VAISHNAVI INFRASTRUCTURE PVT. LTD.,,BANGALORE vs. DCIT, BANGALORE

These appeals are preferred by the assessee against the common order of the CIT(Appeals) on common ground with regard to disallowance by invoking the provisions of section 14A of the Act.

The other ground in these appeals is with regard to chargeability of interest us/. 234B and 234D of the Act. This ground is consequential in nature and much argument was not advanced by the ld. counsel for the assessee. Therefore, we find no merit in this ground and accordingly we confirm the order of CIT(Appeals) in this regard.

So far as disallowance u/s. 14A of the Act is concerned, our attention was invited that during the AYs 2008-09 and 2010-11, the assessee did not earn any exempted income, therefore no disallowance u/s. 14A can be made. With respect to other assessment years, the ld. counsel for the assessee has contended that he has received exempted on account of investment in mutual funds. Moreover, it was done through management consultant by investing its personal funds. Therefore, no disallowance u/s. 14A can be made by blindly applying Rule 8D of the I.T. Rules. The ld. counsel for the assessee further placed reliance upon the judgment of Hon’ble Karnataka High Court in the case of CIT v. Microlabs, 383 ITR 490 (Kar) and the judgment of Hon’ble Apex Court in the case of Munjal Sales Corporation v. CIT, 298 ITR 298 (SC) in support of his contention that if the investments were made out of mixed funds and own funds and own funds are sufficient to cover the tax free investments, then presumption will be only that the investments were made out of own funds. Since the assessee was having sufficient personal funds, the AO ought to have examined this aspect before making a disallowance.

The ld. DR, on the other hand, has placed reliance upon the order of CIT(Appeals).

We have carefully examined the orders of lower authorities in the light of rival submissions. We find that undisputedly during the AYs 2008- 09 & 2010-11 relating to appeals in & 1030/B/2016, the assessee did not earn any exempted income as is evident from a summary of investments in mutual funds and income therefrom, copy of which is placed on record. In this regard, our attention was also invited to the profit & loss account and the details of other income in support of his contention that assessee has not earned any exempted income during the impugned assessment year. The ld. counsel for the assessee further placed reliance upon the order of Tribunal and various judgments of the High Court in which it has been held that in the absence of any exempted income, provisions of section 14A cannot be invoked. Copy of the order of the Tribunal in the case of Alliance Infrastructure Projects Pvt. Ltd. v. DCIT, ITA Nos. 220 & 1043/Bang/2013 in ITA No.220 & 1043/Bang/2013 is placed on record at pages 100 to 113 of the compilation.

Having carefully examined the orders of lower authorities in the light of rival submissions, we find from the record and profit & loss account that the assessee did not earn any exempted income during the AYs 2008-09 & 2010-11. Therefore, in the absence of any exempted income, provisions of section 14A of the Act cannot be invoked. Reliance was placed upon the order of Tribunal in the case of Alliance Infrastructure Projects Pvt. Ltd. v. DCIT (supra) and AllBank Finance Ltd. in in which it has been held that in the absence of any exempted income, provisions of section 14A of the Act cannot be invoked. Therefore, in the light of this legal position, we are of the view that in the instant case, the AO has wrongly invoked the provisions of section 14A for making the disallowance. Accordingly we set aside the order of CIT(Appeals) and delete the addition made in this regard.

So far as remaining disallowances are concerned, the issue was not examined by the lower authorities in the light of details furnished by the assessee. Apparently it is evident that the assessee has made the investments in mutual funds through management consultant and earned some exempted income. The assessee has also demonstrated that he has sufficient interest free personal funds which were also invested in mutual funds to earn the exempt income. Therefore, AO ought to have examined this aspect whether, the investment in mutual funds were made out of borrowed funds or personal funds. If personal funds, the issue of disallowance should have been adjudicated in the light of judgment of Hon’ble Apex Court in the case of Munjal Sales Corporation v. CIT, 298 ITR 298 (SC) and CIT v. Microlabs Ltd., 383 ITR 490 (Kar). Therefore, we are of the view that the issue requires proper verification and examination by the AO. Accordingly, we set aside the order of the CIT(Appeals) in this regard and restore the issue to the file of Assessing Officer to readjudicate the issue in the light of relevant provisions of the Act afresh, after affording opportunity of being heard to the assessee.

In the result, 1030/Bang/2016 are allowed, and 1029/Bang/2016 & 1031/Bang/2016 are allowed for statistical purposes.