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Income Tax Appellate Tribunal, MUMBAI BENCH “B”, MUMBAI
Before: SHRI G.S.PANNU & SHRI AMARJIT SINGH
ORDER PER G.S.PANNU,A.M:
The captioned cross-appeals filed by the Revenue and assessee pertaining to A.Y. 2009-10 are directed against the order of CIT(A)-33, Mumbai which in turn arises out of an order passed by the Assessing Officer under section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’) dated 23/11/2011.
First, we take up the appeal of the Revenue in ITA No. 824/Mum/2013. At the outset, it is noticed that the tax effect involved in this appeal is less than Rs.10.00 lacs. The CBDT vide Circular No.21/2015 dated 10/12/2015 has revised the monetary limits for filing of appeals by the Department before the Tribunal retrospectively. Since the tax effect in dispute in the captioned appeal is stated to be below the monetary limit of Rs.10.00 lacs specified in the CBDT Circular dated 10/12/2015 (supra), the same is dismissed as not maintainable.
Now we may take up the assessee’s appeal in Grounds of appeal have been raised by the assessee:-
“1. On the facts & circumstances of the case the Learned Commr. of Income Tax (Appeals) has erred in confirming the disallowance the sum of Rs.2,40,246/ under section 14A read with Rule 8D. The disallowance made by the Learned assessing officer and confirmed by learned Commr. Of Income Tax (Appeals) amounting to Rs.2,40,246/ is not justified and be deleted.
2. On the facts & circumstances of the case the Learned Commissioner of income tax (Appeals) has erred in granting the deduction of interest only to the extent of Rs.852,619/. The appellant prays that they are entitled to deduction of interest under section 36(1)(iii) amounting to Rs.22,77,904/ and the disallowance made by the Learned assessing officer and confirmed by learned Commr. Of Income Tax (Appeals) amounting to Rs.8,52,619/ may be deleted.
3. The Learned Commissioner of Income Tax (Appeals) has not dealt with the issue regarding levy of interest under section 234B. The appellant denies the liability for payment of interest u/s 234B and prays that the interest levy at Rs.2,37,374/ may be deleted.”
The assessee company had earned dividend income of Rs.6,05,843/-, which was exempt from tax. In the return of income filed, assessee had suo- moto made a disallowance under section 14A of the Act of Rs.22,974/-. The Assessing Officer noted that the disallowance made by the assessee pertained to the element of expenses covered by sub-clause (iii) of clause(2) of Rule 8D of the Income Tax Rules, 1962 ( in short ‘the Rules’) and assessee had not disallowed any portion of interest expenditure which was relatable to the investments. Accordingly, the Assessing Officer disallowed a sum of Rs.2,40,246/- on account of interest expenditure calculated in the manner prescribed in Rule 8D(2)(ii) of the Rules. This addition has been further affirmed by the CIT(A), against which assessee is in further appeal before the Tribunal.
Before us, the Ld. Representative for the assessee vehemently pointed out that there was no justification to disallow the interest expenditure in the instant year. It is pointed out that no investments have been made during the year under consideration. By referring to the balance sheet, it is pointed out that as on 01/04/2008, the aggregate investment was Rs.1,11,87,777/- comprising of mutual funds - Rs.1,11,85,776/- and shares in two Co-operative Housing Societies of – Rs.2,001/-. It was pointed out that in the instant year investment in mutual funds have been sold and no fresh investments have been made and the closing balance of the investments shown in the balance sheet as on 31/03/2009 is Rs.2,001/-, which is the investment in the two Co- operative Housing Societies Ltd. On this basis, it was pointed out that as no funds have been utilized for making investments during the year, the interest debited to P&L Account cannot be considered for the purpose of disallowance under section14A of the Act. It has been further pointed out that in the immediately preceding assessment year of 2008-09, the disallowance of interest expenditure relatable to the investments was deleted by the CIT(A) on the ground that the same was made out of own funds of the assessee. It was pointed out that the order of the CIT(A) dated 01/11/2012 for assessment year 2008-09 has since become final and, therefore, under these circumstances the disallowance of interest expenditure was not merited in the instant year.
On the other hand, the Ld. Departmental Representative has defended the orders of the lower authorities by relying on the same.
We have carefully considered the rival submissions. The factual matrix brought out by the assessee clearly reveal that in the instant year assessee has not made any fresh investment in mutual funds and further in the past year also no interest has been found to be attributable to such investments. Rather, in the year under consideration, assessee has sold investments in mutual funds. The only investment remaining in this year out of the past investments is a sum of Rs.2,001/- in the shares of two Co-operative Housing Societies Ltd. Under these circumstances, it will be appropriate to hold that the interest debited in the P&L Account is not directly attributable to the business of the assessee so as to fall for consideration for disallowance as per the formula contained in Rule 8D(2)(ii) of the Rules. Accordingly, the disallowance of Rs. 2,40,246/- made by the Assessing Officer out of interest expenditure under section 14A of the Act is directed to be deleted. Thus, on this aspect assessee succeeds.
