BIMAL ROY SONI,J L N MARG vs. DCIT, CIRCLE - 1, JAIPUR, STATUE CIRCLE

3. Perusal of above table establishes that out of total investment of Rs.6,73,12,353.00, Rs.2,60,49,348.00 represents investment out of interest free funds (mostly accumulated earnings saved) and only Rs.4,12,63,005/= ( Rs.67312353/= minus Rs.26049348/=) was invested out of interest bearing borrowed funds which may be considered for disallowance of interest u/s 14A. In this reference, it is submitted that the learned Assessing Officer has considered total amount of Rs.6,73,12,353/= invested in shares presuming it to be out of interest bearing borrowings while computing disallowance under section 14A which is patently wrong. Your honours are therefore humbly requested to please consider this vital fact while adjudicating the appeal.

4. Reliance is also placed on the decision of the hon’ble Supreme Court in the following cases- CIT v. UTI BANK LTD [2022] 289 Taxman 238 (SC)

South Indian Bank Ltd. CIT [2021] 283 Taxman 128 (SC)

Principal CIT v. Gujrat Fluorochemicals Ltd. [2022] 284 Taxman 451 (SC)

It was held and approved by the hon’ble Supreme Court that where interest free own funds available with assessee exceeded its investments in tax free securities, investments would be presumed to be made out of assessee’s own funds and proportionate disallowance was not warranted under section 14A.

5. Thus interest to be disallowed should be with reference to amount of investment made out of borrowed funds, which comes to Rs.4,12,63,005/= ( Rs.67312353/= minus Rs.26049348/=) and the amount of interest attributable to this amount by applying average rate of interest of 12.89% (Please refer to PB-7) comes to Rs.53,18,801/=. Thus your honours are humbly requested to please consider Rs.53,18,801/= for disallowance as against Rs.1,07,69,976/= considered for disallowance by the learned Assessing Officer.

6. In respect of nexus of investment in Capital of Partnership Firms, it is humbly submitted that the assessee is deriving taxable income by way of Interest on Capital and Salary in the capacity of Partner besides Share in Profits. Thus when the amount of aggregate taxable income Rs.31,83,274/= (Please refer to PB-4: Salary Rs. 30,27,821/= + Interest on capital Rs.1,55,453/=) earned from partnership firms exceeds the notional amount of interest @ 12.89% on average capital of Rs. 2737508/= comes to Rs.352865/=. Thus inference that assessee has tax free income from partnership firms does not have any legal sanctity. In view of this reasoning, there should not be any disallowance of interest. The disallowance of Rs.4,33,398/= made by the learned Assessing Officer, in our considered opinion deserves not to be considered for disallowance and we request your honours to please delete the amount of Rs.4,33,398/=, considered by the learned A.O.

8. We further request your honours to please restrict the total disallowance of interest u/s 14A to the extent of tax free income earned during the year aggregating Rs.19,06,087/= in view of decision of the hon’ble Supreme Court in the case of Maxopp Investment Ltd and subsequent decisions of various High Courts as well as Tribunals tendered after referring to / considering the Supreme Court decision in the case of Maxopp Investment Ltd (supra) , few of them are as under for ready reference – Maharaja Shree Umaid Mills Ltd. v. Dy CIT [2021] 125 Taxmann.com / 83 ITR 498 (JP.-Trib), the jurisdictional ITAT K. Raheja (P) Ltd. v. DCIT [2022] 142 Taxman.com (Mum.-Trib.)

Smt. Yamini Khandelwal v. ACIT [2022] 142 Taxman.com (Kol.-Trib)

Principal CIT v. Reliance Chemotex Industries Ltd. [2022] 138 Taxman.com 199 (Cal.)

Jaswantlal J. Shah v. ACIT [2021] 128 Taxmann.com 378 (Mum.Trib.)

The hon’ble Madras High Court in the case of M/S. Marg Limited vs Commissioner Of Income Tax (Judgment dt. 30.09.2020 in TCA Nos.41 to 43 / 2017) has also held that “The legal position, as interpreted above by various judgments and again reiterated by us in this judgment, remains that the disallowance of expenditure incurred to earn exempted income cannot exceed exempted income itself and neither the Assessee nor the Revenue are entitled to take a deviated view of the matter”.

