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Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
Before: HON’BLE S/SHRI JOGINDER SINGH (JM), & RAJESH KUMAR,(AM)
स्थधमी रेखध सं./जीआइआय सं./PAN/GIR No. :AAACP8291F अऩीरधथी ओय से / Appellant by: Shri N R Agrawal प्रत्मथी की ओय से/Respondent by Shri Pratap Singh सुनवधई की तधयीख / Date of Hearing : 29.11.2016 घोषणध की तधयीख /Date of Pronouncement : 29.11.2016 आदेश / O R D E R
Per RAJESH KUMAR, Accountant Member:
This is an appeal filed by the assessee and is directed against the order of the Ld. CIT(A)-28, Mumbai dated 3.2.2015 pertaining to A.Y.2010-11.
The issue taken by the assessee in the sole ground is against the confirmation of disallowance of Rs.16,29,409/- by the ld. CIT(A) as made by the AO under section 14A of the Income Tax act, 1961 read with rule 8D of the Income Tax Rules, 1962.
Brief facts of the case are that the assessee filed his return of income on 30.9.2010 declaring total income of Rs.37,67,935/-. The case of the assessee was selected for scrutiny under the CASS and accordingly statutory 2 /M /15 notices under section 143(2) and 142(1) were issued and served upon the assessee. The assessment was framed by the AO vide order dated 1.3.2013 passed under section 143(3) of the Act at Rs.54,46,350/- by making various additions including of Rs.16,29,409/- under section 14A comprising Rs.15,37,367/- under rule 8D (2)(ii) and Rs.92,042/- under rule 8D(2)(iii). During the course of assessment proceedings, the AO noticed that the assessee has earned dividend income of Rs.2,61,652/- and claimed exemption under the Act and no corresponding disallowance was attributed by the assessee suo motto towards earning of exempt income. The AO issued show cause notice to the assessee which was replied by the assessee vide written submission dated 16.1.2013. The AO considered and rejected the submissions of the assessee and finally invoked the provisions of section 14A read with rule 8D and worked out disallowance at Rs.16,29,409/- as per section 14A and added the same to the income of the assessee. Aggrieved by the order of the AO, the assessee preferred an appeal before the First Appellate Authority, who also confirmed the action of the AO qua the addition made u/s 14A read with rule 8D of the Rules by observing and holding as under : “2.5 I have considered the facts of the case and the submissions made by assessee. The assessee has basically contended that since his capital as 31.03.2009 and as on 31.03.2010 was more than the investments made, it should be presumed that the investments are out of the interest free capital of the assessee in view of the judgement of the Hon'ble Bombay High Court in the case of HDFC Bank Ltd (supra) and Reliance Utilities and Power Ltd. (supra). I find that the judgment in the case of Reliance Utilities and Power Ltd (Supra) is based on a finding that if there be interest-free funds available to an assessee 3 /M /15 sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. The relevant finding here is that there should be availability of interest-free funds to the assessee and that such interest-free funds has not already been utilized for any other purpose. Hence, in my opinion, it is incumbent upon the assessee to show that the interest-free funds were available with him for making the investments in shares/mutual funds, income from which is/would be exempt from tax. 2.6 Perusal of the balance sheet filed by the assessee at 31.03.2009 shows that the assessee had balance in the capital account of Rs.3.32 crores. The asset side shows fixed deposits with Bank of India of Rs. 2 crores, flat and office premises of Rs.23.22 lakhs, gold and jewellery of RS.14.46 lakhs and close to Rs. 2 lakhs in bank account and as cash in hand. The first and most logical presumption' that can be made is that all the above has been invested out of the interest-free funds of the assessee since normally no person would take money on loan for investing the same in fixed deposit. Hence, only an amount of approximately Rs.93 lakhs of the own free funds would be available to the assessee. As against this, the assessee has investment in shares and debentures of Rs.1.76 crores and in stock-in-trade of Rs.1.41 crores. The assessee has secured loans of Rs.1.55 crores and unsecured loans of RS.3.19 crores. Clearly, part of the interest bearing loans has been utilized for making investments in shares and debentures. Although, as at 31.03.2010, the interest bearing loans have come down drastically, it is clear that part of the loans on which interest has been paid during the year also relates to the investments made which is being carried forward from the earlier year. Hence, the contention of the assessee that only