECIATE THE FACTS OF THE LETTER DATED 06/06/2016 IN ITS TRUE SPIRIT.” 3. The assessee is in the business of trading in Futures & Options and commission agents. The assessee during the year received dividend income to the tune of Rs. 2,07,884/- which was claimed as an exempt income. The assessee had investments in shares to the tune of Rs. 2,82,57,710/- as on 31.03.2010 while the investments in shares was Rs. 3,18,35,689/- as on 31.03.2009 , the average investments in the shares comes to Rs. 3,00,46,699/- for the year ended 31.03.2010. The assessee has claimed interest expenditure of Rs. 59.47 lacs. The assessee was asked by the AO to explain as to disallowances of expenditure to be made in relation to earning of an exempt income u/s 14A of the 1961 Act read with Rule 8D of the Income-tax Rules, 1962. The assessee submitted that no borrowed funds were used by the assessee for the purposes of share investment and the entire loans were used for the purposes of capital introduction in the partnership firm from where the assessee received interest income. The disallowance of expenditure incurred in relation to earning of an exempt income was worked out by AO by invoking Section 14A read with Rule 8D 2(iii) of the 1962 Rules @ 0.5% on average investments of Rs. 3,00,46,699/- held by the assessee for the year ended 31-03-2010 , wherein disallowance was worked out by the AO to the tune of Rs.1,50,230/- which was added by the AO to the income of the assessee , vide assessment order dated 31.12.2012 passed by the AO u/s 143(3) of the 1961 Act. 4. Aggrieved by the addition made by the AO to the income of the assessee u/s 14A of the 1961 Act read with Rule 8D(2)(iii) of the 1962 Rules, the assessee filed first appeal before Ld.CIT(A) who dismissed the appeal of the assessee and confirmed the additions as were made by the AO, vide appellate order dated 01/07/2016 passed by learned CIT(A). The learned CIT(A) held that no disallowance of interest expenditure incurred in relation to earning of an exempt income was made by the AO u/s 14A of the 1961 Act read with Rule 8D(2)(ii) of the 1962 Rules nor any direct expenses were disallowed under Section 14A read with Rule 8D(2)(i) of the 1962 Rules, rather the AO invoked Section 14A read with Rule 8D(2)(iii) of the 1962 Rules to make disallowance of expenditure incurred in relation to earning of an exempt income computed by applying formula prescribed @ 0.5% of average investment held by the assessee for the year ended 31.03.2010. The learned CIT(A) held that the business of the assessee is indivisible and composite and total income included both exempt and taxable income. The learned CIT(A) held that once business is composite and indivisible, and an expenditure incurred by the assessee are composite indirect expenses as is evident from composite financial statements , the disallowance of the expenditure incurred in relation to earning of an exempt income is to be worked out as per Rule 8D of the 1962 Rules read with Section 14A of the 1961 Act. The learned CIT(A) relied upon decision of Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Company Limited 328 ITR 81(Bom.) while working out disallowance of expenditure u/s 14A of the 1961 Act read with Rule 8D(2)(iii) of the 1962 Rules. The learned CIT(A) also observed that the assessee has huge investments in shares which required regular monitoring of the investment portfolio and expenses are incurred for earning an exempt income which need to be disallowed u/s 14A of the 1961 Act and consequently decision of the AO in disallowing expenses of Rs. 1,50,230/- u/s 14A of the 1961 Act read with Rule 8D(2)(iii) of the 1962 Rules was confirmed by learned CIT(A), vide appellate order dated 01.07.2016 passed by learned CIT(A).
Aggrieved by the appellate orders dated 01.07.2016 passed by learned CIT(A) , the assessee filed second appeal before the tribunal.
The Ld. Counsel for the assessee submitted that no disallowance u/s. 14A is warranted keeping in view factual matrix of the case. The assessee counsel claimed that the assessee has his own funds which were more than the investments in shares and hence no disallowance u/s. 14A is warranted. The assessee has placed on record computation of income, tax-audit report , copy of income tax return and audited financial statements for the year ended 31.03.2010 before the tribunal which is placed in file. The Ld. DR on the other hand supported additions as were made by the authorities below.