9. The nexus of investment in shares out of Interest Free Funds (consisting of own income and interest free borrowings) after FY 1995-96 to FY 2013-14 is as under:

AMOUNT OF INVESTMENT FINANCIAL INCREASE IN OUT OF REMARKS YEAR INVESTMENT IN INTEREST FREE SHARES FUNDS UPTO As narrated above 1995-96 1,28,18,020.00 1,28,18,020.00 Out of income generated for the year 1996-97 5,95,500.00 5,95,500.00 aggregating Rs. 7,08,994/= 1998-99 Interest bearing borrowed funds 1,05,000.00 - 1999-2000 Interest bearing borrowed funds 17,00,913.00 - 2000-01 Interest bearing borrowed funds 1,25,000.00 - 2001-02 Interest bearing borrowed funds 1,14,000.00 - 2002-03 Interest bearing borrowed funds 60,000.00 - 2003-04 Interest bearing borrowed funds 17,00,000.00 -

Out of income generated for the year 2004-05 aggregating Rs. 21,94,552/= and Interest 36,14,250.00 33,09,615.00 free borrowings Out of income generated for the year 2005-06 6,21,670.00 6,21,670.00 aggregating Rs. 74,05,969/= Out of income generated for the year 2006-07 1,11,10,000.00 65,55,790.00 aggregating Rs. 83,83,377/= Out of income generated for the year 2007-08 9,50,000.00 9,50,000.00 aggregating Rs. 1,14,66,319/= 2009-10 Interest bearing borrowed funds 64,84,000.00 - Out of income generated for the year 2010-11 1,99,00,000.00 11,98,753.00 aggregating Rs. 1,20,20,187/= 2011-12 Interest bearing borrowed funds 33,00,000.00 - 2012-13 Interest bearing borrowed funds 41,14,000.00 - Out of income generated for the year 2013-14 3,24,700.00 3,24,700.00 aggregating Rs. 1,09,84,620/= TOTAL 6,76,37,053.00 2,63,74,048.00 (Note- In the aforesaid table, the amount of investment in shares shown in column 2 has been taken from PB-1, 2 and 3; and the amount of yearly income earned shown in the fourth column has been taken from PB 4).

10. Perusal of above table establishes that out of total investment of Rs.6,76,37,053.00, Rs.2,63,74,048.00 represents investment out of interest free funds (mostly accumulated earnings saved) and only Rs.4,12,63,005/= ( Rs.67637053/= minus Rs.26374048/=) was invested out of interest bearing borrowed funds which may be considered for disallowance of interest u/s 14A. In this reference, it is submitted that the learned Assessing Officer has considered total amount of Rs.6,76,37,053/= invested in shares presuming it to be out of interest bearing borrowings while computing disallowance under section 14A which is patently wrong. Your honours are therefore humbly requested to please consider this vital fact while adjudicating the appeal.

South Indian Bank Ltd. CIT [2021] 283 Taxman 128 (SC)

Principal CIT v. Gujrat Fluorochemicals Ltd. [2022] 284 Taxman 451 (SC)

It was held and approved by the hon’ble Supreme Court that where interest free own funds available with assessee exceeded its investments in tax free securities, investments would be presumed to be made out of assessee’s own funds and proportionate disallowance was not warranted under section 14A.

7. We further request your honours to please restrict the total disallowance of interest u/s 14A to the extent of tax free income earned during the year aggregating Rs.2769789/= in view of decision of the hon’ble Supreme Court in the case of Maxopp Investment Ltd and subsequent decisions of various High Courts as well as Tribunals, few of them are as under –

Maharaja Shree Umaid Mills Ltd. v. Dy CIT [2021] 125 Taxmann.com / 83 ITR 498 (JP.-Trib), the jurisdictional ITAT K. Raheja (P) Ltd. v. DCIT [2022] 142 Taxman.com (Mum.-Trib.)

Smt. Yamini Khandelwal v. ACIT [2022] 142 Taxman.com (Kol.-Trib)

Principal CIT v. Reliance Chemotex Industries Ltd. [2022] 138 Taxman.com 199 (Cal.)

Jaswantlal J. Shah v. ACIT [2021] 128 Taxmann.com 378 (Mum.Trib.)

The hon’ble Madras High Court in the case of M/S. Marg Limited vs Commissioner Of Income Tax (Judgment dt. 30.09.2020 in TCA Nos.41 to 43 / 2017) has also held that “The legal position, as interpreted above by various judgments and again reiterated by us in this judgment, remains that the disallowance of expenditure incurred to earn exempted income cannot exceed exempted income itself and neither the Assessee nor the Revenue are entitled to take a deviated view of the matter”.

9. The ld DR is heard who has relied on the findings of the lower authorities and finding of the tribunal so far as merits of the case.

Since, the assessee submitted various contentions on the fact the submission of the assessee forwarded to the AO for his comments/reports. The report of the ld. AO dated 06.02.2023 is reiterated here in below:

“Kindly refer to the subject mentioned above.

