NAVYUG KRISHI SADHAN P.LTD,MUMBAI vs. DCIT 9(2), MUMBAI

The present appeal has been preferred by the assessee against the order dated 13.02.2015 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2011-12.

The sole issue taken by the assessee in this appeal is regarding the disallowance under section 14A relating to the expenditure incurred for earning of tax exempt income. During the assessment proceedings, the Assessing Officer (hereinafter referred to as the AO) noted that the assessee had earned dividend income of Rs.1,19,405/- which had been claimed exempt under section 10 of the Act. The assessee, however, had not suo-moto disallowed any expenditure relating to the earning of the exempt income. On being asked to explain, the assessee submitted that during the year the assessee

Before the Ld. CIT(A), the assessee contended that no disallowance of interest expenditure was attracted as there was a net positive interest income of the assessee. The assessee further submitted that even otherwise the own paid up capital and reserves of the assessee were more than the total investments made. However, the Ld. CIT(A) rejected the contentions of the assessee observing that the assessee could not establish one to one relation regarding the availability of interest free funds with that of investments made. The assessee, thus, has come in appeal before us.

Before us, the Ld. A.R. of the assessee has stated that the paid up capital and reserves of the assessee as on 31.03.10 were Rs.10,37,57,569/-. Whereas, as on 31.03.11 the same were at Rs.11,37,88,432/-. The total investments made by the assessee were at Rs.1,05,30,000/-. He, therefore, has stated that since the own interest free funds of the assessee were more than the total investments made by the assessee, hence, in view of the law laid down by the Hon’ble Bombay High Court in the cases of “CIT vs. Reliance Utilities and Power Ltd.” (2009) 313 ITR 340 (Bom) and “CIT vs. HDFC Bank Ltd.” in 3 M/s. Navyug Krishi Sadhan Pvt. Ltd. ITA No.330 of 2012 decided on 23rd July 2014, the presumption arises that investments were made from the own interest free funds and hence no disallowance under section 14A was attracted. The Ld. A.R. has further submitted that the assessee had invested in the Preference Shares of the Pvt. Ltd. Company, the long term gains regarding the sale and purchase of the same were not exempt under section 10(38) of the Act and hence, the provisions of section 14A, otherwise, were not applicable to the case of the assessee.

On the other hand, the Ld. D.R. has submitted that the dividend income relating to the investments was exempt under section 10(34) of the Act. Hence, the disallowance under section 14A read with rule 8D has rightly been made by the lower authorities.

We have heard the rival contentions and have also gone through the records. As observed above, the Ld. A.R., before us, has demonstrated that the own funds of the assessee were much more than the investments made. Even, there is an increase in the own funds of the assessee from Rs.10,37,57,569/- as on 31.03.10 to Rs.11,37,88,432/- as on 31.03.11. Further, we find that the Hon’ble Bombay High Court in the cases of “CIT vs. Reliance Utilities and Power Ltd.” (supra) and “CIT vs. HDFC Bank Ltd.” (supra) has held that if there are funds available, both interest free and over draft and/or loans taken, then a presumption would arise that investments would be out of the interest free fund generated or available with the company, if the interest free funds were sufficient to meet the investment. In the light of the above cited decisions, no interest disallowance is attracted in relation to investments made by the assessee as the assessee had its own sufficient funds for the purpose of making investments. Moreover, there is a net positive interest income of the assessee of the assessee during the year. The various courts of law have held that for the netting of the interest income and interest expenditure is to be permitted for the purpose of computation of disallowance of interest expenditure.

With the above observations, the appeal of the assessee is hereby partly allowed.