Dhiren Navinchandra Kapadia, Ahmedabad V. The DCIT, Circle-1(3), Vadodara

ITA 1388/AHD/2019

• Counselvise Citation: [2022] 105 COUNSELVISE.COM (IT) 8073 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 5 month(s) 25 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 23-02-2022
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Assessment Year: 2014-2015
• Appeal Filed On: 29-08-2019
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: V.K. SINGH
• Keywords: Business income; Earning of tax free income; Rule 8D
• Section: 14A

Judgement Text

आयकर य कर , हमदाबाद याय ‘‘स ’’ हमदाबाद। IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH, AHMEDABAD (through web-based video conferencing platform) ] ] BEFORE SHRI P.M. JAGTAP, VICE-PRESIDENT AND SHRI T.R. SENTHIL KUMAR, JUDICIAL MEMBER ITA No. 1388/Ahd/2019 Assessment Years : 2014-15 Dhiren Navinchandra Kapadia, 15, Nilparna Society, Opp. Meghmani House, Vikasgruh Road, Paldi, Ahmedabad PAN : AEUPK 1721 L Vs Deputy Commissioner of Income-tax, Circle-1(3), Vadodara ा / (Appellant) य / (Respondent) Assessee by : Shri B.T. Thakkar, CA Revenue by : Shri V.K. Singh, Sr DR /Date of Hearing : 23/02/2022 /Date of Pronouncement: 24/02/2022 आदेश/O R D E R PER P.M. JAGTAP, VICE-PRESIDENT : This appeal filed by the assessee is directed against the order of learned Commissioner of Income-Tax (Appeals-5), Vadodara (“CIT(A)” in short) dated 26.06.2019 and the solitary issue involved therein relates to the disallowance made by the Assessing Officer under Section 14A read with Rule 8D of the Income Tax Rules, 1962 which is sustained by the learned CIT(A) to the extent of Rs.4,18,543/-. 2. The assessee, in the present case, is an individual who filed his return of income for the year under consideration on 29.01.2016 declaring total income of Rs.74,91,950/-. The said return was selected for limited scrutiny; and, during the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee had made an investment of Rs.6.39 crores and Rs.1.93 crores in various mutual funds and shares - the income of which was exempt from tax. He also noticed that interest expenditure of ITA No. 1388/Ahd/2019 Dhiren Navinchandra Kapadia Vs. DCIT AY : 2015-15 2 Rs.38,85,059/- was claimed by the assessee. In this regard, the assessee was called upon by the Assessing Officer to explain as to why the disallowance under Section 14A by applying Rule 8D should not be made on account of interest and other expenses which were incurred in relation to earning of exempt income. In this regard, it was explained by the assessee that his own funds, available in the form of capital, were to the tune of Rs.13.18 crores which were sufficient to make the investment in various mutual funds and shares. It was also submitted by the assessee that interest expenditure to the extent of Rs.32,79,498/- was incurred in respect of funds borrowed from Bajaj Finance Ltd. which were utilized for capital contribution in the partnership firm Varsha Fashion LLP and the interest paid was claimed as deduction from the interest earned from the said LLP. It was contended that there was no utilization of borrowed funds for making investments in mutual funds & shares and there was no question of any disallowance on account of interest under Section 14A of the Act. The stand of the assessee was not found acceptable by the Assessing Officer as, according to him, the same was not supported by any documentary evidence. He accordingly invoked Rule 8D and worked out the disallowance to be made under Section 14A at Rs.19,16,305/-, comprising of interest expenses of Rs.15,20,769/- and other expenses of Rs. 3,95,536/-. 3. The disallowance made by the Assessing Officer under Section 14A read with Rule 8D was challenged by the assessee before the learned CIT(A) and the submissions made before the Assessing Officer were reiterated on behalf of the assessee before the learned CIT(A) in support of his case that the disallowance made by the Assessing Officer under Section 14A read with Rule 8D was not sustainable. After considering the submissions made by the assessee as well as the material available on record, the learned ITA No. 1388/Ahd/2019 Dhiren Navinchandra Kapadia Vs. DCIT AY : 2015-15 3 CIT(A) decided this issue vide paragraph Nos. 5 to 6.4 of his impugned order which read as under:- “5. I have carefully considered the facts on record, arguments put forth in the assessment order, the written submission and the further written submission of the appellant. The AR is also heard in the matter. 