2. In this regard para wise comments on paper book submitted by the assessee is as follows: Page 1-2: The assessee has submitted statement showing details of year wise investment in shares of Limited Companies. It may be noted that the assessee has provided details since FY 1992-93 till FY 2013-14. This office cannot comment on the accuracy of details submitted by the assessee considering the timeline of submitted detail. Page 3: The assessee has submitted statement showing source of incremental investment in shares. It may be noted that the assessee has provided details since FY 1994-95 till FY 2013-14. This office cannot comment on the accuracy of details submitted by the assessee considering the timeline of submitted detail. However it may be noted that the assessee himself has accepted that Interest bearing borrowed funds of Rs 4,12,63,005/- was utilized by the assessee for investment in shares from which exempt income was earned by the assessee. Thus disallowance u/s 14A is warranted in case of the assessee. Page 4: The assessee has submitted Statement showing break up of year wise income earned by the assessee. It may be noted that the assessee has provided details since FY 1994-95 till FY 2013-14. This office cannot comment on the accuracy of details submitted by the assessed considering the timeline of submitted detail.

Page 5-6: The assessee has submitted Statement showing break up of year wise income from Partnership Firms and balance of capital invested. It may be noted that the assessee has provided details since FY 2004-05 till FY 2013-14. This office cannot comment on the accuracy of details submitted by the assessee considering the timeline of submitted detail.

Page 7: The assessee has submitted statement showing calculation of average rate of Interest. It is seen that calculation submitted by the assessee is as per audit report.

AY 2014-15

Page 1-2: The assessee has submitted statement showing details of year wise investment in shares of Limited Companies. It may be noted that the assessee has provided details since FY 1992-93 till FY 2013-14. This office cannot comment on the accuracy of details submitted by the assessee considering the timeline of submitted detail.

Page 3: The assessee has submitted statement showing source of incremental investment in shares. It may be noted that the assessee has provided details since FY 1994-95 till FY 2013-14. This office cannot comment on the accuracy of details submitted by the assessee considering the timeline of submitted detail. However it may be noted that the assessee himself has accepted that Interest bearing borrowed funds of Rs 4,12,63,005/- was utilized by the assessee for investment in shares from which exempt income was earned by the assessee. Thus disallowance u/s 14A is warranted in case of the assessee.

Page 4: The assessee has submitted Statement showing break up of year wise income earned by the assessee. It may be noted that the assessee has provided details since FY 1994-95 till FY 2013-14. This office cannot comment on the accuracy of details submitted by the assessee considering the timeline of submitted detail.

Page 5-6: The assessee has submitted Statement showing break up of year wise income from Partnership Firms and balance of capital invested. It may be noted that the assessee has provided details since FY 2004-05 till FY 2013-14. This office cannot comment on the accuracy of details submitted by the assessee considering the timeline of submitted detail.

Page 7: The assessee has submitted statement showing calculation of average rate of Interest. It is seen that calculation submitted by the assessee is as per audit report.

So far as the deduction in respect of the figures of the income reported by the ld. AR of the assessee, ld. SR. DR fairly accepted that if that may be the fact that the income offered by the assessee is required to be reduced from the amount calculated for interest disallowance the same is required to be verified by the ld.AO as contented by him in this report.

10. In the rejoinder the ld. AR of the assessee submitted that the figures are derived from the regular return of income filed by the assessee and he has no objection to get it verified before the ld. AO if he is given a chance.

11. We have heard the rival contentions and perused the material placed on record. As it is evident from the facts before us that the contention of the assessee that the interest to be disallowable only to the extent of the exempt income is not decided by the ITAT and this co-ordinate bench cannot travel beyond the direction of the ITAT in the first round of litigation. But considering the alternate plea of the assessee while computing the amount the ld. AO has made a mistake and for that he seeks directions. The apple discord is that in the 1st round litigation, the ITAT has given the direction to compute the disallowance based on the finding of the Co-ordinate Bench decision in 275, 309 & 276/JP/2018 dated 25/06/2018 the same is reads as under:-