6. We have considered rival contentions and carefully perused the material on record . The assessee is in the business of trading in Futures & Options and commission agents. The assessee during the year received dividend income to the tune of Rs. 2,07,884/- which was claimed as an exempt income. The assessee had investments in shares to the tune of Rs. 2,82,57,710/- as on 31.03.2010 while the investments in shares were Rs. 3,18,35,689/- as on 31.03.2009 , the average investments in the shares comes to Rs. 3,00,46,699/- for the year ended 31.03.2010. We have carefully gone through the audited financial statements, computation of income, tax-audit report , income-tax return filed and other documents which are placed on record by the assessee . On perusal of the audited financial statements of the assessee for the relevant period which is placed in file, we have observed that the assessee has it is own capital of Rs. 11.40 crores . We have observed from the audited Balance Sheet, Computation of income filed, Drawings Account and other financial data’s which are placed on record that the assessee has claimed interest expenditure to the tune of Rs. 62.46 lacs as deduction from interest income of Rs. 59.60 lacs earned from partnership firm M/s Ritesh Exports.The assessee also claimed as deduction towards Securities Transaction Tax paid of Rs. 87079/- from Profit in Futures and Options segment of NSE. Apart from the above deductions, the assessee has also claimed deduction of Rs. 2,100/- towards Professional Fee u/s 37(1) and Audit fees of Rs. 6000/- , from income from commission and Brokerage Received. Apart from above expenses, there are certain expenses incurred by the assessee but the same were debited to Drawings Account meaning thereby no deduction of expenses from income are claimed by the assessee consequently resulting in no prejudice to Revenue thereby warranting no disallowance u/s 14A of the 1961 Act as no prejudice is caused to Revenue as these expenses were never claimed as expenses / deduction from income. Now, it boils down to interest expenses which in any case no disallowance u/s 14A was made u/r 8D(2)(i) towards direct interest expenses nor any disallowance u/r 8D(2)(ii) was made towards indirect interest expenses purportedly on mixed fund theory was made by the AO. The expenses towards STT was claimed as deduction from Profits in F & O segment which cannot be a matter of disallowance u/s 14A of the 1961 Act as these are direct expenses attributable to trading in F & O segment. This leaves us with expenses of Rs. 6,000/- towards audit fee and expenditure by way of Professional Fee of Rs. 2100/- claimed as deduction u/s 37(1) which was claimed as deduction from income from commission and brokerage . We fail to understand that when only the assessee has effectively claimed deduction of expenses to the tune of Rs. 8,100/- from its income as detailed above, how disallowance u/s 14A r.w.r. 8D(2)(iii) can be worked out to be Rs. 1,50,230/- . Keeping in view smallness of the expenses claimed vis-a-vis scale of operations of the assessee , we are accepting the claim of the assessee for deduction of aforesaid expenses as business expenses to the tune of Rs. 8,100/- from income from commission and brokerage and direct that under these factual circumstances of the case based on material on record, no disallowance u/s 14A read with Rule 8D(2)(iii) of the 1962 Rules is warranted and we order for deletion of the disallowance of Rs. 1,50,230/- made by the AO u/s 14A of the 1961 Act read with Rule 8D(2)(iii) of the 1962 Rules which was later confirmed by learned CIT(A). This disposes of ground no. 4 to 7 raised by the assessee in memo of appeal filed with the tribunal. The assessee succeeds on these grounds. We order accordingly. Second Issue: 7. The AO observed from computation of income that the assessee has adjusted interest of Rs. 2,99,454/- on loan taken from LIC towards interest income received on capital with the partnership firm and net loss of Rs. 2,86,000/- is shown under the head ‘income from partnership firms’. The AO asked assessee to explain as to why the interest on loan from LIC should be allowed against interest income from partnership firm. The assessee explained that the said loan from LIC was taken in the financial year 2007-08 and the same is deposited in the partnership firm M/s Ritesh Exports . The AO rejected the contentions of the assessee and did not allow the assessee to adjust interest paid to LIC on loans taken against the interest income from partnership firm, vide assessment order dated 31.12.2012 passed by the AO u/s 143(3) of the 1961 Act.
