MAESTRO VENTURES P. LTD,MUMBAI vs. DCIT 8(2), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार /PER RAJENDRA, AM- अनुसार Challenging the order, dated 11/09/2014,of the CIT (A)-17,Mumbai, the assessee and the Assessing Officer(AO)have filed cross appeals for the year under consideration.Assessee- company, engaged in the business of training and goods and commodities,filed its return of income on 29/09/2011,declaring total income of Rs. 5.12 crores.The AO completed the assessment u/s.143(3)of the Act,on 11/02/2014, determining its income at Rs. 8.55 crores. 2.During the course of hearing before us,the Authorised Representative (AR) stated that assessee was not interested in pursuing the First ground of appeal. Hence, same stands dismissed,as not pressed. 2.1.Vide its application, dated 20/02/2017, the assessee has filed additional Ground of appeal stating that various judicial pronouncements have now laid down certain principles regarding disallowance to be made u/s.14A of the Act, that the issue raised by it is of legal nature and do not require investigation of facts.During the course of hearing before us, it was stated on behalf of the assessee that additional Ground dealt only with disallowance u/s.14A and it

7270&7305/M/14(11-12) M/s. Maestro Venture Pvt.Ltd. goes to the root of the issue.On behalf of the department it was stated that issue could be decided on merits. We have gone through the additional Grounds raised by the assessee.We find that with the passage of time clarity is emerging with regard to disallowance to be made under Rule 8D r.w.s. 14A of the Act, that various judicial forums have discussed and deliberated upon the issue at length. The issue raised by the assessee is a legal one, therefore, we are admitting it as per the provisions of Rule 11 of the ITAT Rules. ITA/7305/Mumbai/2014.

3.First ground of appeal, raised by the AO, is about deleting the disallowance of Rs.3.15 crores,u/s.14A of the Act.During the assessment proceedings,the AO found that the assessee had earned dividend income of Rs.1.21 crores and same was claimed exempt u/s.10(34) of the Act,that the assessee on its own had disallowed the sum of Rs.9.21 crores u/s.14A read with Rule 8D of the Income Tax Rules,1962 (Rules). He observed that the working of dis - allowance was not proper.Accordingly,he directed the assessee to explain as to why disallow -ance u/s.14A read with Rule 8D should not be made.Consequently,a sum of Rs.12. 15 crores was disallowed as against the disallowance made by the assessee itself of Rs.9,21,18,554/-.

3.1.Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority(FAA).Before him,it was argued that the AO had worked out the disallow -ance considering the assessee’s balances alone as on 31/ 03/2010, that three companies, namely Nozaki Finance and Investment Private Ltd. (NFIPL),Aikone Marketing and Manage -ment Services Private Ltd.(AMMSPL)and Yuga Fininvest Private Ltd. (YFPL)merged into assessee,that it was necessary to consider the closing balances of these companies as on 31/03/2010 in working out the disallowance u/s.14A. After considering the submission of the assessee and the assessment order, the FAA held that the assessee had rightly considered the closing balances of investments and assets as on 31/ 03/2010 of three companies,that Rule 8D provided that for the purpose of the Rule,total assets would mean total assets as appearing in the balance sheet excluding the increase on account of the valuation of assets but including the decrease on account of the increase of assets, that for computation of disallowance what was material was to find out the average of the value of investment,that there was no merit in the argument of the AO in not including the part of the average value of investment, that the merger took place long back, that same was effective from a particular date as declared by the Honorable High Court, that there was no 7270&7305/M/14(11-12) M/s. Maestro Venture Pvt.Ltd. infirmity in the computation of income of the assessee.Finally,he deleted the addition made by the AO.

3.3.Before us, the Departmental Representative (DR) supported the order of the AO . The Authorised Representative (AR) relied upon the order of the FAA.

3.4.We have heard the rival submissions and perused the material before us. We find that the Hon’ble Bombay High Court vide its order,dated 05/08/2001,had approved the scheme of amalgamation with effect from 01/04/2010, that in pursuance of the scheme three entities merged with the assessee company only on 01/04/2010 and not before that.It is a fact that NFIPL,AMMSPL and YFPL got amalgamated with the assessee from a particular date and the assessee had taken the balances of these entities for calculating the disallowance as per Rule 8D read with section 14A of the Act. In our opinion, the FAA had rightly held that investment in all the three companies would form the part of average value of investment contrary to the finding of the AO. As we do not find any legal or factual infirmity in his order,so,confirming the same,we decide the first ground of appeal against the AO.

4.Second Ground of appeal is about deleting the disallowance of interest u/s.36(1) (iii) of the Act. During the assessment proceedings, the AO found that the assessee had claimed sundry balances written off, amounting to Rs.6.56 crores, that the assessee itself had disallowed loan written off, that the assessee had given loan to ACT Finvest Ltd. (AFL) of Rs.6.69 crores, during the year under consideration, that out of the said amount it had written off Rs.6, 56, 21,308/-and had debited the same to its profit and loss account. He directed the assessee to furnish the basis of calculation of interest offered for taxation on interest-free loan and advances and to explain as to why loan given to AFL was not considered for computation of interest offered for taxation. In its reply, the assessee stated that notional interest on advance to AFL at average borrowing rate of 8.54% would work out to Rs.28.23 lakhs, that the principal loan balance itself was written off, that there was no question of considering the disallowance on the amount in question, that the loan written off itself was not claimed as allowable,that in the computation of income the disallowance of related interest was also not considered.After considering the submission of the assessee, the AO held that AFL had borrowed money for a period of six months, that the assessee was paying interest on the borrowed funds on one hand and that on other hand it was not charging an interest on advances given to AFL, that it was engaged in the business of trading of goods and commodities, that it had considered the interest received under the head income from other 3

7270&7305/M/14(11-12) M/s. Maestro Venture Pvt.Ltd. sources, that the interest paid had no direct nexus with the interest paid.Finally, he held that interest expenditure of Rs.28,23,052/- was not incurred wholly and exclusively for earning the interest income, that same was to be added to the total income of the assessee.

