Shilpa Memani, New Delhi V. ACIT,Circle-24(1), New Delhi

ITA 5244/DEL/2017

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 2853 (ITAT-DELHI)
• Duration Of Justice: 4 month(s) 6 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 18-12-2017
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: SMC
• Assessment Year: 2011-2012
• Appeal Filed On: 11-08-2017
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Opportunity of being heard; Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES : SMC : NEW DELHI BEFORE SHRI R.S. SYAL, VICE PRESIDENT ITA NO.5244/DEL/2017 ASSESSMENT YEAR : 2011-12 SHILPA MEMANI, 1-1/16, SHANTI MOHAN HOUSE, ANSARI ROAD, DARYA GANJ, NEW DELHI . PAN: AAJPM6234F VS. ACIT, CIRCLE-24(1), NEW DELHI. ASSESSEE BY : MS CHARU GOYAL, CA DEPTT. BY : NONE DATE OF HEARING : 18.12.2017 DATE OF PRONOUNCEMENT : 18.12.2017 ORDER THIS APPEAL BY THE ASSESSEE ARISES OUT OF THE ORDER PASSED BY THE CIT(A) ON 25.05.2017 IN RELATION TO THE ASSE SSMENT YEAR 2011-12. ITA NO.5244/DEL/2017 2 2. NO ONE WAS PRESENT ON BEHALF OF THE REVENUE. IN FACT, THE REVENUE HAS FILED EN BLOC ADJOURNMENT APPLICATIONS FOR ALL THE CASES LISTED TODAY. EX CONSEQUENTI , THERE IS NO ONE IN THE COURT ROOM TO REPRESENT THE REVENUE. THE LD. AR SERIOUSL Y OBJECTED TO THE GRANT OF ADJOURNMENT IN HIS CASE. AS SUCH, I AM NOT INCLINED TO ACCEPT THE ADJOURNMENT APPLICATION FILE D FOR THE REVENUE AND PROCEEDING TO DISPOSE OF THE APPEALS ON MERITS EX PARTE QUA THE REVENUE. 3. THE FIRST ISSUE RAISED IN THIS APPEAL IS AGA INST THE CONFIRMATION OF PART DISALLOWANCE U/S 14A OF THE IN COME-TAX ACT, 1961 (HEREINAFTER CALLED `THE ACT). 4. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT T HE ASSESSEE EARNED EXEMPT DIVIDEND INCOME AMOUNTING TO RS.92,84 2/-. SINCE NO DISALLOWANCE WAS OFFERED U/S 14A, THE ASSE SSING OFFICER, AFTER RECORDING SATISFACTION, COMPUTED DIS ALLOWANCE U/S 14A AS PER RULE 8D(2) AT RS.1,75,884/-, COMPRIS ING OF RS.1,03,406/- UNDER CLAUSE (I), RS.39,558/- UNDER C LAUSE (II) ITA NO.5244/DEL/2017 3 AND RS.32,920/- UNDER CLAUSE (III). THE LD. CIT(A) REDUCED THE DISALLOWANCE TO THE EXTENT OF THE EXEMPT INCOME EAR NED BY THE ASSESSEE DURING THE YEAR TO THE TUNE OF RS.92,842/- . THE ASSESSEE IS AGGRIEVED AGAINST THE CONFIRMATION OF D ISALLOWANCE TO THIS EXTENT. 5. I HAVE HEARD THE LD. AR AND PERUSED THE RELEVANT MATERIAL ON RECORD. PAGE 6 OF THE PAPER BOOK IS THE ASSESSEE S BALANCE SHEET FOR THE YEAR IN QUESTION. TOTAL INVESTMENT M ADE BY THE ASSESSEE IN PMS AND SHARES STANDS AT RS.74,15,901/- AND RS.2,58,124/-. AS AGAINST THAT, THE ASSESSEES CAP ITAL AT THE CLOSE OF THE YEAR STOOD AT RS.2.97 CRORE AS AGAINST THE OPENING CAPITAL OF RS.2.26 CRORE. THIS SHOWS THAT INVESTME NT IN SECURITIES YIELDING EXEMPT INCOME WAS MADE OUT OF O WN FUNDS OF THE ASSESSEE. 