8. The assessee filed first appeal before the Ld. CIT(A) . The Ld. CIT(A) did not gave any finding on this issue while adjudicating assessee’s appeal vide appellate order dated 01-07-2016. The assessee filed rectification application before the Ld. CIT(A) agitating the non adjudication of the issue by learned CIT(A) of non allowability of interest paid on LIC loans but the said rectification application was dismissed by Ld. CIT(A) vide orders dated 30-09-2016 by holding that since no grounds of appeal
were raised by the assessee before the Ld. CIT(A) in its first appeal and hence the same was not adjudicated by learned CIT(A). The learned CIT(A) noted in its rectification order dated 30-09-2016 that the AO considered the claim of the assessee but rejected the same.
9. The assessee has now raised this ground of allowability of interest paid on LIC Loans before us and prayer is made to adjudicate the same . It is claimed that the assessee has invested the proceeds of LIC Loans in the partnership firm M/s Ritesh Exports from where interest income was earned by the assessee and there is direct nexus of the interest paid on LIC loans and the interest income from Ritesh Exports. To support its claim of direct nexus , the assessee has submitted bank statement copies of his account with Union Bank of India for the financial year 2007-08 to support its contentions that the Loans received from LIC in the financial year 2007-08 were invested in Ritesh Exports( a partnership firm) from where interest income was received which was offered for taxation. It is also submitted that own capital of the assessee is Rs. 11.40 crores and the LIC loan outstanding as on 31-03-2010 was only Rs.13.4 lakhs on which interest was paid. The Ld. DR submitted that these documents filed by the assessee to contend that there is a direct nexus between Loans raised from LIC on which interest was paid and the investment made in partnership firm Ritesh Exports from where interest income was earned need to be verified by the AO and matter can be set aside and restored to the file of AO for making necessary verification.
10. We have considered rival contentions and have perused the material on record . We have observed that the assessee has borrowed money from LIC on which interest to the tune of Rs. 2,99,454/- was claimed to be paid to LIC during the relevant period . It is claimed by the assessee that proceeds of the loan from LIC were invested in partnership firm namely M/s Ritesh Exports from where the assessee earned interest income. It is claimed that there is a direct nexus between the loan raised from LIC and the amount invested in M/s Ritesh Exports. To support its contentions, the bank statements for the financial year 2007-08 of assessee’s bank account with Union Bank of India are placed on record. The interest paid on LIC Loans is sought to be adjusted against the interest income from M/s Ritesh Exports which is not allowed by the AO. The assessee did not raise this ground specifically in an appeal filed before the learned CIT(A) but raised this issue in written pleadings/submissions dated 06-06-2016 (placed in file) filed before learned CIT(A). The assessment order framed by the AO although dedicated para number 5 discussing this issue but separate additions were not made in the assessment order in computation of income but rather interest income of Rs. 59,60,000/- was reduced to NIL after allowing adjustment of Rs. 59,60,000/- towards interest expenditure as against claim of deduction of Rs. 62,46,604/- made by the assessee . Thereafter again a disallowance of Rs. 4,22,202/- is separately made on account of interest payment made on borrowings which were purported to be utilised for granting interest free loans and advances to relatives and sister concerns. The manner in which computation of income is drawn by the AO in pursuance to assessment framed is definitely not free from state of confusion. This could possibly be the reason for the assessee not raising the specific grounds of appeal before learned CIT(A) in first appeal . The assessee albeit raised this issue in pleadings/submissions before learned CIT(A) but specific ground of appeal was not raised before learned CIT(A). Immediately after receipt of learned CIT(A) appellate order, the assessee filed rectification application dated 12-09-2016 before learned CIT(A). The assessee is also contending the same before learned CIT(A) in its rectification application dated 12-09-2016 that the manner in which assessment is framed reflects confused state of mind of the AO . The learned CIT(A) dismissed rectification application filed by the assessee vide orders dated 