interest-free funds have been utilized for the purpose of investments in shares and debentures cannot be accepted: The funds of the assessee, being mixed funds, disallowance of interest u/s 14A as per the method prescribed in Rule 8D(2)(ii) would be called for. This is what the Assessing Officer has done. Hence, his action of working out the disallowance of proportionate interest expenditure as per the method prescribed in Rule D(2)(ii) is upheld. Subject to the verification of the contention of the assessee that while calculating the disallowance, the A.O. took wrong figurers of average of total assets. The A.O. is directed to verify the correctness of the working of the figures of average of total assets and adopt the correct figure for working out the disallowance. 2.7 As regards the contention of the assessee that the net interest expenditure should be considered for working out of the disallowance on account of proportionate interest expenses, I do not find the same 4 /M /15 acceptable. The decision in the case of Morgan Stanley relied upon by the assessee relates to the A. Ys. 2001-02 and 2004-05 when Rule 8D was not on the statute. The present appeal relates the A. Y. 2010-11 and the disallowance has to be worked out mandatorily and strictly by the method prescribed in Rule 8D(2)(ii) of the I.T. Rules, 1962. The Said rule talks about amount of expenditure by way of interest and not net expenditure, by way of interest. Hence, it is the total gross interest by way of interest expenditure which will have to be considered for working out the disallowance under Rule 8D(2)(ii). 2.8 The disallowance worked out by the A.O. as per the method prescribed in Rule 8D(2)(iii) is also upheld as the assessee has not shown that no part of the administrative expenditure can be attributed to the activity of earning tax free income and also for the fact that he has not contested such disallowance made the A.O. in his submissions in the appellate proceeding. In view of the aforesaid reasons, the ground of appeal
filed by the assessee is dismissed”
4. The ld. AR vehemently submitted before us that the assessee’s own funds were for more than the investment made in the shares and securities income of which was claimed as exempt income under the Act. The ld. AR submitted that total capital balance as per the audited balance sheet as on 31.3.2010 was Rs.3,44,28,517.31 vis a vis investments in shares and securities of Rs.1,77,34,233.78 by referring to page 3 of the assessee’s paper book and as such no disallowance under rule 8D(2) (ii) was called far. In defence of his arguments the ld.AR relied on the decision of the Hon’ble Jurisdictional High Court in the case of CIT V/s HDFC BANK LTD. [2014] 366 ITR 505 (Bom) and the decision Commissioner of Income-tax V/s SBI DHFL Ltd. 2015. (2015) 93 CCH 0201( MumHC) and submitted that since the assessee’s own funds are more than the investment made in the shares and securities and therefore no disallowance under rule 8D(2)(ii) of Rs.15,37,367/- to be made. The ld. AR, however, did not object to the addition of Rs.92,042/- made under rule 5 ITA No .2030 /M /15 8D(2)(iii). The ld. AR finally prayed that the disallowance of Rs.15,37,366/- under rule 8D(2(ii) be deleted as the case of the assessee is fully covered by the decision of the Jurisdictional High Court. On the contrary, the ld.DR strongly objected to the arguments of the ld.AR and pointed out that the ld.CIT(A) in para 2.5 to 2.8 of the appeal order has considered this decision and distinguished the same as was not applicable to the case of the assessee and prayed that the orders of lower authorities be upheld.
We have carefully considered the submissions of the parties, perused the material placed before us including the orders of authorities below and case laws relied upon by the parties. We find from the balance sheet on 31.3.2010 filed at page 3 of the paper book that the assessee’s own interest free funds were Rs.3,44,28,517/- against the investment in shares and securities of Rs.1,77,34,233/-. We are of the considered opinion that the case of the assessee is squarely covered by the ratio laid down by the Hon’ble Jurisdictional High Court in the case of HDFC BANK LTD(supra), in which the Hon’ble High Court has held that in case interest free funds are more than the investments made in the shares and securities which yielded exempt income then the presumption would be that investments were made in the shares and securities out of interest free funds. In view of the facts and circumstances of the case, we are of the considered opinion that the case of the assessee is squarely coved by the decision of the Hon’ble jurisdictional High Court and accordingly, we set aside the order of the ld.