6. Appellant has contested against disallowance u/s 14A r.w. Rule 8D amount to Rs. 19,16,305/-. AO has bifurcated disallowance viz under Rule 8D(2)(i)-Nil, 8D under Rule 8D(2)(ii) - Rs. 15,20,769/- and under Rule 8D(2)(iii) - Rs. 3,95,536/-. As per assessment order appellant has earned exempt income of Rs. 4,18,543/-. This fact is also mentioned in statement of facts filed by the appellant on record. Undisputedly, appellant has not made any suo-motu disallowance u/s 14 A r.w. rule 8D in its books. The only effective ground to oppose the addition is availability of own surplus fund for the investment in mutual fund, share, from which exempt income was earned. AR has submitted extract of capital vis-a-vis investment made therein and tried to justify that loan availed from Bajaj Finance Ltd of Rs. 4,50,00,000/- during FY 2012-13 was invested in M/s Varsha Fashion, LLP. In own submission, AR further emphasizes that in all the FY 2011-12, 2012- 13 & 2013-14 appellant continued to have surplus fund. Reoly on decision of the Hon.SC in case of Ms. Reliance Industries Ltd. Vs. CIT, AR argued that invoking of sec. 14A was uncalled for. 6.1 I have considered AR's argument and written submission. One peculiar fact I observed that in FY 2011-12, 2012-13 & 2013-14 investment in shares, mutual fund and in Varsha Fashion LLP exceeds sum total of appellant's Capital and loan from Bajaj Finance. AR's own submission says total investment in FY 2013-14 stands Rs. 13,17,74,587/- but on liability side capital & loan altogether remains only Rs. 13,59,30,436/-. AR should have explained as to how investment is more than sources of fund. In other words, it is implied that investment is made out of fund which is more than the appellant's own capital and advance /secured loan summed up together. 6.2 Another glaring fact must be brought on record that appellant enjoys 70% share in Varsha Fashion LLP (AAKFV66911L) in which his capital as on 31-03-2014 was Rs.5,27,14,390/-. Admittedly, sudden increase in capital was due to diversion of loan availed from Bajaj Finance Ltd in FY 212-13. Undisputedly, income earned from Varsha Fashion is exempt u/s 10(2A). These facts are verifiable from appellant's Balance sheet and ITR and one need not to refer any Act. After finding of these facts, AR could not advance his plea of availability of own surplus fund for making investment in shares & mutual fund. Clearly, borrowed fund has been used tor earning exempt income and I have already discussed these facts more than enough to prove it. ITA No. 1388/Ahd/2019 Dhiren Navinchandra Kapadia Vs. DCIT AY : 2015-15 4 Therefore, AR's plea against invoking Sec. 14A is not correct. I am fully with the AO in invoking Sec. 14A of the Act. Thus, AR's argument is rejected. 6.3 Coming to another argument specifically reliance placed on the order of the SC in case of Reliance Petroleum Ltd, I have already discussed that appellant lacked surplus fund for investment generating exempt income. Apparently, appellant has not denied investing in Varsha Fashion and also in mutual fund capable of generating exempt income. So, this ruling is not applicable in this case. AR's reliance on this ruling is misplaced. 6.4 Connected argument of the AR is that disallowance u/s 14A r.w. RuIe 8D cannot exceed exempt income. AR's argument is convincing. Admittedly, appellant has not maintained separate books of accounts for earning exempt income neither he has bifurcation of interest expenses of his business income and income exempt from taxes. AR has also not denied using part of business set up for the purpose of investment generating exempt income. However, taking guidance from the rulings in the case of Joint Investment Pvt. Ltd. vs CIT (ITA No. 117/2015) passed by the Hon. Delhi High Court, I am of the considered view that total disallowance u/s 14 A r.w. Rule 8D cannot exceed exempt income. In statement of facts filed on-line, appellant himself admits earning of exempt income of Rs.4,18,543/-. Computation of income file before me also suggests exempt income u/s 10(34) earned during FY 2013-14 at Rs.4,18,543/-. Accordingly, AO is directed to restrict the disallowance under rule 8D to the extent of Rs. 4,18,543/-. Balance addition of Rs. 1497762/- (19,16,305 - 4,18,543) is hereby deleted. Appellant succeeds partly on sole ground including sub grounds.” 