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Income Tax Appellate Tribunal, COCHIN BENCH : BY VIRTUAL HEARING
Before: SHRI WASEEM AHMED & SHRI SOUNDARARAJAN K
Assessment Years : 2018-19 The Asst. Commissioner of Bhima Jewellers & Diamonds, Vs. M M Hall LMS Junction, Attingal, Income Tax, Trivandrum – 695 101. Circle – 1(1), Trivandrum. PAN – AAMFB 3260 F The Addl/Joint/Dy./Asst. Commissioner of Income Tax, NFAC, Delhi. APPELLANT RESPONDENT Assessee by : Shri R Krishnan, CA Revenue by : Smt. GirIy Albert, Sr. DR Date of hearing : 19.09.2024 Dateof Pronouncement : 15.10.2024 O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER:
This is an appeal filed by the assessee against the order passed by the NFAC, Delhi dated 30/06/2023 in DIN No. ITBA/NFAC/S/250/ 2023-24/1054048469(1) for the assessment year 2018-19.
The only issue raised by the assessee is that the ld. CIT(A) erred in confirming the disallowance made by the AO amounting to Rs. 6,05,20,735/- in part on account of diversion of interest-bearing fund for non-commercial purposes.
Page 2 of 5 3. The AO during the assessment proceedings found that the assessee has made substantial investment in a company viz., Bhima Jewellers LLC, which is in a violation of the partnership deed of the assessee. Furthermore, the Bhima Jewellers LLC was an independent/ separate entity. It was also found by the AO that the assessee on one hand has incurred interest expenses on the borrowed funds and on the other hand, it has advanced money to the outside company without charging any interest. Thus, the AO was of the view that the assessee had diverted its interest-bearing funds for non-commercial purposes. Accordingly, the AO worked out the amount of interest attributable to such investment amounting to Rs. 6,05,20,735/- and added to the total income of the assessee.
Aggrieved, the assessee preferred appeal to the ld. CIT(A) who partly confirmed the order of the AO by observing as under:
“4.3.4 Though, the AO claimed that the appellant had diverted its interest bearing funds in making the alleged funds interest free, however, no direct nexus could have been established by him. The appellant has made further claim that it had sufficient funds other than borrowed funds for the purpose of making investments in the alleged overseas firms however, the same could not proved by it. From the aforesaid facts it is clear that the appellant was having mixed fwads, i.e. borrowed and own, and it has advanced some portion of it to the overseas entity against which no interest income was earned by it and there were certain amounts of funds which were advanced to certain debtors against which, it had earned interests and the same were duly offered for taxation. This issue has not been contradicted by the AO in his assessment order. Under such circumstances, there are two possibilities arise, firstly, if the direct nexus between the borrowed funds and the invested funds in the overseas entity is established, then the disallowance of interest expenses in respect to the entire amount of non-business related investment made, subject to the netting of any interest earned thereon, is justified. Secondly, if the nexus is not proved, then the interest expenses in the ratio of borrowed funds to the total funds, including own funds and the borrowed funds, should be treated as expenditure not incurred wholly and exclusively for the business purpose of the assessee-firm. If the assessee has incurred .
Page 3 of 5 any interest income on investment of its funds in entities not related to is business, such interest income has to be netted off against the non- allowable interest expenses. As the case under consideration falls under the second scenario, For the sake of clarity, the non-allowable expenses on account of interest on borrowed funds invested in non-businessrelated activities hasto be computed as follows: Non-allowable interest expenses = (Net Interest Expenses debited in the P&L A/c)* x (Borrowed funds / Total funds including borrowed funds & own funds) 'Interest expenses after netting off any interest earned and offered for taxation. With this direction, the AO is directed to reverify the financials, loan account etc. as deemed required and recompute the disallowance of interest expenses afresh and disallow the same as discussed above. Thus, ground nos. 6 to 13 are treated as partly allowed subject to the recomputation of the AO.
Being aggrieved by the order of the ld. CIT(A), the assessee is in appeal before us.
The ld. AR before us contended that own fund of the assessee exceeds the amount of investment made in the company viz. Bhima Jewellers LLC, therefore, it can be presumed that the investment has been made in the impugned company out of its interest free fund, therefore, there cannot be any disallowance of such interest expenses.
On the other hand, the ld. DR vehemently supported the orders of the authorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. The controversy before us relates whether there can be any disallowance of interest expenses on notional basis in a situation where the interest-bearing fund has been diverted by the assessee for non-commercial purposes. Before we deal with the issue, it is necessary to note that the assessee has contended .
Page 4 of 5 time and again before the authorities below that the own fund of the assessee exceeds the investment. Thus, according to the assessee, there cannot be any disallowance of interest on account of diversion of fund.
8.1 At the time of hearing, the ld. AR in support of his contention has relied on the judgement of Hon’ble Supreme Court in the case of South Indian Bank Ltd. Vs. CIT reported in 130 taxmann.com 178, wherein it was held as under: 27. The aforesaid discussion and the cited judgments advise this Court to conclude that the proportionate disallowance of interest is not warranted, under section 14A of Income Tax Act for investments made in tax-free bonds/securities which yield tax-free dividend and interest to Assessee Banks in those situations where, interest free own funds available with the Assessee, exceeded their investments. With this conclusion, we unhesitatingly agree with the view taken by the learned ITAT favouring the assessees.
The above conclusion is reached because nexus has not been established between expenditure disallowed and earning of exempt income. The respondents as earlier noted, have failed to substantiate their argument that assessee was required to maintain separate accounts. Their reliance on Honda Siel (supra) to project such an obligation on the assessee, is already negated. The learned counsel for the revenue has failed to refer to any statutory provision which obligate the assessee to maintain separate accounts which might justify proportionate disallowance.
8.2 From the above judgment, it is reveled that if the own fund of the assessee exceeds the investment, then there cannot be any disallowance of interest expenses. Admittedly, the judgment discussed above was rendered in context of the provisions of sec. 14A of the Act, but the ratio laid down by the Hon’ble Supreme Court can also be applied in the given set of facts and circumstances. Accordingly, we set aside the finding of the ld. CIT(A) and direct the AO to delete the addition made by him on account of interest attributable to the funds diverted for .
Page 5 of 5 non-commercial purposes subject to the verification that the own fund of the assessee exceeds the amount of investments. Hence, the ground of appeal of the assessee is hereby partly allowed.
In the result, the appeal filed by the assessee is partly allowed. Order pronounced in court on 15th day of October, 2024
Sd/- Sd/- (SOUNDARARAJAN K) (WASEEM AHMED) Judicial Member Accountant Member Bangalore Dated, 15th October, 2024 / vms / Copy to:
1. 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore.
6. Guard file By order Asst. Registrar, ITAT, Bangalore .