4.1.Aggrieved by the order of the AO, the assessee preferred an appeal before the FAA and made elaborate submissions and relied upon several case laws. After considering the available material, he held that the AO had begun with the presumption that income accrued to the assessee and worked out the same at 8.5% for the loan advanced to AFL, that income cannot be levied on hypothetical income. He referred to the cases of Shoorji Vallabhdas & Company (46 ITR 144) and Morvi Industries Ltd. (82 ITR 835) and Godhra the Electricity Company Ltd. (225 ITR 746) that no real income had accrued to the assessee, that the AO had not given any finding of fact that the loan advanced was out of the interest-bearing funds, that he had also not given any finding as to whether the assessee had considered the loan in question while disallowing the interest on interest-free loans, that it had disallowed interest paid of Rs.11.77 crores, during the year under consideration, on interest-free loans given to various parties, that the AO had failed to establish that the income had any nexus with the interest that has not been charged by the assessee from AFL, that the assessee had on its own disallowed interest on interest-free loan given to various parties, that there was no scope of any further disallowance on that count. Accordingly, he deleted the disallowance as the same would amount to double disallowance.

4.2.During the course of hearing before us, the DR stated that matter could be decided on merits. The AR supported the order of the FAA and relied upon the case of Excel Industries (358ITR295).Alternatively, he argued that he had no objection if the matter was sent back to AO to verify the fund position and interest free loan amount.

4.3.We have heard the rival submissions and perused the material before us. We find that assessee had advanced loan to AFL, that it had not charged any interest from AFL, that it had on its own disallowed Rs.11,77,28,592/- on interest free loans given to various entities.Though in the books of accounts the assessee had written off Rs.6.58 crores, but, in the statement of income it had not claimed the deduction. But, we find that there is need to make further verification about the position of interest free funds available with the assessee and interest free loan advanced by it.Therefore, in the interest of justice, we are restoring back he issue to the file of the AO for further verification. He is directed to afford a 7270&7305/M/14(11-12) M/s. Maestro Venture Pvt.Ltd. reasonable opportunity to the assessee. Second Ground is decided in favour of the AO, in part. ITA/7270/Mum/2014 : 5.First Ground of appeal, as stated earlier was not pressed before us. 6.Second Ground of appeal (Addl GOA No.1) raised by the assessee is about disallowance made by the AO u/s.14A of the Act. While deciding the appeal filed by AO we have narrated the facts of the case.

6.1.Before us, with regard to the additional Ground of appeal the assessee has argued that the FAA should have restricted the disallowance u/s. 14A of the Act to the extent of Rs.1.21 crores, that the disallowance u/s. 14A could not exceed the exempted income received by it amounting to Rs.1,21,51,710/-, that even if the assessee inadvertently had made an excess suo moto disallowance in its computation of income the departmental authority should have given relief in accordance with the provisions of the Act. The AR relied upon the case of Joint Investments Pvt. Ltd.(372ITR694).The DR left the issue to the discretion of the Bench.

6.2.We find that the assessee had made a suo moto disallowance of Rs.9.21 crores, that the AO had disallowed an amount of Rs.12.36 crores, that the FAA had restricted the disallowance to Rs.9.21 crores, that the exempt income received for the year by the assessee amounted to Rs.1.21 crores only. We find that the recent judgement/order of the Hon'ble High Court/s / Tribunal were not available to the FAA at the time of deciding the appeal. As he was not having the benefit of some of the judgments/order so,we are of the opinion that in the interest of justice the matter should be restored to file of FAA. He would decide the issue after affording reasonable opportunity to the assessee and after considering the case laws referred by AR before us.Ground No.2 is decided in favour of the assessee,in part. As a result, appeals filed by the AO and the assessee stand partly allowed. फलतःिनधा�रती अिधकारी और िनधा�रती �ारा दािखल क� गई अपील� अंशतः मंजूर क� जाती ह� . Order pronounced in the open court on 12th April, 2017. आदेश क� घोषणा खुले यायालय म� #दनांक 12 अ%ैल, 2017 को क� गई । Sd/- Sd/- (राम लाल नेगी राम लाल नेगी / Ram Lal Negi) (राजे�� / Rajendra) राम लाल नेगी राम लाल नेगी �याियक सद�य / JUDICIAL MEMBER लेखा लेखा सद�य सद�य / ACCOUNTANT MEMBER लेखा लेखा सद�य सद�य मुंबई Mumbai; #दनांक/Dated : 12.04 .2017. Jv.Sr.PS. आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत/Copy of the Order forwarded to : आदेश आदेश आदेश क� क� �ितिलिप �ितिलिप अ�ेिषत अ�ेिषत 1.Appellant /अपीलाथ( 2. Respondent /%)यथ( 3.The concerned CIT(A)/संब, अपीलीय आयकर आयु-, 4.The concerned CIT /संब, आयकर आयु- 5.DR “A ” Bench, ITAT, Mumbai /िवभागीय %ितिनिध, खंडपीठ,आ.अ. याया.मुंबई 5

7270&7305/M/14(11-12) M/s. Maestro Venture Pvt.Ltd.