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2015 (10) TMI 1007 - ITAT HYDERABAD

2015 (10) TMI 1007 - ITAT HYDERABAD - TMI - Revision u/s 263 - non-disallowance of an alleged amount under the provisions of Section 14A - Held that:- Issue of disallowance u/s. 36(1)(iii) and also 14A was examined by the AO in detail in the scrutiny assessment. As briefly stated above, AO disallowed part of the interest claim on the reason that assessee has invested funds in the mutual funds diverting from business purposes. He quantified the disallowance at ₹ 7,85,32,019/- based on the p .....

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d fund has been invested in the mutual funds and for what period. AO certainly cannot charge interest for the entire year when the investment is made by assessee for a month or few days. Further, the link is required to be established between the actual amount of investment made out of borrowed funds'. In view of the above, the Pr.CIT's action in concluding that amount to be disallowed under Rule 8D(2)(ii) at ₹ 13,40,73,873/- is without any basis. To that extent, the basic presumption for .....

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passed the order as early as on 24-10-2014, whereas Pr.CIT initiated the proceedings by the show cause letter dt. 03-03-2015. Thus, the issue having been adjudicated by the CIT(A) both u/s. 36(1)(iii) as well as u/s. 14A r.w. Rule 8D, the Pr.CIT can no longer exercise jurisdiction to consider the same issue u/s. 263 - Decided in favour of assessee. - ITA No. 717/HYD/2015 - Dated:- 18-9-2015 - Smt. P. Madhavi Devi, JM And B. Ramakotaiah, AM For the Petitioner : Shri G V N Hari, AR For the Respon .....

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the following grounds contesting the action of Pr.CIT: "2. The learned Pr. Commissioner of Income Tax is not justified in assuming jurisdiction U/s. 263 of the Act in as much as the assessment order dt. 30-03-2013 U/s. 143(3) of the Act is neither erroneous nor prejudicial to the interests of revenue. 3. The learned Pr. Commissioner of Income Tax is not justified in directing the assessing officer to re-work the disallowance, already calculated as per provisions of section 36(1)(iii), by a .....

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ncome Tax ought to have appreciated that the issue of disallowance U/s. 36(1)(iii) and section 14A is the subject matter of appeal filed before the learned CIT(A) and as such, it is no more within the jurisdiction of Commissioner of Income Tax U/s. 263 of the Act to consider the sufficiency of disallowance in respect of this issue". 3. Before adverting to the merits of the action of the Pr.CIT, it is necessary to mention the chronology of events leading to the present order. Assessee is eng .....

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ing the above amount, the AO noticed that assessee has invested huge amounts of money in mutual funds which is not the business activity of assessee. He also noticed that dividend income earned thereon has been claimed as exempt from tax. He was of the opinion that assessee diverted the money to non-business activity, interest expenditure incurred on such non-business activity was not allowable as per the provisions of Section u/s. 36(1)(iii). After obtaining the details of source of funds and i .....

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all units to the extent of ₹ 5771.02crores and earned dividend of ₹ 3,52,19,276/- which was claimed as exemption under tax. AO gave a finding that there is no direct expenditure to be disallowed under Rule 8D(i) and interest expenditure on such funds under Rule 8D(2)(ii) was disallowed u/s. 36(1)(iii) and therefore, there is nothing which requires to be further disallowed under the above two clauses of Rule 8D. Thereafter, he disallowed 0.5% of average investment under Rule 8D(2)(iii .....

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sallowance made u/s. 36(1)(iii). 4. After this order of CIT(A), Ld. Pr.CIT examined the record and came to the conclusion that the order passed by the AO was erroneous insofar as it is prejudicial to the interest of the Revenue on the reason that the disallowance under Rule 8D(2)(ii) was to the tune of ₹ 13,40,73,873/-, whereas the AO disallowed only part amount, therefore, there was short computation of income of ₹ 5,51,41,860/-. Even though the show cause notice issued on 03-03-201 .....

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herein such investment is among the main objectives of the business and the assessee is duly registered with the ROC and RBI as a Non-Banking Financial Company (NBFC) with the same set of objectives that have been accepted as being the main objectives of a NBFC. (ii) Durinq the scrutiny proceedings, the assessee stated that the entire investments in Mutual Funds (the dividend income where from is exempt from tax) has been made out of interest free funds available with, the company. These funds c .....

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out of such funds and mere presence of loan or interest bearing funds in the balance sheet should not be the basis of assuming that such funds were used for investments. (iv) The assessed is well within its legal rights to use its 'own funds for any commercial 'purpose and / or to borrow money for its commercial operations. (v) the assessee stated that the funds invested were not out of the borrowed interest bearing loans from banks. (vi) The basis for application of section 14A is the i .....

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eholders nor the Board of Directors will allow such a loss making investment policy. Hence only the idle working capital and non interest bearing funds of the company has been invested in liquid daily redeemable funds. (viii) As substantiated by submitted sample copies of Loan agreements between the company and the banks, the company is not allowed to utilize the loans for any purpose other than disbursements to borrowers. The company has to disburse the entire borrowing, create a detailed data .....

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se there is an earning of an income which is exempt. For application of section 14A, a clear direct and distinct connection has to be established between the disallowed expenses and the exempt income. In the current case of the assessee, it has stated that there is no connection between, the exempt income and the interest expenses. (xi) During the scrutiny proceedings, the assessee has stated that: (a) No part of interest bearing loan funds were used as a source of mutual fund investments. (b) T .....

