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Income Tax Appellate Tribunal, DELHI BENCHES : SMC-1 : NEW DELHI
Before: SHRI R.S. SYAL
ORDER This appeal by the assessee arises out of the order passed by the CIT(A) on 28.7.2014 in relation to the assessment year 2011-12.
This appeal is time barred as delayed by 25 days. The assessee has filed an application for condonation of delay. I am satisfied with the reasons which led to the delayed filing of appeal before the Tribunal. As such, the delay is condoned and the appeal is admitted for hearing.
The only issue raised in this appeal is against the confirmation of addition of Rs.3,48,691/- u/s 14A of the Act.
Briefly stated, the facts of the case are that that the assessee is engaged in the business of manufacturing as well as trading in medicines. It received a dividend income of Rs.96,785/-from investment in shares and securities. Such income was claimed as exempt. The assessee suo motu disallowed expenses amounting to Rs.32,041/- on account of Demat charges and Expenses on portfolio management services treating them as covered u/s 14A. The AO invoked the provisions of section 14A read with Rule 8D and made an addition of Rs.3,48,691/-. This further disallowance consisted of two parts, namely, disallowance of interest amounting to Rs.3,03,087/- and disallowance @ ½% of the average of the value of investments at Rs.45,604/-. The ld. CIT(A) upheld the addition. The assessee is aggrieved against this addition.
I have heard the rival submissions and perused the relevant material on record. It is observed from the assessee’s balance sheet, a copy of which is available on record, that Investment in shares and securities, fetching exempt dividend income, stood at Rs.79,05,765/-.
As against that, the assessee has Shareholders’ fund to the tune of Rs.5,76,20,504/- as at the end of the year. This shows that the amount invested in shares and securities is far less than the amount of shareholders’ funds. The Hon’ble Bombay High Court in CIT vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom) has held that if there are interest free funds available with the assessee sufficient to meet investments and, at the same time, some interest bearing loan is taken, it should be presumed that the investments were made from interest free funds and, consequently, no disallowance of interest should be made. This decision was rendered by the Hon’ble Bombay High Court after following the judgment of the Hon’ble Summit Court in East India Pharmaceutical Works vs. CIT (1997) 224 ITR 627 (SC). The Hon’ble Gujarat High Court in Principal CIT vs. India Gelatine and Chemicals Ltd. (2015) 376 ITR 353 (Guj) has followed this principle in the context of section 14A by holding that no disallowance of interest u/s 14A should be made where investments made by the assessee in shares and mutual funds are out of interest free funds. As the Investments made by the assessee in shares and securities fetching exempt dividend income is held to be made out of interest free funds in terms of Reliance Utilities (supra), respectfully following India Gelatine and Chemicals Ltd (supra), I order for the deletion of the addition towards interest amounting to Rs.3,03,087/-.
The other component of disallowance u/s 14A amounting to Rs.45,604/- is on account of ½% of the average of the value of investments towards administrative expenses. This addition is strictly in conformity with Rule 8D(2)(iii). The same is, therefore, upheld.
In the result, the appeal is partly allowed.
The order pronounced in the open court on 14.10.2016.