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Income Tax Appellate Tribunal, MUMBAI BENCH “E” MUMBAI
Before: SHRI JOGINDER SINGH & SHRI N.K. PRADHAN
ORDER
PER N.K. PRADHAN, AM
This is an appeal filed by the assessee. The relevant assessment year is 2007-08. The appeal is directed against the order of the Commissioner of Income Tax (Appeals) – 07, Mumbai and arises out of order u/s 143(3) of the Income Tax Act, 1961 (the ‘Act’).
The grounds of appeal filed by the assessee read as under:-
i. The Assessing Officer has erred in adding the disallowance u/s 14A of Rs. 1,79,709/- when no administrative expenses have been incurred or debited to the profit & loss account. Even CIT(A)-7 has not given any relief but directed the A.O. to give opportunity to the appellant and rework the disallowance but the CIT(A) – 7 has not given his finding but send it back to the A.O. ii. The assessing officer has erred in disallowing PMS fees deductable in working out the short term capital of Rs. 1,27,640/-. The PMO fees has not been written off to the profit and loss account, but incurred to improve the investment in shares, the CIT(A) (7) has up held the view of A.O. without giving his view at all. iii. The assessing officer has erred in disallowing and adding to income sum of Rs. 4,48,137/- as excess interest paid to directors and share holder. The CIT(A) – 7 has upheld the view of the A.O. without giving his views at all. iv. The assessing officer has erred in initiation of penalty proceeding u/s 271 (1)(c) of the Income Tax Act, the CIT(A)-7 has said that it is premature and dismissed the same. v. The assessing officer has thus raised a demand of Rs. 2,75,320/- which is not correct at all and need to be quashed.
We begin with the 1st ground of appeal. The assessee has shown dividend income of Rs. 1,78,897/- and long term capital gains of Rs. 3,60,783/- being exempt u/s 10(34) and 10(38) of the Act respectively. The Assessing Officer (A.O.) computed the disallowance u/s 14A r.w.r. 8D of the Income Tax Rules, 1962 and made a disallowance of Rs. 1,79,709/-.
3.1 In appeal, the learned CIT(A) directed the A.O. to follow the judgement of the Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. vs. Dy. CIT (2010) 194 Taxman 203.
3.2 Before us, the learned counsel of the assessee submits that the assessee-company has utilised its surplus funds and given the amount to be invested to Kotak Mahendra Ltd. The assessee has not incurred any administrative expense or any other expense to invest in shares excepting PMS fees paid to Kotak Mahendra Ltd. and this fee has not been debited to the Profit & Loss Account. He further submits that since no expense has been incurred, disallowance u/s 14A or Rule 8D is not called for.
3.3 The learned DR relies on the order passed by the learned CIT(A).
3.4 We have heard the rival submissions and perused the relevant material on record. In the instant case, the assessment year is 2007- 08. We find that the AO has worked out the disallowance u/s 14A r.w.r. 8D. The same rule is not retrospective as it was notified on 24/03/2008 and would be applicable only from AY 2008-09. In Godrej & Boyce Mfg. Co. Ltd. (supra), it has been held that Rule 8 D is not retrospective. The Hon’ble Bombay High Court in CIT vs. M/s. Godrej Agrovet Ltd vide Income Tax Appeal No. 934 of 2011, dated 8.1.2013, has held that percentage of the exempt income can constitute a reasonable estimate for making disallowance in the years earlier to the assessment year 2008-09. In the above case it upheld the disallowance to the extent to 2% of the total exempt income.
Respectfully following the above decision, we direct the AO to restrict the disallowance to 2% of the total exempt income. Thus the second ground of appeal is partly allowed.
The learned counsel of the assessee submits that the assessee would not press the 2nd ground of appeal. Accordingly this ground of appeal is treated as dismissed, not being pressed.
Now we come to the 3rd ground of appeal. During the course of assessment proceedings, the A.O. found that the assessee had paid interest @ 13% to the Directors. The assessee was paying interest @ 8.71% to Union Bank of India. The A.O. observed that the assessee had access to cheap funds and the market rate of interest during the relevant financial year was around 9%. Therefore, he calculated the disallowance in the following manner:
Name of the Party Interest @ 13% Interest @ 9% Excess interest (Rs.) (Rs.) (Rs.) Shri J Kumar 701270 485500 215770 Ms. Asha Kumar 351492 243341 108151 Ms. Ayesh Kumar 403703 279487 124216 448137
Thus the A.O. made a disallowance of Rs. 4,48,137/- and added it to the total income of the assessee.
5.1 In appeal, the learned CIT(A) agreed with the findings of the A.O. and confirmed the disallowance of Rs. 4,48,137/-.
5.2 Before us, the learned counsel of the assessee submits that the rate adopted by the A.O. @ 9% on the pretext that the interest paid to Union Bank of India is at 8.71% whereas the actual rate paid to the said bank is 13.06%. The calculation filed by the learned counsel is extracted below:
Total interest paid to Union Bank of India Rs.3,76,947/- Financial charges due to exchange fluctuation Rs.1,13,190/- (please refer to the addition to the fixed assets schedules against item containers) Total cost of funds (interest) Rs.4,90,137/- Average amount of loan outstanding Rs.37,52,678/- % of interest to average loan 13.06% Interest paid to Director and Relatives 13% Therefore, it is submitted that the disallowance of interest is unwarranted.
5.3 The learned DR supported the order passed by the learned CIT(A).
5.4 We have heard the rival submissions and perused the relevant material on record. The assessee is a private limited company. A perusal of the ‘Party Advice’ given by Union Bank of India, Mumbai indicates that the terms and conditions state that ‘profits should be ploughed back so as to strengthen equity base and improve debt equity ratio’. It has been held that the disallowance of interest is justified when the amount borrowed had not been used for the purpose of business but for advancing money to Managing Director without interest. We may refer to the decision in Highways Construction Co. Pvt. Ltd. vs. CIT (Gau) 199 ITR 702, CIT vs. India Silk House (Mad) 152 ITR 79, Marolia & Sons vs. CIT (All) 129 ITR 475, Tirupati Trading Co vs. CIT (CL) 242 ITR 13, CIT vs. Sujanni Textiles (P) Ltd. (Mad) 225 ITR 560, CIT vs. H.R. Sugar Factory (P) Ltd. (All) 187 ITR 363, CIT vs. P. Ganu Rao and Sons (Mad) 185 ITR 324. The contention of the assessee that the total rate of interest including exchange fluctuations comes to 13% is to be verified. In view of the above the order of the learned CIT(A) on the above issue is set aside and the same is restored to the file of the A.O. to make a fresh assessment after verification of the rate of interest calculated by the assessee at 13% as delineated at para 5.2 and following the ratio of the decisions mentioned here-in-above, after giving a reasonable opportunity of being heard to the assessee. The assessee is directed to file the relevant details before the AO. Thus the 3rd ground of appeal is allowed for statistical purposes.
As the penalty u/s 271(1)(c) has been initiated only, it is premature to consider the 4th ground of appeal.
The 5th ground of appeal is consequential in nature.
In the result, the appeal is partly allowed.
Order pronounced in the open Court on 28/04/2017