DCIT 3(1), MUMBAI vs. BAJAJ AUTO HOLDING P..LTD, PUNE

The captioned appeal by revenue are second round of appeal for Assessment Year [AY] 2004-05 assails order of Ld. Commissioner of Income Tax (Appeals)-5 [CIT(A)], Mumbai dated 31/10/2012 qua relief provided to assessee against disallowance u/s 14A. The assessee has filed cross objections against the appeal for part of disallowance sustained by Ld. CIT(A) and we proceed to dispose-off both of them in the succeeding paragraphs.

Briefly stated, the assessee is a resident corporate assessee engaged as investment company and suffered disallowance u/s 14A for Rs.41,03,244/- for impugned AY during original assessment proceedings which was carried up-to to the level of Tribunal in & 6836/Mum/2008. The Tribunal in its order dated 04/11/2010 directed the Assessing Officer [AO] to compute disallowance u/s 14A in accordance with the ratio laid down by Hon’ble Bombay High Court in the case of ‘Godrej & Boyce Ltd.’. Pursuant to these directions, AO recomputed 14A disallowance at similar figures vide order dated 30/12/2011 which was assailed before Ld. CIT(A). Before CIT(A), the assessee contended that investment made by assessee were old investments made out of owned funds and had no connection with the unsecured loans raised by the assessee. Also, the assessee while continuing the said investment, repaid the unsecured loans in the immediately succeeding years and hence, borrowed funds had no connection with the investments. Further, the AO wrongly observed that the assessee granted interest frees loans to Joint Stock Companies. In fact, these loans were non performing assets and hence no interest thereupon was recognized in view of the fact that the assessee was an investment company and was required to follow directives of RBI on prudential norms of Income recognition and following the same, did not accrued income in respect of these loans. Not convinced, Ld.

The Ld. DR placed reliance on the stand of AO and contended that the detailed working and data of various financial years provided by assessee to CIT(A) was never available before AO and therefore, he was left with no option but to work out the same on the basis of material available on record. The assessee incurred interest expenditure and was mainly engaged in investment activity which certainly called for the impugned disallowance on estimated basis. Per Contra, the Ld. Counsel for assessee [AR] contended that the AO was misled by the fact that interest bearing loan funds were used to make interest free loans & advances to joint stock companies which was factually incorrect. In fact, these were interest bearing loans but no income thereupon was accrued in terms of RBI norms for income recognition and hence, the very basis of making this disallowance was vitiated. Further, he strongly placed reliance on the judgment of Hon’ble Bombay High Court in CIT Vs. Reliance Utilities & Power Ltd. [313 ITR 340] to contend that as on the last date of the relevant financial year, the company’s owned funds in the shape of equity capital and reserves were adequate enough to cover the exempt income earning investments and hence, no interest disallowance could be sustained in such a situation.

We have heard the rival contentions and perused relevant material on record. The short question before us concerns with Section 14A disallowance. The basic facts are not in dispute. The AO estimated the disallowance by apportioning the total expenditure between C.O. No.57/Mum/2014 M/s Bajaj Auto Holdings Ltd. Assessment Year 2004-2005 exempt income and total income earned by the assessee whereas CIT(A) estimated the same by correlating the investment with the unsecured loans raised by the assessee from time to time. Without delving much deeper into the issue, we observe that a perusal of financial statement of the assessee as on 31/03/2004 reveals that assessee had Shareholders’ funds of Rs.27.74 crores against investment of Rs.25.25 crores and hence, investment stood at lesser figure than the owned funds of the assessee. Our jurisdictional Hon’ble Bombay High court in the case of CIT Vs. Reliance Utilities & Power Ltd. [313 ITR 340] has made following observation:- “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 nutshell, both the appeals stand partly allowed.