JAGDISH AHUJA,MUMBAI vs. JCIT (OSD) WD 13(3), MUMBAI

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.

In the result, the appeal of the assessee is hereby allowed.