Devakikrishna K. Prabhu, Pune V. Deputy Commissioner of Income-tax, Circle - 3, Pune

ITA 1687/PUN/2018

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 5714 (ITAT-PUNE)
• Duration Of Justice: 6 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 14-05-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: SMC
• Next Hearing Date: 13-05-2019
• Assessment Year: 2009-2010
• Appeal Filed On: 24-10-2018
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: ARISES OUT OF PASSED
• Keywords: Earning of tax free income; Rule 8D
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH SMC, PUNE BEFORE SHRI R.S. SYAL, VICE PRESIDENT . / ITA NO.1687/PUN/2018 / ASSESSMENT YEAR : 2009-10 DEVAKIKRISHNA KESHAV PRABHU, A-1, A-2, KUSUM SOCIETY, HAREKRISHNA MANDIR SOCIETY, SHIVAJINAGAR, PUNE 411 016 MAHARASHTRA PAN : AAUPP2953P VS. DCIT, CIRCLE-3, PUNE (APPELLANT) (RESPONDENT) / ORDER PER R.S.SYAL, VP : THIS APPEAL BY THE ASSESSEE ARISES OUT OF THE ORDER PASSE D BY THE CIT(A)-3, PUNE ON 05-06-2018 IN RELATION TO THE ASSESSMENT YEAR 2009-10. 2. THERE IS A DELAY OF 33 DAYS IN PRESENTING THIS APPEAL BE FORE THE TRIBUNAL. THE ASSESSEE HAS FILED AN AFFIDAVIT IN SUPPOR T OF THE REASONS WHICH LED TO THE FILING OF THE INSTANT APPEAL BELATEDLY. APPELLANT BY SHRI SHARAD A. VAZE RESPONDENT BY SHRI RAJESH GAWALI DATE OF HEARING 13-05-2019 DATE OF PRONOUNCEMENT 14-05-2019 ITA NO.1687/PUN/2018 DEVAKIKRISHNA K. PRABHU 2 I AM SATISFIED WITH THE REASONS. AS SUCH THE DELAY IS CONDO NED AND THE APPEAL IS TAKEN UP FOR DISPOSAL ON MERITS. 3. THE ASSESSEE HAS FILED REVISED GROUNDS. GROUND NO S. 1 TO 3 ARE AGAINST CONFIRMATION OF DISALLOWANCE U/S.14A OF THE INCO ME- TAX ACT, 1961 (HEREINAFTER ALSO CALLED THE ACT). 4. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSESSE E IS ENGAGED IN THE MANUFACTURING OF MARINE PARTS, RESELLING AND EXPORTS. EXEMPT DIVIDEND INCOME FROM MUTUAL FUNDS AND S HARES WAS RECEIVED DURING THE YEAR TO THE TUNE OF RS.22,09,471/ -. NO DISALLOWANCE U/S.14A WAS OFFERED. ON BEING CALLED UPON TO EXPLAIN THE REASONS FOR NOT OFFERING ANY SUCH DISALLOWANCE, THE ASSESSEE FILED CERTAIN REPLIES WITH WHICH THE ASSESSING OFFICE R (AO) WAS NOT SATISFIED. INVOKING THE PROVISIONS OF SECTION 14A OF THE ACT, HE COMPUTED DISALLOWANCE AT RS.7,62,226/- AS PER RULE 8D(2)(II) AND 8D(2)(III). THE LD. CIT(A) UPHELD THE DISALLOWANCE. THE ASSESSEE IS AGGRIEVED BY THE CONFIRMATIO N OF DISALLOWANCE. 