“7. We have heard the rival contentions of both the parties and perused the relevant material available on the record. As far as the factual aspect of the matter is concerned, the assessee has not disputed the fact that the borrowed fund was used by the assessee for investment in shares and capital infusion in the partnership firm. The income of dividend and profit of partnership firm are not included in the total income of the assessee and therefore direct expenditure incurred for making such investment cannot be allowed against the taxable income. As regards the decision of this Tribunal in assessee’s own case in the earlier assessment years, we note that the Tribunal has decided the issue solely on the ground that the investment was made by the assessee for holding and controlling stakes in the companies and partnership firms and therefore, the provisions of Section 14A cannot be invoked in disallowance of expenditure. The decision of this Tribunal, though, was challenged by the revenue before the Hon'ble High Court but since it was a question of fact and therefore, the Hon'ble High Court has dismissed the appeal filed by the assessee on the ground that no substantial question of law arises. The order of the Tribunal for the A.Y. 2011-12 dated 08/3/2017 dealt with this issue in para 3.2 to 3.5 as under: “3.2. We have heard rival contentions, perused the material available on record and gone through the orders of the authorities below. It is contended that the investment made in the sister concerns was to have controlling interest and in respect of the investment made in partnership firms, it is contended that income from partnership firms in the form of remuneration is duly offered for tax. The income in the form of share in profits of the firm is also subject to tax which was borne by the partners. It is submitted that share in profits of firm apparently seems to be exempt income, but eventually the same comes in the hands of the partners after suffering tax in their profit sharing ratio. Thus the tax is also borne by the respective partner. We find that the Coordinate Bench in & 687/JP/2012 for the A.Y. 2008-09 & 09-10 has decided the issue in para 4.3. of its order by holding as under :- “4.3. We have heard rival contentions, perused the material on record and gone through the orders of the authorities below. The ld. CIT (A) has deleted the disallowance on the ground that it has been held by the coordinate Bench in assessee’s own case pertaining to A.Y. 2002-03 that provisions of section 14A are not applicable. Since the facts are identical in the year under appeal also, the contention of the assessee throughout has been that the investment wherefrom it has earned exempt income were made for the purpose of maintaining the controlling interest. Therefore, in view of the decision of the Tribunal, provisions of section 14A would not be applicable. The coordinate Bench in assessee’s own case in the assessment year 2002-03 had deleted the addition on the basis that provisions of section 14A would not be applicable in the case of the assessee as the investment has been made solely for the purpose of having the controlling interest. There is no change into the facts in this year as well. The revenue has not brought to our notice any contrary binding precedent. Moreover, the assessee has dividend income to the tune of Rs. 756/- and the disallowance towards expenditure is made at Rs. 44,89,436/-. In view of above, we do not see any reason to interfere in the order of the ld. CIT (A). The same is hereby upheld. The facts are identical in this year as well. Therefore, taking a consistent view, we direct the AO to delete the addition. Ground raised in this appeal is allowed.

4. Now we take up revenue’s appeal in ITA No. 554/JP/2016. The revenue has raised the following grounds of appeal :- “Whether on the facts and in the circumstances of the case and in law, the ld. CIT (A) has erred in deleting the disallowance of Rs. 47,07,125/- out of total disallowance of Rs. 80,26,665/- made by the AO under the provisions of section 14A of the I.T. Act r.w. Rule 8D of the I.T. Rules.”

5. The representatives of the respective party have adopted the same argument as made in ITA No. 416/JP/2016. The only effective ground in revenue’s appeal is against restricting the disallowance made under rule 8D of the Income Tax Rules. Since this issue is decided in favour of the assessee in the assessee’s appeal in ITA No. 416/JP/2016, we do not see any merit in the contention of the ld. D/R, the same is dismissed.”

Thus, it is clear that the Tribunal has held that the investment was made for the purpose of maintaining and controlling interest in these concerns and therefore, the exempt income earned on such investment would not attract the provisions of Section 14A of the Act. However, the Hon'ble Supreme Court in the case of Maxopp Investment Ltd. Vs. CIT, New Delhi (supra) has specifically considered this point in para 31 to 41 of the decision, which is reproduced as under: 31. We have given our thoughtful consideration to the argument of counsel for the parties on both sides, in the light of various judgments which have been cited before us, some of which have already been taken note of above.

8. In the ground No. 2 of the assessee’s appeal for the A.Y. 2013-14, the issue involved is disallowance made by the Assessing Officer of claim of payment of house tax against the income from house property. The Assessing Officer has noted that the assessee has claimed the payment of house tax of property of Rs. 14,552/-, however, the assessee has not brought any evidence for actual payment of house tax. Even before the ld. CIT(A), the assessee has not produced any evidence of payment of house tax. However, the assessee took a plea that the house tax amount of Rs. 14,552/- was deducted by the tenant from the rent payable to the assessee and therefore, the assessee is entitled to claim deduction U/s 23 of the Act. Before us, the ld AR of the assessee has reiterated its contention that since this house tax was paid by the tenant and the same was deducted from rent, therefore, the assessee is eligible for deduction U/s 23(1) of the Act.