6. I HAVE HEARD THE LD. AR AND PERUSED THE RELEVANT MATERIAL ON RECORD. SECTION 36(1)(III) PROVIDES FOR DEDUCTION O F INTEREST OF THE AMOUNT OF INTEREST PAID IN RESPECT OF CAPITAL BORRO WED FOR THE PURPOSE OF ITA NO.5244/DEL/2017 4 BUSINESS OR PROFESSION. THE ESSENCE OF THIS PROVIS ION IS THAT THE INTEREST SHOULD BE ALLOWED SO LONG AS THE CAPITAL BORROWED, ON WHICH SUCH INTEREST IS PAID, IS USED FOR THE PURPOSE OF BUSINE SS OR PROFESSION. IF, HOWEVER, AN ASSESSEE IS HAVING ITS OWN INTEREST FRE E SURPLUS FUNDS AND SUCH FUNDS ARE UTILISED AS INTEREST FREE ADVANCES E VEN FOR A NON-BUSINESS PURPOSE, THERE CANNOT BE ANY DISALLOWANCE OF INTERE ST 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 FUND S OF ITS OWN WHICH WERE GENERATED IN THE COURSE OF RELEVANT FINANCIAL YEAR, APART FROM SUBSTANTIAL SHAREHOLDERS FUNDS, PRESUMPTION STANDS ESTABLISHED THAT THE INVESTMENTS IN SISTER CONCERNS WERE MADE BY THE ASS ESSEE OUT OF INTEREST FREE FUNDS AND, THEREFORE, NO PART OF INTEREST ON B ORROWINGS CAN BE DISALLOWED ON THE BASIS THAT THE INVESTMENTS WERE M ADE OUT OF INTEREST BEARING FUNDS. IN THAT CASE, THE AO RECORDED A FIND ING THAT A SUM OF RS.213 CRORE WAS INVESTED BY THE ASSESSEE OUT OF IT S OWN FUNDS AND RS.1.74 CRORE OUT OF BORROWED FUNDS. ACCORDINGLY, D ISALLOWANCE OF INTEREST WAS MADE TO THE TUNE OF RS.2.40 CRORE. THE ASSESSEE ARGUED THAT ITA NO.5244/DEL/2017 5 NO PART OF INTEREST BEARING FUNDS HAD GONE INTO INV ESTMENT IN THOSE TWO COMPANIES IN RESPECT OF WHICH THE AO MADE DISALLOWA NCE OF INTEREST. IT WAS ALSO ARGUED THAT INCOME FROM OPERATIONS OF THE COMPANY WAS RS.418.04 CRORE AND THE ASSESSEE HAD ALSO RAISED CA PITAL OF RS.7.90 CRORE, APART FROM RECEIVING INTEREST FREE DEPOSIT OF RS.10 .03 CRORE. THE ASSESSEE SUBMITTED BEFORE THE FIRST APPELLATE AUTHO RITY THAT THE BALANCE- SHEET OF THE ASSESSEE ADEQUATELY DEPICTED THAT THER E WERE ENOUGH INTEREST FREE FUNDS AT ITS DISPOSAL FOR MAKING INVESTMENT. T HE LD. CIT(A) GOT CONVINCED WITH THE ASSESSEES SUBMISSIONS AND DELET ED 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 ARGU ED THAT THE BORROWED FUNDS HAD BEEN UTILIZED FOR THE PURPOSE OF MAKING I NVESTMENT IN THE SISTER CONCERN AND THE DISALLOWANCE OF INTEREST WAS RIGHTLY CALLED FOR. 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 ITA NO.5244/DEL/2017 6 UPHELD. WHEN THE MATTER 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 CONSTRUED AS AVAILABLE FOR INVESTMENT IN SISTER CONCERN. REPELL ING THIS CONTENTION, THE HONBLE HIGH COURT OBSERVED THAT : IN OUR OPINION, THE VERY BASIS ON WHICH THE REVENUE HAD SOUGHT TO CONTEND OR ARGUE TH EIR CASE THAT THE SHAREHOLDERS FUND TO THE TUNE OF OVER RS.172 CRORE WAS UTILIZED FOR THE PURPOSE OF FIXED ASSETS IN TERMS OF THE BALANCE-SHE ET 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 AVAILABLE TO AN ASSESSEE SUFFICIENT TO MEET ITS INVESTMENT AND AT T HE 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 A RE FUNDS AVAILABLE ITA NO.5244/DEL/2017 7 BOTH INTEREST FREE AND OVERDRAFT AND/OR LOANS TAKEN , THEN A PRESUMPTION WOULD ARISE THAT THE INVESTMENTS WOULD BE OUT OF IN TEREST FREE FUNDS GENERATED