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Income Tax Appellate Tribunal, “D” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI NABIN KUMAR PRADHAN
Aforesaid appeal of the assessee is directed against the order dated 1st October 2013, passed by the learned Commissioner (Appeals)–24, Mumbai, for the assessment year 2009–10. The only issue arising for consideration in the present appeal is in relation to disallowance of ` 7,77,531 under section 14A Income Tax Act, 1961 (for short "the Act") r/w rule 8D of the Income Tax Rules, 1963.
2 M/s. Dhirajlal Morarji 2. Brief facts are, the assessee a partnership firm is authorised distributor of SKF bearing on retail and wholesale basis. For the year under consideration, assessee filed its return of income on 22nd September 2010, declaring total income of ` 6,55,140. During the assessment proceedings, the Assessing Officer noticed that the assessee had dividend income of ` 3,44,672 and long term capital gain of ` 66,078, on sale of shares which were claimed as exempt income. He, therefore, called upon the assessee to explain why expenditure relating to earning of exempt income should not be disallowed under section 14A r/w rule 8D. In response, it was submitted by the assessee, as the assessee in the computation of income has already disallowed an amount of ` 476, no further disallowance should be made. The Assessing Officer, however, was not convinced with the explanation of the assessee. He observed, disallowance made by the assessee is not in accordance with rule 8D. Observing that in assessee’s own case, learned Commissioner (Appeals) has upheld the disallowance made under section 14A for the assessment year 2008– 09, Assessing Officer to proceeded to disallow an amount of ` 7,77,531. Being aggrieved of such disallowance, assessee preferred appeal before the learned Commissioner (Appeals). In the course of hearing before the first appellate authority, it was submitted by the assessee that in assessment year 2007–08, the Tribunal having considered the fact that assessee had surplus fund to make tax free
3 M/s. Dhirajlal Morarji income yielding investment restricted the disallowance to 0.5% of the investment. He submitted, similar view was also expressed by the learned Commissioner (Appeals) in assessment year 2008–09. It was, therefore, submitted before learned Commissioner (Appeals) that disallowance to the extent of 0.5% of the average investment should be made. The learned Commissioner (Appeals) after considering the submissions of the assessee, observed, as far as impugned assessment year is concerned, the assessee had own funds of ` 1,03,90,521, whereas, the investment in exempted asset as on 31st March 2009 was ` 1,74,11,196. He, therefore, observed that the investment made by the assessee in the exempt income yeilding assets is more than surplus found available with the assessee, to the extent of ` 70,20,675. The learned Commissioner (Appeals) observed, since the aforesaid excess investment was not sourced from assessee’s own fund, the payment of interest on the amount of loan taken has to be linked to the investment in exempt asset. Accordingly, disallowance has to be made under rule 8D(2)(ii). However, the learned Commissioner (Appeals) directed the Assessing Officer to work out the disallowance under section 14A r/w rule 8D by applying provisions of sub–rule (ii) and (iii) of rule 8D(2).
Learned Authorised Representative reiterating the stand taken before the learned Commissioner (Appeals) submitted, assessee had 4 M/s. Dhirajlal Morarji sufficient interest free surplus funds available with it to make the investment in exempt income earning assets, therefore, no disallowance of interest expenditure in terms of rule 8D(2)(ii) can be made. To demonstrate such fact, learned Authorised Representative furnished a note showing the details of availability of surplus funds in various bank account as well as co–relating them to the investment made in assets. Further, the learned Authorised Representative submitted that the capital brought in by the partners is also available with the assessee to make investment. Learned Authorised Representative submitted, when the assessee has mixed funds comprising of both interest bearing and interest free funds, the presumption would be, investment made was out of interest free fund. In this context, he relied upon the decision of Hon'ble Jurisdictional High Court in CIT v/s Reliance Utilities & Power Ltd., [2009] 313 ITR 340 (Bom.). He, therefore, submitted, necessary directions be given to the Assessing Officer to verify the availability of surplus funds with the assessee and restrict the disallowance of 0.5% to the average value of investment.
Learned Departmental Representative, though, relied upon the observations of the learned Commissioner (Appeals), however, he submitted that the matter may be restored back to the Assessing Officer for verifying assessee’s claim.
5 M/s. Dhirajlal Morarji
We have considered the submissions of the parties and perused the material available on record. As noted by us, the Tribunal while deciding assessee’s appeal for assessment year 2007–08, has restricted disallowance to 0.5% of the average investment. Learned Commissioner (Appeals) has also expressed similar view while deciding assessee’s appeal for assessment year 2008–09. However, in the impugned assessment year, the learned Commissioner (Appeals) has deviated from the view expressed by the Tribunal and his predecessor–in–office on the reasoning that in the impugned assessment year, the investment made by the assessee is more than the surplus fund available. On the contrary, the learned Authorised Representative has vehemently submitted before us and has tried to demonstrate that the assessee had sufficient surplus funds available with it to make the investment. In this context, learned Authorised Representative submitted before us a short note showing availability of surplus interest free found in different bank account and their nexus to the investments made. Further, learned Authorised Representative has submitted before us that the interest free fund by way of capital brought in by the partner is also available with the assessee. In our view, if the assessee can demonstrate that it had sufficient interest free funds available with it to make the investment, applying the ratio laid down by the Hon'ble Jurisdictional High Court in Reliance Utilities
6 M/s. Dhirajlal Morarji & Power Ltd. (supra), no disallowance of interest expenditure can be made. In the aforesaid view of the matter, we direct the Assessing Officer to verify assessee’s claim of availability of surplus interest free funds for making the investment and if assessee’s claim is found to be correct on verification, then we direct the Assessing Officer to restrict the disallowance under section 14A to 0.5% of the average value of investment in terms of rule 8D(2)(iii). The Assessing Officer must provide reasonable opportunity of being heard to the assessee.
In the result, appeal is allowed for statistical purposes. Order pronounced in the open Court on 19.08.2016