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2015 (7) TMI 829 - ITAT HYDERABAD

2015 (7) TMI 829 - ITAT HYDERABAD - TMI - Disallowance of interest expenditure u/s 14A - Held that:- When assessee was having enough non-interest bearing surplus fund to make the investment and department has failed to establish any nexus between the borrowed funds and investment, presumption would be that assessee has made investment utilizing its own funds. The decisions relied upon by ld. DR would be of no help to department as they are not on the proposition, whether interest expenditure wil .....

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tion 14A, which provides that even in a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of total income, still disallowance can be made by AO. In view of the aforesaid, we direct AO to compute disallowance @ 0.5% of the total average investment in terms with rule 8D(2)(iii) of IT Rules. - Decided partly in favour of assessee. - ITA No. 398 & 399/Hyd/2014 - Dated:- 22-7-2015 - Shri P.M. Jagtap and Shri Saktijit Dey, JJ. For .....

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lved in AY 2008- 09 being ITA No. 398/Hyd/2014. 4. Briefly the facts are, assessee a company is incorporated on 29/03/2007 under a scheme of demerger process of Aster Teleservices Pvt. Ltd. (ATPL). Assessee is basically engaged in the activity of constructing, executing, improving, developing and managing or controlling in India or elsewhere infrastructure projects of civil, mechanical including laying of optical fiber and copper cables related to information technology, telecommunications, hote .....

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ited interest expenditure of ₹ 2,63,29,579. AO was of the view that assessee has utilized some of the borrowed amount for making the tax exempt investment. As assessee has not disallowed any interest expenditure on its own, AO by applying the provisions of section 14A read with Rule 8D, proceeded to compute disallowance of interest expenditure on account of investment made and quantified the same as per rule 8D(2) at ₹ 40,18,400. Being aggrieved of such disallowance, assessee challen .....

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by assessee that since investments were out of own/surplus funds available with assessee and no borrowed fund was utilized, disallowance of interest expenditure cannot be made u/s 14A of the Act. In support of such contention, assessee also relied upon certain judicial precedents. 6. Ld. CIT(A) after considering the submissions of assessee in the context of the statutory provisions, observed that assessee is maintaining common account from where all its business transactions are routed including .....

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f the IT Rules, applicable from AY 2008-09, AO in case was not satisfied with the accounts of assessee can make disallowance by applying the said rule. On the aforesaid reasoning, she confirmed the disallowance made by AO. However, she directed AO to exclude an amount of ₹ 33,40,353 while computing disallowance u/s 14A of the Act, as the said amount is not pertaining to investment. 7. Ld. AR more or less reiterating the submissions made before ld. CIT(A), stated that at the time of demerge .....

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and Axis Bank are in the nature of term loan and for the purpose of working capital as well as purchasing fixed assets, they were totally utilized for that purpose which would be evident from the addition made to the fixed assets as well as sundry debtors, inventories, etc. Ld. AR referring to the scheme of demerger as incorporated in the Notes on Accounts submitted, at the time of demerger, assessee received reserves and surplus of ₹ 58,36,79,820. Thus, it was submitted, as assessee was .....

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working capital. Thus, it was submitted by ld. AR, since borrowed funds are not utilized for investment no disallowance out of interest expenditure can be made. In support of such contention, he relied upon the following decisions: 1. CIT Vs. Hero Cycles Ltd., [2010] 323 ITR 518 (P&H) 8. Ld. DR referring to the provisions of section 14A of the Act submitted before us, for applying provisions contained therein, two conditions have to be satisfied; firstly, there must be an investment giving .....

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out of surplus funds will not be acceptable unless assessee specifically proves the fact that investments made were out of such funds. Therefore, it is necessary to bring on record the fact that on the dates investments were made assessee was having surplus funds. In other words, a link has to be established between investments and availability of surplus funds. Ld. DR referring to the cash flow statement of assessee, for the year ended 31/03/2008 submitted, cash available to assessee is ₹ .....

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of his contention, ld. DR relied upon the following decisions: 1. Siva Industries & Holdings Ltd. Vs. ACIT, 54 SOT 49 (Chennai) 2. ACIT Vs. Champion Commercial Co. Ltd., 139 ITD 108 3. ITO Vs. RBK Sharebroking Pvt. Ltd., [2013] 54 ITCL 164 4. Dabur India Ltd. Vs. ACIT, [2013] 145 ITD 175 5. CIT Vs. State Bank of Travancore, 203 Taxman 639 6. Cheminvest Ltd. Vs. ITO, [2009] 121 ITD 318 9. We have considered the submissions of the parties and perused the orders of revenue authorities as well a .....

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g the year is to the tune of ₹ 4,60,64,752. . As against such investments, as seen from the balance sheet sources of funds of assessee are share capital of ₹ 58,35,40,000 and unsecured loans of ₹ 7,84,25,062. Secured loans from banks and financial institutions during the year was to the tune of ₹ 12,25,39,051. From the aforesaid facts, it becomes clear that assessee was having substantial amount towards its own fund for making investments. Though, ld. DR tried to make out .....

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als clearly demonstrate that assessee was having sufficient surplus funds available with it to make investments. That being the case, a presumption cannot be made that assessee has utilized borrowed funds towards making investments. More so, when the secured loans were sanctioned by banks and financial institutions with conditions attached and material on record also show that assessee has utilized the same for the purpose for which they were obtained as there is substantial increase in the valu .....

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made. The Hon ble P & H High Court in case of CIT Vs. Hero Cycles Ltd. (supra) while dealing with the issue of disallowance u/s 14A held that there must be a finding of fact that interest expenditure was incurred for earning exempt income. The relevant observation of the Hon ble High Court is extracted hereunder: Whether, in a given situation, any expenditure was incurred which was to be disallowed, is a question of fact. The contention of the Revenue that directly or indirectly some expendi .....

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igh Court, would still apply even after introduction of Rule 8D of IT Rules. The Hon ble Bombay High Court in case of CIT Vs. Reliance Utilities and Power Ltd., 313 ITR 340 while examining disallowance of interest expenditure on the allegation that interest free advances were made to sister concerns, held that when the assessee has both interest bearing funds as well as non interest bearing surplus fund, presumption would be non-interest bearing surplus funds have been advanced to sister concern .....

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