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nds were available and were used for dividend yielding investments. Also the learned CIT(A) has applied the same decision to the appeal against the order u/s. 143(3) for AY 2010-11". 6. Ld. Pr.CIT however, was of the opinion that AO has not made proper enquiry and therefore, the order is erroneous and prejudicial to the interest of Revenue and as AO failed in his basic duty to examine these aspects while completing the scrutiny assessment, an error has crept in the assessment order framed b .....

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ssue was examined by the ITAT in earlier year wherein, the ITAT opined that for disallowance of interest, the period of investment is to be considered rather than mechanically disallowing for the whole of the period even though there is investment for a small period during the year. Thus, the view of Pr.CIT is contrary to the opinion of the ITAT in earlier year. 8. The next argument raised by the Ld. Counsel is with reference to the fact that the very same issue was subject matter of appeal befo .....

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ed in exercising jurisdiction u/s. 263. 10. Ld. DR however, relied on the detailed order of Pr.CIT, referred to the computation and decision of Hon'ble Delhi High Court in the case of Maxopp Investment Ltd and ors vs CIT 247 CTR 0162 for explaining Section 14A and Rule 8D, provisions of the Act and relied on the principle that the disallowance under Rule 8D(ii) was not subject matter of appeal before the CIT(A) and therefore, Pr.CIT was well within his rights to invoke the jurisdiction u/s. .....

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,019/- based on the period of investment during the year. Therefore, as far as quantification of interest on diversion of funds for investment in mutual funds are concerned, we cannot subscribe to the Ld. Pr.CIT's opinion of quantifying the amount on a formula under Rule 8D(2)(ii). This issue was already examined and adjudicated by the ITAT in ITANo.1653/Hyd/2012 dt 10-10-2014 in earlier assessment year AY 2009-10 wherein, ITAT was of the opinion (in para 6) that, 'However, for making an .....

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,73,873/- is without any basis. To that extent, the basic presumption for invoking the jurisdiction being wrong, we cannot uphold the action of Pr.CIT in coming to the conclusion that AO's order is erroneous. 11.1 Apart from the above, it is also to be seen that the very issue of disallowance of interest on borrowed funds, whether u/s. 36(1)(iii) or under Rule 8D(2)(ii) has been examined by the AO and is subject matter of appeal before the CIT(A). Further, CIT(A)'s order deleting the dis .....

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4 dt. 20-03-2015, has set aside the order u/s. 263 while deciding as under: "7. We have perused the records and find that the order passed by the CIT (A)-IV dated 31.08.2012 and the order passed u/s 263 is dated 20.03.2014 and hence the order of the CIT u/s 263 is subsequent to the order of the CIT (A) on the very same issue. Once a particular matter has been considered and decided in appeal, on the issue of inclusion of processing fee incurred during the year for inclusion of disallowance .....

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Income Tax Officer which can be revised by the Commissioner. Once the order of assessment is confirmed by the Appellate Assistant Commissioner or any order with regard to the assessment has been made by him, that becomes a final order of assessment and the only right the Department has is the right of appeal to the Appellate Tribunal. 8. Further, the Hon'ble High Court with respect to the Doctrine of merger at Page 676 held as follows: "9. We have considered rival contentions carefully. .....

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to the assessment has been made by him, that becomes a final order of assessment and the only right the department has is the right of appeal to the Tribunal. The right of the Commissioner continues so long as the order of the ITO is not merged in the order of the AAC. As regards the powers of the AAC, the learned Chief Justice has gone on to say that once an appeal was preferred by the assessee, it was open to the Commissioner to raise before the AAC any matter dealing with the assessment of t .....

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aled against the order of the ITO the widest jurisdiction was given to the AAC in appeal. He had the power to confirm, reduce, enhance or annul the assessment; he had the power to direct the ITO to make a fresh assessment and the only limitation on the exercise of jurisdiction was that if he wanted to enhance the assessment he must give the assessee reasonable opportunity of being heard against enhancement. It was concluded that the Commissioner completely went out of the picture once the AAC pa .....

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e same issue and therefore, Pr. CIT has no jurisdiction to revise u/s. 263 of the Act. 12. This can also be looked into in another angle. As already stated, the AO has examined the issues by issuing show cause notice in the course of scrutiny proceedings. Assessee vide letter dt. 11-10-2012 and subsequent clarifications placed in the Paper Book, has explained various investments, sources of funds in detail. It cannot be stated that AO has not examined the issues in the course of assessment. More .....

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. Hotz Industries Ltd89 CCH0192 Del HC dt 23-07-14., wherein it was held that CIT was not justified in exercising jurisdiction u/s. 263 and setting aside assessment order without arriving at finding that assessment order passed by AO was erroneous. 13. In the case of Spectra Shares & Scrips Pvt Ltd., Vs. CIT [354 ITR 35 (AP)], Hon'ble jurisdictional High Court has held as follows: "If there was an inquiry, even inadequate that would not by itself give occasion to the Commissioner to .....

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relevant statute on an incorrect or incomplete interpretation, a lesser tax than was just, has been imposed. The power of the Commissioner u/s 263(1) is not limited only to the material which was available before the AO and in order to protect the interests of the Revenue, the Commissioner is entitled to examine any other records which are available at the time of examination by him and to take into consideration even those events which arose subsequent to the order of the assessment". 14. .....

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