The second Ground raised by the assessee is with respect to a disallowance of Rs.22,07,904/- made by the Assessing Officer out of interest expenditure by invoking the provisions of the proviso to section 36(1)(iii) of the Act. In this context, brief facts are that the assessee was undertaking construction of building. The total cost of the building under construction at the end of the year stood Rs.2,49,40,337/-. During the year under consideration, assessee had made additions to the extent of Rs.1,63,52,088/- and the balance of Rs.85,88,248/- was the opening balance brought forward from earlier years. The Assessing Officer noted that assessee had debited expenditure on account of interest in the P&L Account amounting to Rs.46,68,746/- towards interest paid to partners on their credit balance in the capital account. According to the Assessing Officer a portion of interest paid to partners relating to the outlay of Rs.2,49,40,337/- towards the building under construction was not eligible for deduction. For the said reason the Assessing Officer made disallowance of Rs.22,77,904/- on the ground that such interest expenditure was in respect of capital borrowed for acquisition of an asset which was not put to use. In this regard, the Assessing Officer has also referred to proviso to section 36(1)(iii) of the Act. The CIT(A) has also affirmed the disallowance, against which assessee is in further appeal before the Tribunal.
8.1 Though the Ld. Representative for the assessee did not dispute that the asset in question i.e. building is still under construction and is not put to use for business, yet according to him no disallowance is required to be made out of interest expenditure in terms of the proviso to section 36(1)(iii) of the Act because on facts there is no interest expenditure, which is relatable to funds invested towards the building under construction.
8.2 In order to appreciate the aforesaid plea of the assessee, the following factual aspects are relevant. Notably, the opening balance in the building construction was Rs.85,88,248/- and additions during the year are to the tune of Rs.1,63,52,088/-, which totals to Rs.2,49,40,337/-. In this context, Ld. Representative for the assessee pointed out that assessee has not raised any borrowings except to the extent of a specific loan of Rs.1,91,246/- raised for acquisition of car, and in this regard he has referred to page -5 of the Paper Book, wherein is placed balance sheet as on 31/3/2009. Therefore, the first and the foremost plea of the assessee is that in the absence of any borrowings, no interest can be attributable to the investment made in the construction of the building. The Ld. Representative for the assessee has referred to page-22 of the Paper Book, wherein is placed the details of the interest debited to the P&L Account of Rs.46,68,746/-, which represents interest paid to partners on the credit balance in the capital accounts. Apart therefrom, the details of Bank & financial charges of Rs.3,64,469/-, placed on page 15 of the Paper Book, shows that it comprises of bank charges, bank guarantee commission, interest on car loan, processing fee, and interest on bank overdraft, which is a small figure of Rs.4,142/-. The Ld. Representative for the assessee pointed out that assessee does not have any overdraft facility with the bank and that the interest on bank overdraft of Rs.4,142/- is on account of certain temporary overdrawing that would have occurred pending cheque realization. It was explained that out of the addition of Rs.1,63,52,088/- made in the Building construction account during the year, actual deployment/physical outflow of funds was only to the tune of Rs.1,55,58,782/- and at page 19 of the Paper Book, a chart showing the source of such payments has been placed. As per the same, it is seen that the payments have been made out of current bank accounts maintained by the assessee, which do not carry any interest burden. Be that as it may, it is quite clear that it is only interest paid to the partners of Rs.46,68,746/-, which has been considered by the Assessing Officer as relatable to the funds invested in the building construction. In this context, Ld. Representative for the assessee has placed a chart analysing the details of the capital account of partners, which is placed at pages 23 of the Paper Book. As per the P&L Account as well as the balance sheet of the assessee, it is quite evident that the credit balance of the partners at the end of the year stood at Rs.4,88,11,203/- and cash flow for the year stood at Rs.3,05,43,543/-. It is quite clear that the cash profits generated by the assessee during the year are sufficient to cover the investments made in the construction of building during the year of Rs.1,63,52,088/-(more so, if actual value of out-flow at Rs.1,55,58,782/- is considered). Apart therefrom, we find that out of the total investment of Rs.2,49,40,337/- is concerned, a sum of Rs.85,80,248/- has been made in the preceding year. In the preceding year, the Ld. Representative for the assessee, pointed out that no such disallowance was made and referred to the assessment order passed under section 143(3) for the assessment year 2008- 09 dated 16/12/2010, a copy of which has been placed at pages 36 to 39 of the paper book.
8.3 The aforesaid factual matrix is clearly borne out of the record and at the time of hearing, the same has not been repudiated by the Ld. Departmental Representative. Considering the above matrix, in our view, there is no material to suggest that any interest can be attributable to the funds invested by the assessee in the building under construction and, therefore, the Assessing Officer has wrongly invoked the proviso to section 36(1)(iii) of the Act to disallow a sum of Rs. 22,77,904/- out of interest expenditure. Accordingly, on this aspect assessee succeeds.
The last Ground in the appeal of the assessee relates to charging of interest under section 234B of the Act , which is consequential in nature and does not require any adjudication.
In the result, whereas appeal of the Revenue is dismissed, that of assessee is partly allowed, as above.
Order pronounced in the open court on 19/10/2016