5. I HAVE HEARD BOTH THE SIDES AND GONE THROUGH THE RELE VANT MATERIAL ON RECORD. IT IS SEEN THAT THE AO HAS MADE DISALLOW ANCE UNDER RULE 8D(2)(II) AT RS.2,73,504/- TOWARDS INTEREST PAID. ITA NO.1687/PUN/2018 DEVAKIKRISHNA K. PRABHU 3 COPY OF ASSESSEES BALANCE SHEET HAS BEEN PLACED AT PAG E 19 OF THE PAPER BOOK FROM WHICH IT CAN SEEN THAT THE ASSESSEE, A N INDIVIDUAL, HAS CAPITAL OF RS.13.40 CRORE. AS AGAINST THAT, THE BALANCE OF INVESTMENT ACCOUNTS STANDS AT RS.10.08 CRORE . 6. SECTION 14A READ WITH RULE 8D(2)(II) STIPULATES THAT IN A CA SE WHERE THE ASSESSEE HAS INCURRED EXPENDITURE BY WAY OF IN TEREST DURING THE YEAR WHICH IS NOT DIRECTLY ATTRIBUTABLE TO ANY PARTICULAR INCOME, THE DISALLOWANCE SHALL BE MADE FOR AN AMOUNT COMPUTE D IN ACCORDANCE WITH THE FORMULA GIVEN THEREIN. SUM AND SUBSTAN CE OF DISALLOWANCE UNDER RULE 8D(2)(II) IS THAT THE INTEREST RELATABLE TO INVESTMENTS/SECURITIES YIELDING EXEMPT INCOME IS TO BE DISALLOWED. 7. AT THIS JUNCTURE, IT IS RELEVANT TO NOTE THAT SECTION 36(1)(III) PROVIDES FOR DEDUCTION OF INTEREST OF THE AMOUNT OF INTEREST P AID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSE OF BUSINESS OR PROFESSION. THE ESSENCE OF THIS PROVISION IS THAT THE INTERE ST SHOULD BE ALLOWED SO LONG AS THE CAPITAL BORROWED, ON WHICH SUCH INTEREST IS PAID, IS USED FOR THE PURPOSE OF BUSINESS OR PROFESSION. IF, HOWEVER, AN ASSESSEE IS HAVING ITS OWN INTEREST FREE SURPLUS FUNDS AND SUCH FUNDS ARE UTILISED AS INTERES T FREE ITA NO.1687/PUN/2018 DEVAKIKRISHNA K. PRABHU 4 ADVANCES EVEN FOR A NON-BUSINESS PURPOSE, THERE CANNO T BE ANY DISALLOWANCE OF INTEREST PAID ON INTEREST BEARING LOANS. THE HON'BLE BOMBAY HIGH COURT IN CIT VS. RELIANCE UTILITIES AND POWER LTD. (2009) 313 ITR 340 (BOM) , HAS HELD THAT WHERE AN ASSESSEE POSSESSED SUFFICIENT INTEREST FREE FUNDS OF ITS OW N WHICH WERE GENERATED IN THE COURSE OF RELEVANT FINANCIAL YEAR, AP ART FROM SUBSTANTIAL SHAREHOLDERS FUNDS, PRESUMPTION STANDS ESTABLISHED THAT THE INVESTMENTS IN SISTER CONCERNS WERE MADE BY THE ASSESSEE OUT OF INTEREST FREE FUNDS AND, THEREFORE, NO PART OF INTEREST ON BORROWINGS CAN BE DISALLOWED ON THE BASIS THAT TH E INVESTMENTS WERE MADE OUT OF INTEREST BEARING FUNDS. IN TH AT CASE, THE AO RECORDED A FINDING THAT A SUM OF RS.213 CRO RE WAS INVESTED BY THE ASSESSEE OUT OF ITS OWN FUNDS AND RS.1.74 CRORE OUT OF BORROWED FUNDS. ACCORDINGLY, DISALLOWANCE OF INTERES T WAS MADE TO THE TUNE OF RS.2.40 CRORE. THE ASSESSEE A RGUED THAT NO PART OF INTEREST BEARING FUNDS HAD GONE INTO INVESTMENT IN THOSE TWO COMPANIES IN RESPECT OF WHICH THE AO MADE DISALLOWANCE OF INTEREST. IT WAS ALSO ARGUED THAT INCOME FROM OPERATIONS OF THE COMPANY WAS RS.418.04 CRORE AND THE A SSESSEE HAD ALSO RAISED CAPITAL OF RS.7.90 CRORE, APART FROM RECE IVING INTEREST FREE DEPOSIT OF RS.10.03 CRORE. THE ASSESSEE S UBMITTED ITA NO.1687/PUN/2018 DEVAKIKRISHNA