30-09-2016 on the grounds that the assessee did not raise this ground of appeal before learned CIT(A) in its first appeal filed with learned CIT(A). The said rectification application dated 12-09-2016 is placed in file. The assessee in our considered view is entitled to benefit of doubt which was created in the manner the computation of income was drawn by the AO in consequence of assessment framed . We direct admission of the grounds of appeal raised by the assessee with respect to disallowance of interest expenditure on LIC loans raised by it. However, these pleadings and claims of the assessee on merits of the issue requires verification by the authorities. We are of the considered view that the matter need to be set aside and restored to the file of the AO for necessary verification and fresh determination as to the investments of the proceeds of LIC loans in the partnership firm M/s Ritesh Exports. Thus, the matter is remitted to the file of the AO for necessary verifications and fresh determination of issue after considering the contentions of the assessee on merits in accordance with law. The ground number 1 to 3 raised by the assessee in memo of appeal filed with tribunal are allowed for statistical purposes. We order accordingly. Third Issue:- 11. The third issue in this appeal is with respect to the diversion of funds by way of loans and advances (interest free) to his relative and sister concerns to the tune of Rs. 46.91 lacs while at the same time it was observed by the AO that the assessee is paying interest on borrowed funds from outsiders. It is claimed by the assessee that it has own sufficient funds to the tune of Rs. 11.40 crores as well other interest free borrowings which are used for giving loans and advances free of interest to sister concerns and relatives. The AO has applied rate of interest @ 9% per annum on the amount of Rs. 46,91,134/- on account of allegation of diversion of fund free of interest to relatives and sister concerns which led to the additions to the tune of Rs. 4,22,202/- to the income of the assessee by the AO by invoking provisions of Section 36(1)(iii) of the 1961 Act, vide assessment order dated 31.12.2012 passed u/s 143(3) of the 1961 Act.
The assessee filed first appeal before learned Ld. CIT(A) who dismissed the appeal of the assessee vide appellate order dated 01-07- 2016 . The assessee has claimed that it has own funds to the tune of Rs. 11.40 crores and borrowings free of interest were to the tune of Rs. 1.21 crores were also available with the assessee, and it was submitted that the interest free loans and advances advanced to sister concerns and relatives were to the tune of Rs. 46.91 lacs only. It was claimed that no borrowed funds were used to advance aforesaid interest free loans and advances to sister concerns and relatives. The above contentions did not found favour with learned CIT(A) who dismissed appeal of the assessee vide appellate order dated 01-07- 2016 and learned CIT(A) upheld the disallowance of interest expenditure u/s 36(1)(iii) of the 1961 Act to the tune of Rs. 4,22,202/- as was made by the AO.
Aggrieved by the appellate order passed by learned CIT(A), the assessee has filed second appeal with the tribunal.
The contentions are raised by learned counsel for the assessee that interest free own funds available with the assessee are to the tune of Rs. 11.40 crores which are more than the interest free advances and loans made to sister concerns and relatives which were to the tune of Rs. 46.91 lacs and presumption will apply that the assessee has invested its own interest free funds in making interest free loans and advances to sister concerns and relatives. It was also contended that interest free loans and advances to the tune of Rs. 1.21 crores were also available with the assessee in addition to own capital. The assessee relied upon decision of Hon’ble Bombay High Court in the case of Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom.) as well as decision in the case of and HDFC Bank Limited v. DCIT (2016) 383 ITR 529 (Bom.) , while on the other hand the Ld. DR relied upon the order of authorities below.
We have considered rival contentions and have perused the material on record including cited case laws . We have observed that the assessee has borrowed interest bearing funds on which interest payment of Rs. 59.57 lacs were made during the relevant year under consideration before us. The assessee is seeking to adjust these interest costs against interest income of Rs. 59.60 lacs earned from its capital investment in Partnership firm M/s Ritesh Exports. The assessee has advanced Rs. 46.91 lacs as loans and advances to its