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Income Tax Appellate Tribunal, DELHI BENCH - ‘F’ NEW DELHI
Before: SHRI BHAVNESH SAINI & SHRI PRASHANT MAHARISHI
This appeal by revenue has been directed against the order of Ld. CIT(A) Faridabad dated 21st November, 2013 for assessment. Year 2009- 10 on the following grounds :-
1. “The CIT(A) has erred both in law and facts in not appreciating the addition made u/s 14A of the Income Tax Act when the calculation of amount disallowed u/s 8D has not been faulted with or any point.
2. The CIT(A) has erred both in law and facts in not appreciating the disallowance made in respect of letting-go of interest income on advances, which can only be said personal or not wholly and exclusively for the purpose of the business of the assessee, particularly in the light of the judgment of the jurisdictional High Court in view of the decision of [CIT vs Abhisek Industries Ltd. (2006) 286 ITR 1 (P & H)” Page 1 of 7
2. Briefly the facts of the case on ground No. 1 are that the Assessing Officer on perusal of the balance sheet found that assessee had made investment in M/s. Richa industries Ltd. The Assessing Officer issued notice to the assessee as to why investment in M/s Richa Industries Ltd. should not be covered u/s 14A of the I.T. Act since its purpose was to earn tax free dividend income. The assessee explained that the investments in the said company were made through own unutilized funds and not through borrowed funds. It also sought establishment of nexus between all indirect expenses and exempt income in the light of judgment of ITAT Delhi Bench in the case of DCIT vs Jindal Photo Ltd. (ITA 4539/Del/ITAT). Furthermore, it was submitted that the method prescribed in rule 8D can be used to disallow expenses as per section 14A if the Assessing Officer, having regard to the accounts of the assessee is not satisfied with the correctness of its claim in respect of expenditure incurred in relation to exempt income.
The Assessing Officer after considering reply of the assessee made addition of Rs. 31,50,724/- u/s 14A of the I.T. Act on the reasons that investments in shares by assessee company constituted 52% of the total assets of the company, the assessee is engaged in the sale and purchase of shares through recognized stock exchange regularly and that during the year assessee had received dividend income of Rs. 7,018/-.
The assessee challenged the above additions before Ld. CIT(A) and written submissions of assessee is reproduced in the appellate order in which the assessee explained that M/s. Richa Capital Private Limited and M/s. Richa Clothing Private Limited were merged in M/s CSB Capital Ltd. (now name changed to M/s Richa Holding Limited) vide order of Punjab & Haryana High Court dated 29th May, 2009. During the course of amalgamation proceedings, the High Court directed the assessee company to prepare the consolidated accounts of all the above three companies as on 31st March , 2008. The necessary details of unsecured loan received / advanced (interest free as well interest bearing) and investment in shares of different companies as on 31st March, 2008 and 31st March, 2009 were prepared and placed on record. The details of investment in shares by all the three companies individually as on 31st March, 2008 were totaling to Rs. 7.57 crores and consolidated investment in shares as on 31st March, 2009 were Rs. 10.67 crores. The assessee did not incur any interest liability on the investment in the shares of different company. The investments were made out of capital available with the assessee company. The Assessing Officer has not brought any material in the order to prove the nexus between funds borrowed and invested in shares of the company. The details of fund available and investment made in shares were explained to show that assessee was having sufficient funds to invest in shares of the companies therefore provisions of section 14A would not apply. The assessee relied upon the decisions of Hon'ble Punjab & Haryana High Page 3 of 7 Court in support of the submissions. Ld. CIT(A) noted the details of interest free funds available with the assessee company both at the beginning as well as at the end of the year which is reproduced at page 6 of the appellate order which prove that the amount of interest free funds available with the assessee company both at the beginning as well as at the end of the year much higher as compared to the amount utilized in investment in shares. It was also noted that Assessing Officer also did not establish the fact that borrowed funds were used for making investment in shares. Ld. CIT(A) relied upon decision of the Hon'ble Punjab & Haryana High Court in the case of CIT vs. Hero Cycles Ltd. 323 ITR 518 in which it was held that disallowance u/s 14A required finding of incurring of expenditure. Where it was found that for earning exempted income no expenditure has been incurred , disallowance u/s 14A could not stand. Ld. CIT (A) also relied upon decision of the Punjab & Haryana High Court in the case of CIT vs Winsome Textile Industries Pvt. Ltd. 319 ITR 204 in which it was held as under :
“Therefore, it is to ascertained as to whether the assessee has made the investment in purchase of shares out of borrowed funds or invested its own funds. If the assessee has invested its own money in the purchase of shares then there is no question of any disallowance in respect of interest on borrowed funds under section 14A. However, if the borrowed funds have been utilized for purchase of shares of M/s. Winsome Yarns Limited, disallowance under section 14A shall have to be calculated even when investment has been made in the course of business of the assessee.”
In view of the above findings held that Assessing Officer erred in making disallowance of Rs. 31,50,724/- u/s 14A of the Act and deleted the addition.
On ground No. 2 Assessing Officer made addition of notional interest of Rs. 28,02,218/-. The Assessing Officer noted that assessee has given interest free advances to number of persons therefore he disallowed interest @ 7.5% on account of notional interest. The assessee submitted before Ld. CIT(A) that the assessee is a NBFC.
Acceptance of deposits or loans and advancing is the business of the assessee company. The assessee as on 31st March, 2009 has taken interest free loans for Rs. 1.45 crore and advance of Rs. 3,20,25,347/- .
The assessee has drawn cumulative effect of availability of free funds after investment in shares of the company and interest free loan as per annexure attached with the written arguments dated 22nd August, 2012.
The assessee after investment in shares and interest free loan has free fund of Rs. 7,12,19,771/-. The assessee has therefore not incurred any interest liability of funds invested in shares or interest free loans. Ld. CIT(A) noted that assessee had sufficient interest free funds available with it and that interest free advances were given out of those funds.
The Assessing Officer has not established that interest free funds have been given out of borrowed funds. Ld. CIT(A) accordingly deleted the addition.
Ld. DR relied upon order of the Assessing Officer. On the other hand, Ld. Counsel for assessee reiterated the submissions made before authorities below and also submitted that the Ld. CIT Faridabad did not recommend filing of the appeal on ground No. 2 as per annexure A filed by the department in departmental appeal.
After considering rival submissions we do not find any merit in the departmental appeal. The assessee has proved before Ld. CIT(A) that it has amount of interest free funds available with the assessee company both at the beginning and at the end of the year which was much higher as compared to the amount utilized in investment in shares. The assessee thus proved it made investment in shares out of own surplus capital. The Assessing Officer did not prove that investments have been made out of borrowed funds. Assessing Officer has also not proved if assessee incurred any expenditure for earning exempt income. On ground No. 2 the assessee similarly proved that it has given interest free advances to number of persons out of interest free funds available with it. Therefore no nexus have been proved between interest free advances and borrowed funds. Hon'ble Supreme Court in the case of Hero Cycle Pvt. Ltd. vs. CIT 379 ITR 347 held that assessee has credit balance in bank account at the time of advances, no disallowance of interest on the borrowings can be made. Other decisions relied upon by Ld. CIT(A) clearly support its findings for deleting the addition. Even on ground No. 2 Ld. CIT(A)Faridabad as per annexure A filed by the department did not Page 6 of 7 recommend on ground No. 2. Since assessee used its surplus funds for the purpose of investment and giving interest free loans, therefore, Ld. CIT(A) on proper appreciation of facts and material on record correctly deleted both the additions .
Both grounds of appeal of revenue are dismissed.
In the result departmental appeal is dismissed.