DEPUTY COMMISSIONER OF INCOME TAX, BANGALORE vs. M/SDOVETAIL FURNITURE P LTD, BANGALORE

This appeal by the Revenue is directed against the order dated 21.07.2014 of the CIT(Appeals)-I, Bangalore for the assessment year 2009-10.

The Revenue has raised various grounds, however, the only issue that arises for our consideration and adjudication is, whether in the facts and circumstances of the case, the CIT(Appeals) has erred in deleting the disallowance of Rs.21,42,428 u/s. 14A of the Act r.w. Rule 8D(2)(ii) on account of interest expenses.

During the year under consideration, the assessee received a sum of Rs.14,56,149 as income from mutual fund and same is claimed as exempt.

The AO noted that as on 31.3.2008, the investment appears in the balance sheet for Rs.4,18,40,916. Further, a sum of Rs.43,49,901 was debited towards interest paid to the bank. Accordingly, the AO disallowed Rs.21,42,428 on account of interest expenditure by invoking the provisions of section 14A r.w. Rule 8D apart from disallowance on account of general administrative expenses as per Rule 8D(2)(iii) being 0.5% of the average value of investment amounting to Rs.1,53,470.

The assessee challenged the action of the Assessing Officer before the CIT(Appeals) and pleaded that the assessee has not used any interest bearing borrowed fund for the purpose of investment in mutual funds. The CIT(A) after considering the contentions as well as the record showing the availability of the assessee’s non-interest bearing fund for the purpose of investment, deleted the disallowance made by the AO on account of interest expenditure u/s. 14A. However, the CIT(A) has confirmed the disallowance made by the AO u/s. 14A on account of general administrative expenses.

The Revenue has challenged the impugned order of the CIT(Appeals). Thus, the issue before us is only with regard to disallowance made by the AO on account of interest expenditure as the disallowance made by the AO on account of administrative expenses has been confirmed by the CIT(Appeals) and the assessee has not filed any appeal.

The ld. DR has submitted that the CIT(Appeals) while deleting the addition has given much emphasis on the fact that during the year under consideration, there was a reduction in the investment which is not relevant when the initial investment was made by the assessee by using the borrowed fund. He has further submitted that the assessee has failed to establish a direct nexus between the assessee’s own non-interest bearing fund and the investment in question. He has relied upon the order of the AO.

On the other hand, the ld. AR of the assessee has submitted that apart from the reduction in the investment during the year under consideration, the assessee has also received substantial amount of Rs.3,68,02,829 from Erasmic Ventures Fund Ltd., a foreign entity on account of allotment of shares of the assessee. Since the allotment of shares were pending approval of the Hon’ble High court, therefore this amount was invested by the assessee in the mutual fund and therefore assessee was having more than sufficient fund for making investment in the mutual funds in question. The ld. AR has referred to the bank statement of the assessee and submitted that as on 20.08.2007, the assessee received the said amount of Rs.3,68,02,829, whereas the investment was made subsequent to the amount received. She has also referred to the ledger account showing the receipt of the said amount as well as the investment made in the mutual fund. Therefore, there is a direct connection between the inflow and outflow to the fund.

We have considered the rival submissions as well as relevant material on record. The CIT(Appeals) has deleted the addition by taking into account the fact that during the year under consideration, the assessee has raised a loan from Rs.1,46,94,595 to Rs.3,64,33,037, whereas at the same time investment was reduced from Rs.4,18,40,916 to Rs.1,95,47,065. Thus, it was observed by the CIT(A) that there is a substantial reduction in the investment and therefore there was no fresh investment by the assessee by using the borrowed fund.

We further note that the assessee has explained the availability of non-interest bearing fund before the CIT(Appeals), which has been reproduced in para 4 of the impugned order of the CIT(A), wherein the assessee has clearly brought on record that the assessee did not use any borrowed fund for making investment in question. The money came from abroad specifically for the purpose of allotment of share. Since the issue of merger of the assessee company with M/s. Studioline Interior Systems Pvt. Ltd. was pending adjudication before the Hon’ble High Court, the money received from abroad was available with the assessee till the merger had come into force. We find that a sum of more than Rs.3 crores has been received by the assessee on 20.08.2007 and therefore the said money was very much available with the assessee. Keeping in view the availability of the fund with the assessee which is not interest bearing fund, the question of disallowance u/s. 14A on account of interest expenditure does not arise. In view of the above facts and circumstances of the case, we do not find any reason to interfere with the impugned order of the CIT(Appeals) in deleting the disallowance made by the AO u/s. 14A on account of interest expenditure.

In the result, the appeal of the Revenue is dismissed.