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2015 (10) TMI 1007

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..... est 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 invoking the jurisdiction being wrong, we cannot uphold the action of Pr.CIT in coming to the conclusion that AO's order is erroneous. 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 disallowance per se was prior to the proceedings u/s. 263. As stated, Ld.CIT(A) 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 is .....

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..... ide order dt. 30-03-2013, determined the total income at ₹ 3,28,29,17,467/-. In determining the income, AO examined assessee's statement of accounts, called for certain clarifications, explanations and vide para 6 of the order, disallowed the interest u/s. 36(1)(iii) of the Act to an extent of ₹ 7,85,32,019/-. In disallowing 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 investments, a comparative analysis of share funds, loans and investments month-wise was prepared and on the basis of investment, AO quantified the disallowance u/s. 36(1)(iii) at ₹ 7,85,32,019/-, which was disallowed. 3.1 In addition to the disallowance u/s. 36(1)(iii), AO also examined the provisions of Section 14A and gave a finding that assessee d .....

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..... ves 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 comprised of Share Capital and accumulated Reserves and Surplus. From the month wise comparative chart attached (as annexure-1), it can be seen that at no point of time, the investments were more than the sum of Share Capital and Reserves. Hence, the assessee has sufficient non interest bearing funds to source the entire investment during the F Y 2009-10. (iii) Once the sufficiency of. assessee's own non interest bearing funds is established, it is to be assumed that the investment were made 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 .....

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..... s identical for the AY 2009-10 that has been decided 'by the Hon'ble Hyderabad Bench of ITAT that has ruled that Rule 8D(ii) cannot be applied as the assessee has mentioned that it's own non interest bearing funds 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 by the AO which is prejudicial to the interest of the Revenue and deserves to be set aside. By opining as such, Ld. Pr.CIT-III, set aside the order with a direction to re-do the assessment denovo as per law. Assessee is aggrieved and raised the above grounds. 7. Ld. Counsel for assessee referring to the sequence of events and the stand taken by the Pr.CIT submitted that applying fixed formula without considering the dates of investment as was done by the Ld. Pr.CIT was not .....

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..... /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 any disallowance it has to be established on record how much borrowed 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 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 disallowance per se was prior to the proceedings u/s. 263. As st .....

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..... med by the AAC 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 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 the assessee. It is not as if the power of the AAC was confined to only those questions which had been raised before him by the assessee. He has widest jurisdiction. The Commissioner has no right of appeal from an order of the assessment passed by the ITO. The right of appeal is confined to the assessee only and until section 33B was enacted the position in law was that if the assessee did not appeal against the order of the assessment, that order became final and conclusive. If the assessee appealed 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; h .....

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..... pinion in the matter. It is only in cases of lack of inquiry that such a course of action would be open. An assessment order made by the Income Tax Officer cannot branded as erroneous by the Commissioner simply because, according to him, the order should have been written more elaborately. There must be some prima facie material on record to show that the tax which was lawfully exigible has not been imposed or that by the application of the 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. The Hon'ble Supreme Court in the case of Malabar Industrial Company Ltd., Vs. CIT [243 ITR 83 (SC)] held that the phrase 'prejudicial to the interest of Revenue' had to be read in conjunction with an erroneous order passed by AO. Every loss of .....

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