K. PRABHU 5 BEFORE THE FIRST APPELLATE AUTHORITY THAT THE BALANCE-SHEET OF TH E ASSESSEE ADEQUATELY DEPICTED THAT THERE WERE ENOUGH INTERES T FREE FUNDS AT ITS DISPOSAL FOR MAKING INVESTMENT. THE LD. CIT(A) GOT CONVINCED WITH THE ASSESSEES SUBMISSIONS AND DELETED THE ADDITION. BEFORE THE TRIBUNAL, IT WAS CONTENDED ON BEHALF OF THE REVENUE THAT THE SHAREHOLDERS FUNDS WERE UTILIZED FOR THE PURCHASE OF ITS ASSETS AND HENCE THE ASSESSEE WAS LEFT WITH NO RESERVE OR OWN FUNDS FOR MAKING INVESTMENT IN THE SISTER CONCERN. THUS, IT WAS ARGUED THAT THE BORROWED FUNDS HA D BEEN UTILIZED FOR THE PURPOSE OF MAKING INVESTMENT IN THE SISTER CONCERN AND THE DISALLOWANCE OF INTEREST WAS RIGHTLY CALLED F OR. THE TRIBUNAL, ON APPRECIATION OF FACTS, RECORDED A FINDING THAT THE ASSESSEE HAD SUFFICIENT FUNDS OF ITS OWN FOR MAKING INVESTMENT WITHOUT USING THE INTEREST BEARING FUNDS. ACCORDINGLY, THE ORDER OF CIT(A) WAS UPHELD. WHEN THE MA TTER CAME UP BEFORE THE HONBLE HIGH COURT, IT WAS CONTENDED BY THE DEPARTMENT THAT THE SHAREHOLDERS FUNDS STOOD UTILIZED IN THE PURCHASE OF FIXED ASSETS AND HENCE COULD NOT BE CONSTRUE D AS AVAILABLE FOR INVESTMENT IN SISTER CONCERN. REPELLING THIS CONTENTION, THE HONBLE HIGH COURT OBSERVED THAT : IN OUR OPINION, THE VERY BASIS ON WHICH THE REVENUE HAD SOUGHT TO ITA NO.1687/PUN/2018 DEVAKIKRISHNA K. PRABHU 6 CONTEND OR ARGUE THEIR CASE THAT THE SHAREHOLDERS FUND TO THE TUNE OF OVER RS.172 CRORE WAS UTILIZED FOR THE PURPOSE O F FIXED ASSETS IN TERMS OF THE BALANCE-SHEET AS ON MARCH 31, 1999 , IS FALLACIOUS. IN UPHOLDING THE ORDER OF THE TRIBUNAL, THE HON BLE HIGH COURT HELD THAT: IF THERE BE INTEREST FREE FUNDS AVAILAB LE TO AN ASSESSEE SUFFICIENT TO MEET ITS INVESTMENT AND AT THE SAME TIME THE ASSESSEE HAD RAISED A LOAN, IT CAN BE PRESUMED THAT THE INVESTMENTS WERE FROM THE INTEREST FREE FUNDS AVAILABLE. THEREAFTER, THE JUDGMENT OF THE HONBLE SUPREME COURT IN THE CASE OF EAST INDIA PHARMACEUTICAL WORKS LTD. VS. CIT (1997) 224 ITR 627 (SC) AND ALSO THE JUDGMENT OF THE HONBLE CALCUTTA HIGH COURT IN WOOLCOMBERS OF INDIA LTD. VS. CIT (1981) 134 ITR 219 (CAL) WERE CONSIDERED. IT WAS FINALLY CONCLUDED THAT: THE PRINCIPLE, THEREFORE, WOULD BE THAT IF THERE ARE FUNDS AVAILABLE BOTH INTEREST FREE AND OVERDRAFT AND/OR LOANS TAKEN , THEN A PRESUMPTION WOULD ARISE THAT THE INVESTMENTS WOULD BE OUT O F INTEREST FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INTEREST FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENT . CONSEQUENTLY THE INTEREST WAS HELD TO BE DEDUCTIBLE IN FULL. FROM THE ABOVE JUDGMENT, IT IS MANIFEST THAT THERE CAN BE NO PRESUMPTION THAT THE SHAREHOLDERS