ADDL CIT 10(1), MUMBAI vs. L & T INFRASTRUTURE FINANCE CO. LTD, MUMBAI

आदेश / O R D E R PER RAVISH SOOD, JM:

2. The appellant prays that the order of the CIT(A)’s on the above ground be set aside and that of the assessing officer be restored.

3. The appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of appeal.”

2. The brief facts of the case are that the assessee company which is engaged in the business of providing financial products and services for development/establishment of infrastructure projects and providing infrastructure loans had e-filed its return of income on 29.09.2009, declaring income of Rs. 119,49,09,219/-. The return of the assessee was processed as such u/s 143(1) of the Income-tax act, 1961 (for short ‘Act’).

3. The case of the assessee was taken up for scrutiny proceedings u/s 143(2) of the ‘Act’. That during the course of the assessment proceedings the A.O observed that the assessee had earned dividend income of Rs.1,44,04,463/- which was claimed as exempt u/s. 10(35), against which it had disallowed an expenditure of Rs.8,72,668/- u/s. 14A (i.e. @ 0.5% of the average investments) in its return of income. The A.O however not finding himself as being in agreement with the disallowance carried out by the assessee, therein proceeded with and worked out the disallowance u/s.14A r.w Rule 8D at Rs. 7,01,97,623/-.

4. The assessee being aggrieved with the assessment therein carried the matter in appeal before the CIT(A). The assessee assailing the disallowance of Rs. 7,01,97,623/- carried out by the A.O u/s 14A and substantiating its contention that no part of interest paid on borrowed funds could be related to the investments made by the assessee, therein submitted that during the previous year relevant to the A.Y.2009-10 the borrowed funds were mainly utilized by the assessee for providing infrastructure loans, which was the main business activity of the assessee. That in the backdrop of the aforesaid facts, the assessee justifying the disallowance of a sum of Rs.8,72,668/- (i.e. @ 0.5% of the average investments) which was suo motto carried out in the return of income, therein submitted that as there was an inextricable nexus between the ‘interest paid’ on borrowed funds and the ‘interest received’ on the infrastructure loans which represented 99% of the total income of the assessee, with a resultant net surplus ‘interest income’ having been earned by the assessee during the year under consideration, therefore the ‘interest paid’ was not considered for the purpose of computing disallowance as per Sec. 14A in the return of income. The assessee further fortifying its contention that the borrowed funds had been channelized into its business of advancing infrastructure loans, therein submitted that the loan funds of the assessee company comprised of Term Loan from Banks (Rs.1355 crores); Bank O/D (Rs.216 crores); Commercial Papers (Rs.100 crores); and secured NCDs (Rs.100 crores). It was submitted by the assessee that as per RBI Circular dated 01.07.2009 term loans cannot be given by banks for investment activities, therefore the question of utilizing term loans for making investments did not arise. The assessee further submitted before the CIT(A) that during the year under consideration as it had not made any new investments, except for investments in 'growth oriented' mutual funds which did not earn any exempt income, therefore the question of utilizing borrowed funds for making investments to earn exempt income did not arise.

5. The assessee further elaborating the nature of investments, therein submitted that the same consisted of investment in equity shares of 'BSCPL', a strategic investment on which it had not earned any dividend income, as well as investment in 'growth oriented' mutual funds which were not capable to earn any exempt income at all and were redeemed in April, 2009, therein resulting into a short term capital gain of Rs.7,78,918/- which was offered for tax in A.Y.2010-11. That in the backdrop of the aforesaid facts, it was thus averred by the assessee that no part of interest paid on borrowed funds could be related to the investments made by the assessee. It was further submitted by the assessee that the A.O. while framing the assessment order has disallowed a sum of Rs.7,01,97,623/- without appreciating as to whether the method followed by the assessee was correct or not, and irrespective of the genuineness of the claim of the assessee in respect of expenses incurred in relation to exempt income, had rather simply proceeded on the premises as if the disallowance as per Rule 8D was automatic.

6. That it was further submitted by the assessee that its share capital plus reserves during the year, viz upto 31.03.2009 were Rs.626 crores and Investments were only Rs.115 crores. Out of Rs.115 crores of investments, it was submitted by the assessee that an amount of Rs.90 crores were invested in ‘growth oriented funds’ which were taxable as capital gains on their redemption in the period relevant to A.Y.2010-11. Thus in the backdrop of the aforesaid facts, it was submitted by the assessee that the effective amount of investment thus remained at Rs.25 crores, against which it had received exempt income in the form of dividend. It was however averred by the assessee that as its share capital and free reserves were more than the investments which had earned exempt income, therefore in light of the judgment of the Hon’ble High Court of Bombay in : CIT vs. Reliance Utilities & Power Ltd. (2009) 313 ITR 340 (Bom), it was to be presumed that it had invested its own funds towards the investments which earned exempt income. The assessee had in order to further support his aforesaid contention, therein relied on the following orders/judgments:- (i) M/s.Achutel Products Ltd. vs. ACIT/DCIT & AC1T vs. M/s. Achutel Products Ltd. (ITA Nos.3183-3185-2649/Mum/2011) (ii) M/s.Mazopp Investment Ltd. &Ors. Vs. CIT (Del) (2012) 247 CTR (Del) 162 (iv) Punjab State Coop & Marketing Fed. Ltd.(ITA Nos. 548-579/Chd/201 1)