4. The learned CIT(A) thus restricted the disallowance of Rs.19,16,305/- made by the Assessing Officer under Section 14A read with Rule 8D to Rs.4,18,543/-. Aggrieved by the order of the learned CIT(A), the assessee has preferred this appeal before the Tribunal. 5. We have heard the arguments of both the sides and also perused the relevant material available on record. The learned Counsel for the assessee has invited our attention to the balance-sheet of the assessee as on 31.03.2014 placed at page nos. 12-13 of the paper-book to show that sufficient funds, in the form of own capital of Rs.13.17 crores and interest free loans of Rs.3.49 crores, were available with the assessee at the relevant ITA No. 1388/Ahd/2019 Dhiren Navinchandra Kapadia Vs. DCIT AY : 2015-15 5 time to make investment in mutual funds and shares. He has also submitted that the interest bearing funds, on the other hand, were utilized by the assessee mainly for making investment in the partnership firm Varsha Fashion LLP as partner’s capital and since no exempt income in the form of share profit from the said firm was received during the year under consideration, the disallowance on account of interest under Section 14A was not called for. He has further submitted that the assessee had received interest from Varsha Fashion LLP and the same was offered for tax after deducting the interest paid on borrowed loans. He has contended that it was thus a case of net interest income earned by the assessee and there being non-deduction claimed by the assessee on account of any expenses, the disallowance made by the Assessing Officer and sustained by the learned CIT(A) under Section 14A read with Rule 8D is not sustainable. We find merit in this contention raised by the learned Counsel for the assessee. As is evident from the balance-sheet of the assessee as on 31.03.2014, the assessee had sufficient interest free funds in the form of own capital and unsecured loans available in the year under consideration; and, since the same were sufficient to make investments in mutual funds and shares, there was no utilization of interest bearing borrowed funds by the assessee in mutual funds and shares. On the other hand, the interest bearing borrowed funds were utilized by the assessee for making investment in M/s. Varsha Fashion LLP in the form of partner’s capital; and, since there was no exempt income received by the assessee during the year under consideration as share of profit from the said firm which was exempt from tax and the interest earned by the assessee from the said firm was offered for tax after deducting the interest paid, it was a case where the assessee had actually earned net interest income. Moreover, as pointed out by the learned Counsel for the assessee from the income and expenditure account of the assessee for the year under consideration, no deduction on account of any ITA No. 1388/Ahd/2019 Dhiren Navinchandra Kapadia Vs. DCIT AY : 2015-15 6 other expenditure was claimed by the assessee. Keeping in view all the facts and circumstances of the case, which have remained unrebutted and uncontroverted by the learned Departmental Representative, we are of the view that the disallowance made by the Assessing Officer under Section 14A read with Rule 8D, as sustained by the learned CIT(A), is not justified and deleting the same, we allow this appeal of the assessee. 6. In the result, the appeal filed by the assessee is allowed. Order pronounced in the Court on 24 th February, 2022 at Ahmedabad. Sd/- Sd/- (T.R. SENTHIL KUMAR) (P.M. JAGTAP) JUDICIAL MEMBER VICE-PRESIDENT Ahmedabad, Dated 24/02/2022 *Bt /Copy of the Order forwarded to : 1. ! / The Appellant 2. "# ! / The Respondent. 3. $%$&' # # ( / Concerned CIT 4. # # ( ) (/ The CIT(A)- 5. + , # &' , # # &' /DR,ITAT, Ahmedabad, 6. , ./ 0 /Guard file. / BY ORDER, TRUE COPY ह # $ज (Asstt. Registrar) # # &' ITAT, Ahmedabad 1. Date of dictation- ...23.02.2022 ...... 2. Date on which the typed draft is placed before the Dictating Member ...24.02.2022 ............ Other member.... 24.02.2022 .......... 3. Date on which the approved draft comes to the Sr.P.S./P.S. - ...24.02.2022 ............... 4. Date on which the fair order is placed before the Dictating Member for Pronouncement ...24.02.2022 . 5. Date on which the file goes to the Bench Clerk....24.02.2022 ............... 6. Date on which the file goes to the Head Clerk.................................. 7. The date on which the file goes to the Assistant Registrar for signature on the order..................... 8. Date of Despatch of the Order..................