HARIYANA SHIP BREAKERS LTD,MUMBAI vs. ACIT CC 38, MUMBAI

The captioned appeal by the assesse for Assessment Year [AY] 2007-08 assails the order of Ld. Commissioner of Income tax (Appeals)- 54 [CIT(A)], Mumbai dated 30/12/2014 qua confirmation of disallowance u/s 14A. The assesse is in second round of appeal before us.

Briefly stated, the assesse, being resident corporate assessee engaged in the business of Ship Breaking & manufacturing of sponge iron, was assessed for impugned AY u/s 143(3) at Rs. 1,31,82,422/- under normal provisions and Rs.4,51,30,190/- u/s 115JB as against returned income of Rs.97,09,250/- filed on 29/10/2007. Since assessee earned exempt income u/s 10 for Rs.20.07 Lacs, AO applied Rule 8D and computed the said disallowance u/s 14A at Rs.30.56 Lacs, which was carried up-to the level of Tribunal vide order dated 10/12/2010 where the matter was restored back to Ld. AO for re- adjudication in view of the order of Hon’ble Bombay High Court in Godrej & Boyce Mfg. Co. Ltd. [328 ITR 81]. 3. Consequently, Ld. AO re-examined the issue vide an order u/s 143(3) read with Section 254 dated 07/09/2012 and computed the said disallowance in the following manner:- No. Particulars Amount (Rs.) 1. Interest expenses @12% on investment in 16,57,481/- shares Rs.138.12 Lacs 2. On account of Salary, Printing, Stationery, 15,00,000/- Bank Charges, General Expenses etc. Total 31,57,481/- 3 Hariyana Ship Breakers Limited Assessment Year-2007-08 4. Aggrieved, the assessee carried the matter in second round with partial success before Ld. CIT(A) vide impugned order dated 30/12/2014 and raised various contentions in support of the claim that no expenditure was incurred to earn the exempt income and the assessee had sufficiently large owned funds to make investments in shares, and therefore, no disallowance u/s 14A was warranted for particularly when the assessee, himself made suo-moto disallowance of direct expenditure of Rs.4.86 Lacs. However, not convinced, Ld. CIT(A) confirmed interest disallowance of Rs.16.57 Lacs but restricted expense disallowance to 2% of administrative expenditure of Rs.2.32 Crores which came to Rs.4.64 Lacs. To sum up, the addition of Rs.31.57 Lacs computed by AO was restricted to Rs.21.21 Lacs. Still aggrieved, the assessee is in appeal before us.

The Ld. Counsel for assessee [AR], first of all drew our attention to the financial statements of the assessee, to contend that the assessee at the beginning as well as at the end of the year had large self owned funds in the shape of Share Capital and Free reserves to make investments in shares and hence, no interest disallowance could be made. There being no direct nexus between borrowed funds and investments, a presumption has to be drawn that the investments were out of owned funds in view of the judgment of Hon’ble Bombay High Court in CIT Vs. HDFC Bank Limited [366 ITR 505].

Per contra, Ld. DR placed reliance on the findings of lower authorities and contended that unsecured loans raised by the assessee were increased during the year and the assessee has debited interest 4 Hariyana Ship Breakers Limited Assessment Year-2007-08 expenditure of Rs.6.01 crores as against interest income 1.43 crores and therefore, rightly saddled with impugned disallowance. Moreover, adequate relief was already granted by Ld. CIT(A) to the assessee with respect to administrative expenditure and therefore, no further relief could be granted to the assessee.

We have heard the rival contentions and perused relevant material on record. A perusal of financial statements produced before us reveals that the assessee is having owned funds in the shape of Share Capital & Free Reserves to the extent of Rs.30.78 crores & Rs.31.37 crores as on 31/03/2006 & 31/03/2007 respectively. Against the same, investment stood at Rs.7.34 crores & Rs.2.43 crores as on 31/03/2006 & 31/03/2007 respectively. In fact, investments have reduced drastically from Rs.7.34 crores at the beginning to Rs.2.43 crores at the end of the year and therefore, the finding by lower authorities that unsecured loans have been raised during the year to make new investment in shares, prima facie, seems erroneous. A further perusal of financial statements also reveals that although unsecured loans obtained by the assessee have increased by Rs.11.42 crores, however, loans advanced by assessee have also increased by Rs.14.66 crores. Therefore, we find strength in the argument of Ld. AR that there being no nexus between borrowed funds and investments, a presumption has to be drawn that the investments were out of owned funds as observed by Hon’ble Bombay High Court in CIT Vs. Reliance Utilities & Power Ltd. [313 ITR 340] which was followed in CIT Vs. HDFC Bank Ltd. [supra]:- “If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be 5 Hariyana Ship Breakers Limited Assessment Year-2007-08 presumed that the investments were from the interest-free funds available. In our opinion, the Supreme Court in East India Pharmaceutical Works Ltd. v. CIT (1997) 224 ITR 627 had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. (1982) 134 ITR 219 where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcombers of India Ltd.'s case (1982) 134 ITR 219 the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the over draft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle, therefore, would be that if there were funds available both interest-free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company if the interest-free funds were sufficient to meet the investment. In this case this presumption is established considering the finding of fact both by the Commissioner of Income-tax (Appeals) and the Income-tax Appellate Tribunal.”

In nutshell, the assessee’s appeal stands partly allowed.