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Income Tax Appellate Tribunal, MUMBAI BENCH “C”, MUMBAI
Before: SHRI D. KARUNAKARA RAO & SHRI AMIT SHUKLA
आदेश ORDER अिमत शु�ला, �या. स.: PER AMIT SHUKLA, JM:
The aforesaid appeal has been filed by the assessee against impugned order dated 16.06.2011 passed by CIT(A)-4, Mumbai for the quantum of assessment passed u/s 143(3) for the assessment year 2008-09. The assessee is aggrieved by disallowance made u/s 14A r.w. Rule 8D for sums aggregating to Rs. 81,37,289/-.
Brief facts are that, the assessee company is an Authorized Dealer of Cat-II, registered with Reserve Bank of India, which is mainly in the business of sale of foreign currencies, foreign money exchange etc. During the year, the assessee had earned a dividend income of Rs. 38,18,832/- which was claimed as exempt in 2 Centrum Direct Limited ITA 5595/M/2011 computation of total income. The assessee has not computed any disallowance for earning of the exempt income. In response to the show cause notice, assessee submitted that entire investments were made out of assessee’s own interest free funds, therefore, no direct or indirect expenses were incurred. However, the AO computed the disallowance as per formula laid down under Rule 8D.
Before the CIT(A), the assessee reiterated the same submissions, stating that it has own sufficient funds in the form of share capital and free reserves and therefore, no interest is disallowable. Further, all the indirect expenses were purely incurred for the business purpose. However, the Ld. CIT(A) confirmed the said addition on the ground that nexus between the surplus funds and investments made have not been given and the decision of Reliance Utilities and Power Ltd of Bombay High Court (313 ITR 340) is inapplicable on the impugned facts of the case.
Before us Ld. Senior Counsel, Shri J D Mistry, submitted that the assessee had a share capital of Rs. 5.90 crores and reserves and surplus of more than Rs. 93.80 crores. As compared to this, the investment in mutual funds were Rs.69.50 crores. Therefore, the presumption is that the investment has been made mostly out of reserves and surplus. In any case, he submitted that the assessee had given a fund flow statement, which is available at page 11 of the paper book and on perusal of the same it will show the availability of source of funds for making the investments. These details are reproduced hereunder :- HSBC Mutual Fund Daily Dividend Summary from date of investment i.e. 20.4.2007 to 31.3.2008 Rs. Purchased out of share issue proceeds received on 20.4.2007 8,00,00,000 Purchased out of share issue proceeds received on 12.3.2008 75,13,62,734 Dividend reinvestment 27,40,555 83,41,03,289 Redemption for investment in Reliance Money Manager Mutual Fund On 25.03.2008 (69,00,00,000) Redemption others (14,00,00,000) Closing balance as on 31.3.2008 41,03,289
3 Centrum Direct Limited ITA 5595/M/2011 Reliance Money Manager Mutual Fund (Institutional option dividend plan) Particulars No. of Units Rate Balance (Rs) Purchased out of redemption proceeds of HSBC MF 6,89,216.774 1,001.1364 69,00,00,000 Dividend reinvestment 877.279 1,001.1364 8,78,276 6,90,094.053 69,08,78,276 Redemption - Closing balance as on 31.3.2008 6,90,094.053 1,001.1364 69,08,78,275 Thus, he submitted that no interest expenditure can be disallowed. This fund flow statement, he corroborated from the bank statement also which has been placed in the paper book at pages 15 and 16 and also from the account statement of HSBC Global Asset Management and Reliance Mutual Fund, which are appearing from pages 17 to 38 of the paper book. Therefore, no disallowance of interest should be made. Regarding indirect expenses, he submitted that, only activity carried out by the assessee during the year was switching of one HSBC account to Reliance Mutual Fund. For this purpose such a huge indirect disallowance cannot be made, looking to the fact that when the exempt income itself is only Rs.31.81 lakhs.
On the other hand, Ld. DR strongly relied upon the order of the CIT(A).
After considering the rival submissions and on perusal of the impugned orders and material on record, we find that not only the assessee has shown that it has a huge surplus funds for making the investment but has also shown the availability and source of funds which were interest free for making the investment. Thus, it can be safely presumed that no interest bearing funds have been diverted for making the investment in HSBC or Reliance Mutual Fund. Now, the Hon’ble jurisdictional High Court in the case of CIT vs HDFC Bank Ltd, [Income Tax Appeal 330 of 2012, judgment and order dated 23rd July, 2014], has laid down the proposition
4 Centrum Direct Limited ITA 5595/M/2011 that, if assessee’s capital, profit reserve & surplus and current account deposits are higher than the investment in tax free securities, then it would be presumed that investments made by the assessee would be out of interest free funds available with the assessee. Thus, we agree with the contention of the assessee that no disallowance on account of interest can be made u/s 14A. Otherwise also Ld. Counsel has specifically pointed out before us, the source of investments, which were from interest free funds. Thus, on these facts also, no disallowance of interest can be made. Now, coming to the indirect expenses, we find that assessee has debited sum of Rs. 8.92 crores on the ‘employees costs’ which majorly constituted “salary” of the employees. As pointed out by the Ld. Senior Counsel, the only activity in relation to the investment carried out by the assessee was Switching of one HSBC Mutual Fund account to Reliance Mutual Fund account. Thus, if at all any indirect expenses is to be attributable, then same has to be estimated having regard to the accounts and nature of expenditure incurred by the assessee. The blanket application of Rule 8D(iii) that is 0.5% of the average investment may not be acquired to do so because it is not commensurate with the nature of activity of investment carried out and the expenses debited by the assessee which is mostly for its business activities. Looking to the fact that the assessee has earned dividend income of Rs. 38.19 lakhs, we estimate the indirect expenses at Rs. 5 lakhs which in our opinion, is still on a higher side, but it will take into account all other indirect expenses. Thus, the disallowance u/s 14A is restricted to Rs. 5 lakh and balance addition made by the AO and confirmed by the CIT(A) stands deleted. Accordingly, ground of appeal raised by the assessee is partly allowed.
5 Centrum Direct Limited ITA 5595/M/2011 7. In the result, appeal of the assessee stands partly allowed. Order pronounced in the open court on 15th October, 2015.
Sd/- Sd/- (िड. क�नाकर राव) (अिमत शु�ला) लेखा सद�य �याईक सद�य (D. KARUNAKARA RAO) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai, Date: 15th October, 2015 ��त/Copy to:- 1) अपीलाथ� /The Appellant. 2) ��यथ� /The Respondent. 3) The CIT(A) -4, Mumbai. 4) The CIT -2, Mumbai. 5) िवभागीय �ितिनिध “सी”, आयकर अपीलीय अिधकरण, मुंबई/ The D.R. “C” Bench, Mumbai. 6) गाड� फाईल \ Copy to Guard File. आदेशानुसार/By Order / / True Copy / /