FUND OF A COMPANY WAS ITA NO.1687/PUN/2018 DEVAKIKRISHNA K. PRABHU 7 UTILIZED FOR THE PURCHASE OF FIXED ASSETS. IF AN ASSESSEE HAS INTEREST FREE FUNDS AS WELL AS INTEREST BEARING FUNDS AT ITS DISPOSAL, THEN THE PRESUMPTION WOULD BE THAT INVESTMENTS WERE MADE FROM INTEREST FREE FUNDS AT THE DISPOSAL OF THE ASSESS EE. SIMILAR VIEW HAS BEEN TAKEN BY THE HON'BLE DEHI HIGH COURT I N CIT VS. TIN BOX COMPANY (2003) 260 ITR 637 (DEL), HOLDING THAT WHEN THE CAPITAL AND INTEREST FREE UNSECURED LOAN WITH THE ASSESSEE FAR EXCEEDED THE INTEREST FREE LOAN ADVANCED TO THE SISTER CONCERN, DISALLOWANCE OF PART OF INTEREST OUT OF TOTAL INTEREST P AID BY THE ASSESSEE TO THE BANK WAS NOT JUSTIFIED. 8. APPLYING THE ABOVE PROPOSITION IN THE CONTEXT OF SECTIO N 14A, THE HON'BLE KARNATAKA HIGH COURT IN CIT & ANR VS. MICROLABS (2016) 383 ITR 490 (KAR) HAS HELD THAT WHEN INVESTMENTS ARE MADE FROM COMMON POOL AND NON-INTEREST BEARING FUNDS ARE MORE THAN THE INVESTMENT IN TAX FREE SEC URITIES, NO DISALLOWANCE OF INTEREST EXPENDITURE U/S 14A CAN BE MADE . THIS VIEW HAS BEEN TAKEN BY FOLLOWING THE JUDGMENT OF THE HON'BLE BOMBAY HIGH COURT IN CIT VS. HDFC BANK LTD. (2014) 366 ITR 515 (BOM) . IT IS FURTHER OBSERVED THAT THIS ISSUE IS NO MORE RES INTEGRA IN VIEW OF THE RECENT JUDGMENT DELIVERED BY THE ITA NO.1687/PUN/2018 DEVAKIKRISHNA K. PRABHU 8 HON'BLE SUPREME COURT IN GODREJ & BOYCE MANUFACTURING COMPANY LTD. VS. DCIT (2017) 394 ITR 449 (SC), IN WHICH IT HAS BEEN HELD THAT WHEN INTEREST FREE FUNDS IN THE FORM O F SHARE CAPITAL AND RESERVES ARE MORE THAN INVESTMENT, THEN NO DISALLOWANCE OF INTEREST CAN BE MADE U/S 14A. IN VIEW OF THE FOREGOING DISCUSSION, I AM SATISFIED THAT THE DISALLOWANCE MAD E BY THE AO HAS BEEN WRONGLY SUSTAINED IN THE FIRST APPEAL. I , THEREFORE, ORDER TO DELETE THE SAME. 9. THE SECOND COMPONENT OF DISALLOWANCE U/S.14A READ WITH RULE 8D(2)(III) IS 0.5% OF THE AVERAGE VALUE OF THE INVESTM ENTS. THE AO COMPUTED 0.5% OF THE AVERAGE VALUE OF INVESTMEN TS AT RS.4,88,721/- AND MADE DISALLOWANCE FOR THE SAME WHICH C AME TO BE AFFIRMED IN THE FIRST APPEAL. 10. THE LD. AR SUBMITTED THAT THE DISALLOWANCE MADE IN THIS REGARD IS EXCESSIVE. HE SUBMITTED THAT THE DISALLOWANCE MAY BE MADE ON THE REASONABLE BASIS, MAY BE, AT RS.1,000/- PE R ENTRY. HE FILED A COPY OF DIVIDEND ACCOUNT SHOWING NUMBER OF ENTR IES. IN MY CONSIDERED OPINION, THIS TYPE OF AD HOCISM IS IMPERMISSIBLE IN VIEW OF THE CLEAR MANDATE OF RULE 8D(2)(III). AS THE ASSESSMENT YEAR UNDER CONSIDERATION IS A PERIOD AFTE R THE ITA NO.1687/PUN/2018 DEVAKIKRISHNA K. PRABHU 9 INSERTION OF RULE 8D, I HOLD THAT THE DISALLOWANCE AT 0.5%, BEIN G THE PRESCRIPTION OF THE RULE, AS MADE AND SUSTAINED IN THE F IRST APPEAL IS IN ORDER. TO SUM UP, DISALLOWANCE U/S.14A OF THE ACT IS SUSTAINED AT RS.4,88,721/- AND THE ASSESSEE GETS RELIEF OF RS.2,73,505/-. 