Provided that the taxes levied by any local authority in respect of the property shall be deducted (irrespective of the previous year in which the liability to pay such taxes was incurred by the owner according to the method of accounting regularly employed by him) in determining the annual value of the property of that previous year in which such taxes are actually paid by him.”

Thus, the proviso stipulates the deduction in respect of liability of payment of tax but only on actual payment. Such deduction is allowable against the annual value of the property of that previous year in which such taxes are actually paid. The assessee, though claimed the house tax of Rs. 14,552/-, however, in absence of any proof of actual payment, such deduction cannot be allowed. Accordingly, we do not find any error or illegality in the orders of the authorities below qua this issue.

Amount in Rs. Sr No. Particulars Amount disallowed for A. Y. 2013-14 2014-15 1 Investment in shares 6,73,12,353 6,76,37,053 2 Average rate 16 % 16 % 3 Expenditure disallowed u/s. 1,07,69,976 1,08,21,928 14A(1)*(2)=(A) 4 Investment in partnership firm 4.1 Opening value of investment 19,02,580 -- 4.2 Closing value of investment 35,14,890 -- 4.3 Average Value of investment 27,08,735 -- 4.4 Average rate 16 % -- 4.5 Expenditure disallowed u/s. 14A 4,33,398 -- for investment in firm(4.3*4.4)(B) Total Disallowance u/s. 14A 1,12,03,374 1,08,21,928 r.w.r.8D(A)+(B)

AMOUNT OF INVESTMENT FINANCIAL INCREASE IN OUT OF REMARKS YEAR INVESTMENT INTEREST IN SHARES FREE FUNDS UPTO 28,18,020.00 Investment made in F. Y. 85-86 1994-95 ,28,18,020.00 Assessee sold his hospital for a consideration of Rs. 1,00,00,000/- and 1995-96 1,00,00,000.00 1,00,00,000.00 the said consideration was invested in shares of the company. Out of income generated for the year 1996-97 5,95,500.00 5,95,500.00 aggregating Rs. 7,08,994/= 1998-99 - Interest bearing borrowed funds 1,05,000.00 1999-2000 - Interest bearing borrowed funds 17,00,913.00 2000-01 - Interest bearing borrowed funds 1,25,000.00 2001-02 - Interest bearing borrowed funds 1,14,000.00 2002-03 - Interest bearing borrowed funds 60,000.00 2003-04 - Interest bearing borrowed funds 17,00,000.00

Out of income generated for the year 2004-05 aggregating Rs. 21,94,552/= and 36,14,250.00 33,09,615.00 Interest free borrowings Out of income generated for the year 2005-06 6,21,670.00 6,21,670.00 aggregating Rs. 74,05,969/= Out of income generated for the year 2006-07 1,11,10,000.00 65,55,790.00 aggregating Rs. 83,83,377/= Out of income generated for the year 2007-08 9,50,000.00 9,50,000.00 aggregating Rs. 1,14,66,319/= 2009-10 - Interest bearing borrowed funds 64,84,000.00 Out of income generated for the year 2010-11 1,99,00,000.00 11,98,753.00 aggregating Rs. 1,20,20,187/= 2011-12 - Interest bearing borrowed funds 33,00,000.00 2012-13 - Interest bearing borrowed funds 41,14,000.00 Out of income generated for the year 2013-14 3,24,700.00 3,24,700.00 aggregating Rs. 1,09,84,620/= TOTAL 2,63,74,048.00 6,76,37,053.00 For A.Y.2014-15 Rs. 6,76,37,053 and for A.Y.2013-14 Rs. 6,76,37,053 less Rs. 3,24,700/- equals to Rs. 6,73,12,353/-. Based on the above chart he has submitted that the amount available out of income and non-interest-bearing fund is required to be deducted from the amount considered by the ld. AO to the extent of Rs. 2,63,74,048/- as the same cannot be considered as investments made out of the borrowed fund. Therefore, he contended that the disallowance is required to be modified to that extent so to considered the direction of the ITAT in true spirit. As regards the contention of the ld. AR of the assessee before us stating that round litigation of the litigation and this issue is not before us we cannot considered the grounds of the assessee in full but the amount considered for the disallowance is required to be reduced to the extent of the income and non-interest bearing fund as contended by the ld. AR of the assessee. Though, the ld.AR admitted at bar that these figures he has derived from the records of the assessee maintained by him and he has expressed his willing to get it verified with the ld. AO for the relied he sought.

Therefore, in the light of these observations, we direct the ld. AO to compute check the figure of the investment made out of the income earned by the assessee and out of non-interest bearing fund available with the assessee and the ld. AO after verification reduce the figure of the investment and on balance he may compute the disallowance u/s. 14A.