OR AVAILABLE WITH THE COMPANY, IF THE INT EREST FREE FUNDS WERE SUFFICIENT TO MEET THE INVESTMENT . CONSEQUENTLY THE INTEREST WAS HELD TO BE DEDUCTIBLE IN FULL. 7. FROM THE ABOVE JUDGMENT, IT IS MANIFEST THAT THERE CAN BE NO PRESUMPTION THAT THE SHAREHOLDERS FUND OF A COMPAN Y WAS UTILIZED FOR PURCHASE OF FIXED ASSETS. IF AN ASSESSEE HAS INTERE ST FREE FUNDS AS WELL AS INTEREST BEARING FUNDS AT ITS DISPOSAL, THEN THE PR ESUMPTION WOULD BE THAT INVESTMENTS WERE MADE FROM INTEREST FREE FUNDS AT I TS DISPOSAL. SIMILAR VIEW HAS BEEN TAKEN BY THE HON'BLE DEHI HIGH COURT IN 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, DISALLOWA NCE OF PART OF INTEREST OUT OF TOTAL INTEREST PAID BY THE ASSESSEE TO THE B ANK WAS NOT JUSTIFIED. 8. APPLYING THE ABOVE PROPOSITION IN THE CONTEXT OF SECTION 14A, THE HON'BLE KARNATAKA HIGH COURT IN CIT & ANR VS. MICROLABS (2016) 383 ITA NO.5244/DEL/2017 8 ITR 490 (KAR) HAS HELD THAT WHEN INVESTMENTS ARE MADE FROM COMMON POOL AND NON-INTEREST BEARING FUNDS ARE MORE THAN T HE INVESTMENT IN TAX FREE SECURITIES, NO DISALLOWANCE OF INTEREST EXPEND ITURE U/S 14A CAN BE MADE. THIS VIEW HAS BEEN TAKEN BY FOLLOWING THE JU DGMENT 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 MOR E RES INTEGRA IN VIEW OF THE RECENT JUDGMENT DELIVERED BY THE HON'BL E 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 OF SHARE CAPITAL AND RESERVES ARE MORE THAN IN VESTMENT, THEN NO DISALLOWANCE OF INTEREST CAN BE MADE U/S 14A. 9. ADVERTING TO THE FACTS OF THE INSTANT CASE, I F IND THAT THE ASSESSING OFFICER HAS TAKEN VALUE OF INVESTMENTS YIELDING EXE MPT INCOME AT RS.76.74 LAC. AS AGAINST THIS, THE ASSESSEESS CAP ITAL FUND AT THE CLOSE OF THE YEAR STANDS AT RS.2.97 CRORE. THIS SHOWS THAT T HE ASSESSEES CAPITAL FUND IS FAR IN EXCESS OF THE AMOUNT OF INVESTMENTS IN SECURITIES YIELDING ITA NO.5244/DEL/2017 9 EXEMPT INCOME, THEREBY REQUIRING NO DISALLOWANCE UN DER CLAUSE (II) OF RULE 8D(2). 10. TURNING TO CLAUSE (III) OF RULE 8D(2), IT IS SE EN THAT THE ASSESSING OFFICER COMPUTED DISALLOWANCE AT RS.32,920/- BY CON SIDERING THE AVERAGE OF VALUE OF INVESTMENTS ON THE OPENING AND CLOSING DATE OF THE YEAR. 11. THE HON'BLE JURISDICTIONAL HIGH COURT IN ACB INDIA LTD. VS. ACIT (2015) 374 ITR 108 (DEL) HAS HELD THAT VALUE OF TAX EXEMPT INVESTMENTS SHOULD BE CONSIDERED INSTEAD OF TOTAL I NVESTMENTS FOR ADOPTING AVERAGE VALUE OF INVESTMENTS OF INCOME WHI CH IS NOT PART OF THE TOTAL INCOME. THE EFFECT OF THIS DECISION IS THAT WHILE MAKING DISALLOWANCE UNDER RULE 8D(2)(III), IT IS ONLY THE AVERAGE OF THOSE INVESTMENTS WHICH HAVE YIELDED EXEMPT INCOME ARE TO BE TAKEN INTO CONSIDERATION AND NOT THE AVERAGE OF ALL INVESTMENT S AS HAS BEEN DONE BY THE AO IN THIS CASE. ADVERTING TO THE FACTS OF THE INSTANT CASE, IT IS SEEN THAT THE DISALLOWANCE HAS BEEN MADE IN IGNORANCE OF THE ABOVE MANDATE OF LAW AS APPROVED BY THE HONBLE DELHI HIGH COURT. I, THEREFORE, SET ITA NO.5244/DEL/2017 10 ASIDE THE IMPUGNED ORDER AND DIRECT THE COMPUTATION OF CORRECT AMOUNT OF DISALLOWANCE UNDER CLAUSE (III) OF RULE 8D(2). 