TIL HEALTHCARE PVT LTD.,CHENNAI vs. ACIT CORPORE WARD 3(1), CHENNAI

आदेश / O R D E R

Per A. Mohan Alankamony, AM:- This appeal by the assessee is directed against the order passed by the learned Commissioner of Income Tax (Appeals)-11, Chennai, dated 21.07.2017 in for the assessment year 2012-13 passed U/s.250(6) r.w.s. 143(3) & 147 of the Act.

2 The assessee has raised several grounds in its appeal however the cruxes of the issues are that:-

During the course of scrutiny assessment proceedings, it was observed by the Ld.AO, that the investment portfolio of the assessee as on 31.03.2012 stood as Rs.9,75,16,069/- and the assessee had earned dividend income of Rs.8,14,369/- towards the investment which was claimed as exemption U/s.10 of the Act. The Ld.AO opined that the assessee would have incurred expenditure for monitoring the huge volume of investment portfolio such as administrative and managerial cost. Therefore the Ld.AO invoked the provisions of Section 14A r.w.r. 8D of the Rules and thereby made disallowance of Rs.9,42,085/-. On appeal the Ld.CIT(A) restricted the disallowance to Rs.8,14,369/- by holding that the disallowance U/s.14A of the Act cannot exceed the exempt income earned by the assessee.

4.1 Before us the Ld.AR submitted that the Ld. Revenue Authorities had failed to consider that only investment yielding exempt income alone should be considered for calculating disallowance U/s.14A of the Act. It was therefore pleaded that directions may be given to assess the income of the assessee accordingly. The Ld.DR relied on the orders of the Ld. Revenue Authorities.

4.2 We have heard the rival submissions and carefully perused the materials available on record. Section 14A of the Act only specifies that no deduction shall be allowable in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. It does not specify with respect to expenditure incurred on taxable income. Therefore in the case where assessee incurs revenue expenditure towards Investments, the income from which is taxable, the provisions of Section 14A of the Acted does not apply. Hence the Investments made by the assessee, wherein the income derived is taxable provisions of Section 14A of the Act are not applicable. The decision rendered by the Delhi Benches of the Tribunal in the case ACIT & ANR v/s. Vireet Investment PVT.LTD. & ANR also fortify our view wherein it was held that “As per Rule 8D(2)(iii), only those investments were to be considered for computing average value of investment which yielded exempt income during year under consideration.” Accordingly we hereby direct the Ld.AO to compute the disallowance U/s.14A r.w.r., 8D(2)(iii) of the Rules only on the investment which yield exempt income.

On query it was explained that the advance given to M/s. DK Securities was interest free loan and the loan given to M/s. Shri Hari Foundations was investment. Hence it was opined by the Ld.AO that the investment made by the assessee with M/s. Hari Foundations would attract the provisions of Section 14A r.w.r. 8D of the Rules and further disallowed the interest of Rs.13,92,463/- adopting the rate at 16% on the aggregate amount of Rs.87,02,892/- being the interest attributable to the interest free loan extended to M/s. DK Securities and M/s.Artec Products Pvt. Ltd.. On appeal, the Ld.CIT(A) relying in the decision of the Hon’ble High Court of Delhi in the case Punjab Stainless Steel Indus vs. CIT reported in 324 ITR 396, the decision of the Hon’ble Jurisdictional Madras High Court in the case K. Somasundaram & Bros. vs. CIT reported in 238 ITR 939, the decision of the Hon’ble High Court of Kerala in the case CIT vs. Popular Vehicles and Services Ltd., reported in 325 ITR 523 and the decision

Hon’ble Jurisdictional Madras High Court in the case CIT vs. P.

Ganu Rao & Sons reported in 185 ITR 324 confirmed the order of the Ld.AO by holding that the appellant had diverted interest bearing borrowed loans to three parties without charging interest which amounts to diversion of business fund for non-business purposes.

5.1 Before us the Ld.AR submitted the balance sheet of the assessee for the relevant assessment year, wherein the share- holders funds stood as Rs.41,47,50,179/- (share capital - Rs.3,03,86,200/- and Reserves & surplus - Rs.38,43,63,979/-). The Ld.AR argued that when the assessee had own interest-free funds more than Rs.41 crores, disallowance of interest expenditure cannot be made just because the assessee had extended interest free loan aggregating to Rs.87,02,892/-. Reliance was placed in the decision of the Hon’ble Jurisdictional Madras High Court in the case CIT vs. Hotel Savera reported in 239 ITR 795 wherein it was held

“No part of the interest on borrowings could be disallowed on the ground that part of the money borrowed was advanced to a third party free of interest when there was sufficient credit balance in the partners’ accounts and there was no evidence that the amounts were advanced out of the borrowed amounts”

The Ld.AR also placed reliance in the decision of the Hon’ble Mumbai High Court in the case CIT vs. Reliance Utilities & Power Ltd., reported in 313 ITR 340 wherein it was held

“Tribunal having recorded a clear finding that the assessee possessed sufficient interest-free funds of its own which were generated in the course of relevant financial year, apart from substantial shareholders fund, presumption stands established that the investments in sister concerns were made by the assessee out of interest-free funds and therefore no part of interest on borrowings can be disallowed on the basis that the investments were made out of interest bearing funds.”

5.2 The Ld.DR on the other hand could not controvert to the submission of the Ld.AR however relied in the orders of the Ld. Revenue Authorities.

5.3 We have heard the rival submissions and carefully perused the materials on record. We find merit in the submission of the Ld.AR.

When the assessee has own interest free funds such as share capital and reserves & surplus, it should be presumed that the interest free loan was extended from such funds. The decision relied by the Ld.AR is applicable to the facts of the case present before us. Further the decisions relied by the Ld.DR are not identical to the facts of the case because all those cases was related to diversion of interest bearing funds. Therefore following the ratio of the decision relied by the Ld.AR, we hereby direct the Ld.AO to delete the addition of Rs.13,92,463/- made by the Ld.AO by holding that the assessee had advanced interest free loan from non-interest bearing funds.

Order pronounced on the 17th April, 2018 at Chennai.