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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY, JM & SHRI MANOJ KUMAR AGGARWAL, AM
O R D E R PER MANOJ KUMAR AGGARWAL (AM) : 1. The instant appeal has been filed by the revenue for the Assessment Year [AY] 2010-11 assailing the order of Commissioner of Income Tax (Appeals)-21 [CIT(A)], Mumbai dated 27.08.2014 on the following grounds of appeal:- “On the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in deleting the disallowance of interest amounting to Rs.19,22,89,567/-“
Facts in brief, are that the assessee is a resident company mainly engaged in the business of providing financial services and filed its return of income for AY 2010-11 declaring an income of Rs.452,90,14,813/- which was processed under Section 143(3) vide assessing officer [AO] order dated 12.03.2013 wherein total income was recomputed at Rs.469,18.76,502/- after making certain adjustments and disallowances including additional disallowance under section 14A amounting to Rs.13,66,34,139/-. The assessee had made suo-moto disallowance of Rs.5,56,55,427/- under Section 14A while computing its income but the same was recomputed at Rs.19,22,89,566/- by AO after applying Rule 8D. Thus, an additional disallowance of Rs.13,66,34,139/- was made by the AO. Aggrieved by the same, the assessee preferred appeal before CIT(A) and raised various contentions in its support. It was contended that main business of company was granting of loans as its primary source of income was interest income. The assessee, being Non Banking Finance Company (NBFC), was not permitted to borrow funds from the banks for the purpose of any investment activity and funds borrowed from the bank could be utilized for lending activity only and hence interest paid on bank loans could not be considered for working out disallowance under Section 14A. The bank borrowings were exclusively meant for lending activities which is the primary business of the assessee and has generated business income. The assessee further submitted that net worth of the company as on 31.03.2010 was Rs.1449.74 Crores which far exceeded exempt income yielding investments amounting to Rs.729.13 Crores and therefore, investments were presumed to be made out of owned funds and no interest, therefore, could be attributed towards the said investments and hence could not be considered to work out disallowance as per Rule 8D. In this regard , the assessee relied upon the decision of Bombay High Court in the case of Reliance Utilities and Power Ltd 313 ITR 340 (Bom), wherein the Bombay High Court held that in case of a company which has interest-free funds available, it will always be presumed that the company has invested its own fund and interest-free funds for the purpose of making investments. Accepting the contentions of the assessee and observing the fact that net worth of the company far exceeded its investment, CIT(A) concluded that no disallowance could be made on interest expenditure. The only addition sustained by CIT(A) under Section 14A Rule 8D, was to the extent of 0.50% of average investment towards expenditure for administrative purposes. Thus, the claim of the assessee was partly allowed. Aggrieved by the stand of the CIT(A), revenue is in appeal before us.
At the outset, the Ld. Representative [AR] for the assessee drew our attention to the fact that this matter has continuously arisen in various years in assessee’s own case and has already been settled in favour of the assessee by Hon’ble Mumbai ITAT in assessee’s own case in for AY 2008-09 & ITA No. 5622/M/2012 for AY 2009-10 and produced before us the copies of the same. Upon perusal of the orders of Mumbai Tribunal in ITA No. 7676/Mum/2011 for AY 2008-09, we find that the issue has been decided in favour of the assessee by making following observations:- “We have heard the rival contentions and have perused the relevant findings of the assessing officer and the learned Commissioner (Appeals) and the material available on record. The assessing officer has worked out the disallowance under section 14A as per rule 8D at Rs.28,72,22,642, after taking interest cost of Rs.24,99,03,799 and administrative cost of Rs.3,73,18,843. The learned counsel has given various working of disallowance under section 14A and had submitted that if any disallowance is called for, then same should be made on that basis only. His main contention has been that the assessee’s networth and availability of funds is far more than investment which are capable of yielding exempt income and, therefore, no interest cost should be attributed for working out the disallowance. If the assessee has huge funds which also consist of interest free funds, then presumption would be that investments have been made out of interest free funds, available with the assessee and, therefore, interest cost cannot be made attributable. However, availability of interest free funds and investments which are capable of yielding interest income, has not been examined properly either by the Assessing Officer or by the learned Commissioner (appeals). Therefore, respectfully following the decision of the Hon’ble jurisdictional High Court in Reliance utilities and Power Ltd (supra), we direct the Assessing Officer to re-examine the nexus of interest free funds and investments made. In case, the interest-free funds are more than the investment, that interest should be cost excluded from the working of the disallowance and in that situation only administrative costs can only be disallowed. Other workings given by the assessee are not been considered in view of the aforesaid direction. We thus, set aside the impugned order passed by the learner Commissioner (appeals) and restore the matter back to the file of the Assessing Officer with the above direction. Needless to say that the assessing officer shall give due and effective opportunity of being heard to the assessee and to explain its case.
Following the ratio of the above order, similar directions have been issued in assessee’s own case for assessment year 2009-10 by Mumbai Tribunal in ITA No. 5622/M/2012. Pursuant to above directions of Tribunal, AO has allowed the relief to the assessee for both the above years, a copy of which has been placed on record. The AR has also produced before us, inter-alia, a chart showing calculation of excess of net worth and investment capable of yielding exempt income as on 31.03.2010. A perusal of the same shows that the net worth of the assessee as on 31.03.2010 is far more than the exempt yielding investments made by the assessee as on that date.
The above facts were fairly conceded by the DR and he could neither distinguish the facts in present case with that of facts in earlier years nor could point out any infirmity in the stand taken by CIT(A).
Therefore, on the facts and circumstances of the case, we see no reason to interfere with the order of CIT(A) and thus, the appeal of the revenue is dismissed.
In nutshell, the appeal of the revenue is dismissed.
Order pronounced in the open court on 21/09/2016.