12. AS REGARDS THE COMPUTATION MADE UNDER CLAUSE (I ) OF RULE 8D(2), THE LD. AR SUBMITTED THAT SUCH CALCULATION SUFFERS FROM INFIRMITIES WHICH HAVE NOT BEEN SORTED OUT BY THE LD. FIRST APPELLATE AUTHORITY AS WELL. SHE SUBMITTED THAT CERTAIN EXPENSES WHICH DO NOT RELATE TO EXEMPT INCOME HAVE ALSO BEEN CONSIDERED. WITHOUT GOING INTO THE DETAILS OF SUCH EXPENSES, I CONSIDER IT EXPEDIENT TO SET ASIDE THE IMPUGNED ORDER ON THIS SCORE AS WELL AND REMIT THE MATTER TO THE FILE OF A SSESSING OFFICER FOR DECIDING THIS ISSUE AS PER LAW, AFTER ALLOWING REAS ONABLE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. 13. IT IS MADE CLEAR THAT IF THE DISALLOWANCE UNDER CLAUSES (I) AND (III) OF RULE 8D(2) EXCEEDS THE AMOUNT OF EXEMPT INCOME, THEN, THE DISALLOWANCE SHOULD BE RESTRICTED TO THE EXTENT OF EXEMPT INCOME AS HAS BEEN SUSTAINED IN THE FIRST APPEAL. IF, HOWEVER, T HIS EXERCISE RESULTS IN SOME FURTHER RELIEF TO THE ASSESSEE, THE SAME SHOUL D BE GRANTED. ITA NO.5244/DEL/2017 11 14. THE ONLY OTHER ISSUE IN THIS APPEAL IS AGAINST ENHANCEMENT OF INCOME TO THE TUNE OF RS.1,87,141/- U/S 57(III) OF THE ACT. 15. THE FACTS APROPOS THIS ISSUE ARE THAT THE LD. C IT(A) FOUND DURING THE COURSE OF APPELLATE PROCEEDINGS THAT THE ASSESS EE EARNED INTEREST INCOME OF RS.14,74,195/- ON FIXED DEPOSITS WITH THE BANK. OUT OF SUCH AMOUNT, DEDUCTION WAS CLAIMED FOR A SUM OF RS.1,87, 141/-, BEING THE AMOUNT PAID TO THE BANK ON OVERDRAFT FACILITY AND T HE REMAINING AMOUNT WAS OFFERED TO TAX. NOTICE OF ENHANCEMENT WAS ISSU ED U/S 251 OF THE ACT. AFTER ENTERTAINING THE ASSESSEES REPLY THAT THE FIXED DEPOSITS WERE PLEDGED AS SECURITY WITH THE BANK AS A PRE-CONDITIO N FOR AVAILING OVERDRAFT FACILITY, THE LD. CIT(A) TAXED INTEREST A T THE GROSS LEVEL U/S 57(III). TO FORTIFY HIS VIEW, RELIANCE WAS PLACED ON CERTAIN DECISIONS RECORDED ON PARA 5.4 OF THE IMPUGNED ORDER. THE AS SESSEE IS AGGRIEVED AGAINST THE IMPUGNED ORDER. 16. IN MY CONSIDERED OPINION, THE ISSUE RAISED THRO UGH THIS GROUND IS NO MORE RES INTEGRA IN VIEW OF THE JUDGMENT OF THE HON'BLE SUPREME COURT IN THE CASE OF CIT VS. DR. V.P. GOPINATHAN (2001) 248 ITR 449 ITA NO.5244/DEL/2017 12 (SC) IN WHICH IT HAS BEEN HELD THAT INTEREST ON LOAN TAK EN BY THE ASSESSEE FROM BANK ON THE SECURITY OF FIXED DEPOSITS CANNOT BE REDUCED FROM HIS INCOME BY WAY OF INTEREST ON THE FIXED DEPOSITS PLA CED BY HIM IN THE BANK. RELIANCE OF THE LD. AR ON CERTAIN DECISIONS CONTRARY TO THAT OF THE HON'BLE APEX COURT IN THE CASE OF DR. V.P. GOPINATHAN (SUPRA) CANNOT BE SUSTAINED. I, THEREFORE, UPHOLD THE IMPUGNED OR DER ON THIS SCORE. 17. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN THE OPEN COURT ON 18.12.2017. SD/- [R.S. SYAL] VICE PRESIDENT DATED, 18 TH DECEMBER, 2017. DK ITA NO.5244/DEL/2017 13 COPY FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT (A) 5. DR, ITAT AR, ITAT, NEW DELHI.