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Income Tax Appellate Tribunal, MUMBAI BENCH “J”, MUMBAI
Before: SHRI SANJAY GARG & SHRI ASHWANI TANEJA
Per Sanjay Garg, Judicial Member:
The present appeal has been preferred by the assessee against the order dated 14.09.2013 of the Commissioner of Income Tax (Appeals) [hereinafter referred to as the CIT(A)] relevant to assessment year 2009-10.
The assessee, in this appeal, has agitated the confirmation of disallowance of Rs.30,16,806/- made by the Assessing Officer (hereinafter referred to as the AO) under section 14A of the Income Tax Act read with rule 8D of the Income Tax Rules in relation to the expenditure incurred for earning of tax exempt dividend income of Rs.13,350/-. The brief facts of the case are that the assessee during the year had earned dividend income of Rs.13,350/-. The AO, therefore, computed the disallowance under section 14A by way of applying rule 8D of Income Tax Rules at Rs.30,16,806/-. The AO, in this respect, disallowed a sum of Rs.27,56,199/- towards interest expenses
The Ld. CIT(A) confirmed the disallowance so made by the AO. The assessee, thus, has come in appeal before us.
At the outset, the Ld. A.R. of the assessee has submitted that no investments were made by the assessee out of the borrowed funds, hence, no disallowance of interest expenditure was warranted. He, in this respect, has invited our attention to the assessment order itself wherein the AO has mentioned that the assessee had incurred interest expenditure of Rs.2,31,40,792/- during the year. However, there is no observation that the borrowed funds were used for investment purposes. The basis upon which the AO disallowed the interest expenditure is that ‘had there been no investments, the assessee’s burden of loans would have reduced so also the burden of interest’. In our view, such a basis adopted by the AO is wrong, illegal and against the provisions of law. The assessee, admittedly, is in the business of financing. In the course of its business activity, the assessee used to borrow funds and further advance loans to the other parties on interest basis. The Ld. A.R. of the assessee has submitted before us that the borrowed funds were utilized for investing in Fully Convertible Debentures (FCD) and granting loans on interest and on this, the assessee during the year had earned interest of Rs.1,69,12,712/- and Rs.94,11,126/- respectively aggregating total interest earned of Rs.2,63,23,838/-. He, in this respect, has invited our attention to page 5 of the paper book, which is the copy of the profit & loss account for the period ended on 31.03.09. The Ld. A.R. has further demonstrated that the total interest paid during the year is at Rs.2,31,40,792/- and that there has been a net positive interest income during the year of more than Rs.31 lakhs. He, therefore, has submitted that under the circumstances, it cannot be presumed that the assessee had incurred any interest expenditure towards investments.
3 Shri Jagdish Ahuja The Ld. A.R. has further submitted that no new investments were made during the year. All the investments were made long back, some prior to financial year 2007 and others prior to financial year 2005. He has further invited our attention to page 9 of the paper book to show that all the investments were made in the related concerns which were strategic investments made by the assessee on long term basis. The purpose of such investments was not for earning dividend income but having control and for business purposes and consideration. The Ld. A.R. has further demonstrated that the assessee was having sufficient own funds for making such investments. Even neither the investments were made for earning of any dividend income nor any fresh investments were made during the year and no administrative expenditure was incurred for the purpose of earning of dividend income. The Ld. A.R., in this respect, has relied upon the decision of the Hon’ble Bombay High Court in the case of “HDFC Bank” 366 ITR 505. He has relied upon various other judicial decisions also to stress on the point that where the assessee is in the business of financing and there is a net positive income, then under such circumstances, no interest disallowance is warranted in relation to investments made out of the own/interest free funds available with the assessee. Considering the above submissions and after going through the record, we find force in the contentions raised by the Ld. A.R. From the accounts of the assessee, it is revealed that the investments were old investments and no investments were made during the year. No borrowed funds were used for making the investments. The purpose of investments was strategic in nature for the purpose of having business control in the related concerns and not for earning of any dividend income. Such investments do not require any day to day decision making or use of official machinery or manpower on regular basis. Under such circumstances, in our view, no disallowance is attracted under section 14A in the case of the assessee.
In the result, the appeal of the assessee is hereby allowed.
Order pronounced in the open court on 05.02.2016.