11. THE OTHER GROUND RAISED BY THE ASSESSEE IS AGAINST THE CONFIRMATION OF DISALLOWANCE OF FOREIGN TOUR EXPENSES AMOUNTING TO RS.2,10,987/-. 12. THE FACTS APROPOS THIS ISSUE ARE THAT THE AO MADE ADDIT ION OF RS.2,10,987/- ON THE GROUND THAT THE ASSESSEE FAILED T O PRODUCE ANY SUBMISSION ON THE PERFORMANCE OF FOREIGN TOUR AND H OW IT WAS RELATED TO BUSINESS. THE LD. CIT(A) SUSTAINED THE ADD ITION. THE ASSESSEE IS AGGRIEVED BY THE CONFIRMATION OF SUCH DISALLOWANCE. 13. I HAVE HEARD BOTH THE SIDES AND GONE THROUGH THE RE LEVANT MATERIAL ON RECORD. A COPY OF THE ASSESSEES PROFIT AND LOSS ACCOUNT HAS BEEN PLACED AT PAGE 20 OF THE PAPER BOOK. IT CAN BE SEEN THAT THE ASSESSEE MADE EXPORT SALES OF RS.2.81 CROR E AS AGAINST DOMESTIC SALES AMOUNTING TO RS.40.55 LAKH. THE LD. ITA NO.1687/PUN/2018 DEVAKIKRISHNA K. PRABHU 10 CIT(A) HAS RECORDED THE ASSESSEES SUBMISSION MADE BEF ORE HIM ON PAGE 16 OF THE IMPUGNED ORDER, VIDE WHICH IT WAS STATED THAT FOREIGN TOUR WAS UNDERTAKEN TO USA WHERE THE ASSESSEE HAS GOT ITS CUSTOMERS. NOT ONLY THAT, THE ASSESSEE ALSO FILED COPIES O F BILLS AND VOUCHERS BEFORE THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS. THIS SHOWS THAT THE ASSESSEE GEN UINELY UNDERTOOK FOREIGN VISIT TO USA. SINCE HIS MAJOR SALES ARE TO FOREIGN COUNTRIES INCLUDING USA, THERE CAN BE NO REASON TO DISALLOW THE FOREIGN TRAVEL EXPENSES INCURRED IN THIS REGARD. I, THEREFORE, ORDER TO DELETE THE ADDITION. 14. GROUND NO.4 WAS NOT PRESSED BY THE LD. AR. THE SAM E IS, THEREFORE, DISMISSED. 15. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 14 TH MAY, 2019. SD/- (R.S.SYAL) / VICE PRESIDENT PUNE; DATED : 14 TH MAY, 2019 ITA NO.1687/PUN/2018 DEVAKIKRISHNA K. PRABHU 11 / COPY OF THE ORDER IS FORWARDED TO : 1. / THE APPELLANT; 2. / THE RESPONDENT; 3. ( ) / THE CIT (APPEALS)-3, PUNE 4. THE PR. CIT-2, PUNE 5. , , SMC / DR SMC, ITAT, PUNE; 6. / GUARD FILE. // TRUE COPY // / BY ORDER, // TRUE COPY // SENIOR PRIVATE SECRETARY , / ITAT, PUNE DATE 1. DRAFT DICTATED ON 13-05-2019 SR.PS 2. DRAFT PLACED BEFORE AUTHOR 13-05-2019 SR.PS 3. DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER JM 4. DRAFT DISCUSSED/APPROVED BY SECOND MEMBER. JM 5. APPROVED DRAFT COMES TO THE SR.PS/PS SR.PS 6. KEPT FOR PRONOUNCEMENT ON SR.PS 7. DATE OF UPLOADING ORDER SR.PS 8. FILE SENT TO THE BENCH CLERK SR.PS 9. DATE ON WHICH FILE GOES TO THE HEAD CLERK 10. DATE ON WHICH FILE GOES TO THE A.R. 11. DATE OF DISPATCH OF ORDER. *