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2015 (11) TMI 1067 - ITAT MUMBAI

2015 (11) TMI 1067 - ITAT MUMBAI - TMI - Disallowance of interest u/s 36(1)(iii) - Held that:- During the year under consideration the assessee has furnished the details of utilization of loans. A perusal of the same shows that the assessee has used major portion of the loans for purchasing shares and giving interest bearing advances. With regard to the interest free advances of ₹ 1.90 crores given by the assessee, we notice that the assessee is having funds as explained. In view of the av .....

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clearly held in the case of CCI Ltd (2012 (4) TMI 282 - KARNATAKA HIGH COURT) that the shares held as stock in trade should be excluded for the purpose of computing disallowance u/s 14A of the Act, since they can not be said to be the “investment” made for the purpose of earning dividend income. In the case of India Advantage Securities Ltd (2015 (6) TMI 140 - BOMBAY HIGH COURT), the Hon’ble Bombay High Court has noticed that the CIT(A) took into account the words of the Rule and found that the .....

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15 - Dated:- 28-10-2015 - Shri B. R. Baskaran, AM And Lalit Kumar, JM For the Appellant : Shri Rajiv Khandelwal For the Respondent : Ms. Anu Aggarwal ORDER Per B. R. Baskaran All the three appeals filed by the assessee are directed against the orders passed by Ld CIT(A)-8, Mumbai for assessment years 2009-10 to 2011-12. All these three appeals were heard together and are being disposed of by this common order, for the sake of convenience. 2. The facts relating to the case are that the assessee i .....

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ies, where as it has availed interest bearing loans and was paying interest. The assessee submitted that the interest free advances were given to purchase shares. However, the AO noticed that the said advances have been returned back. Hence, the AO took the view that the explanation about purchase of shares is unreliable and accordingly disallowed a sum of ₹ 28.86 lakhs out of interest expenditure. It was confirmed by Ld CIT(A) and hence the assessee took the matter to the ITAT. The Tribun .....

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to pages 102 to 106 of the paper book wherein the details of utilization of loans taken by the assessee are given. The Ld A.R submitted that the unsecured loans have been fully utilized for the purposes of business only. It was further submitted that the assessee has also availed interest free unsecured loans from M/s MW infra holding Pvt Ltd to the tune of ₹ 7.60 crores; from M/s Triveni Management consultancy services Ltd to the tune of ₹ 31 lakhs and from M/s Global Absolute Resea .....

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we find that there is merit in the submissions made by Ld A.R. First of all, the assessee s claim that the interest free advances were given in connection with the purchase of shares was not disproved with any material. It is an admitted fact that the assessee s business consisted of investing and trading in shares. Hence, the explanations furnished by the assessee should not have been rejected without bringing any material on record. Secondly, we notice that the Ld CIT(A) has not considered th .....

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essee has availed interest free unsecured loans to the tune of ₹ 8.10 crores. Besides the above, the assessee is having own funds also. Hence, in our view, the decision rendered by the Hon ble Bombay High Court in the case of Reliance Utilities and Power Ltd (supra) is applicable to the facts of the present case. Since the interest free funds available with the assessee is more than the alleged interest free advances, we are of the view that the tax authorities are not justified in disallo .....

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oans taken by it. The AO examined about the utilization of loan and took the view that the interest to the extent of ₹ 43,72,880/- is related to the business of purchase of shares. However, the AO noticed that the assessee has given interest free advances to the tune of ₹ 1.90 crores. The AO computed interest on the above said interest free advances under product method and the same worked out to ₹ 40,04,575/- and the same was disallowed. The Ld CIT(A) confirmed the same. 8. We .....

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age 112 of the paper book. Own Funds in the form of Share holders fund Less accumulated losses 109.97 lakhs Interest free unsecured loans:- Hydragen Infrastructures Pvt Ltd 50.00 Sofkit Educom Pvt Ltd 400.00 - 450.00 lakhs - 559.97 lakhs In view of the availability of interest free funds, the disallowance of interest made by the tax authorities is liable to deleted in view of the decision of Hon ble Bombay High Court in the case of Reliance Utilities & infrastructre Ltd (supra). Accordingly, .....

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d the said addition. 10. The Ld A.R submitted that the assessee is a trader in shares and hence he has held the shares as stock in trade only. He further submitted that the disallowance as per rule 8D is required to be made only if the shares are held as investments. In support of this proposition, he placed his reliance on the following case law:- (a) CCI Ltd Vs. JCIT (2012)(250 CTR 291) (b) CIT Vs. India Advantage Securities Ltd (ITA No.1131 of 2013 dated 17-03-2015 of Bombay High Court) (c) G .....

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the decision of Hon ble Karnataka High Court rendered in the case of CCI Ltd (supra). The order of the Tribunal was found by Hon ble High Court of Bombay to be neither perverse nor vitiated by any error law apparent on the face of the record. Accordingly, the Ld A.R prayed that the shares held as stock in trade should be excluded for computing the disallowance u/s 14A of the Act. 11. On the contrary, the Ld D.R placed strong reliance on the order of Ld CIT(A) on this issue. 12. We heard the part .....

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und that the figures as derived by the Assessing officer cannot be taken into consideration. The Ld CIT(A) had observed that, one can at best disallow the expenses which are incurred for earning dividend income and for that purpose, the figures under the head Investment could be taken and some charges apportioned for the purpose of computing expenses. We further notice that the decision rendered in the case of CCI Ltd (supra) has been followed by the co-ordinate benches of Tribunal in the case o .....

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f CCI Ltd (supra) has already been followed by the Tribunal in the case of Ganjam Trading Co.P.Ltd (supra) and also the Special Bench of the Tribunal in the decision rendered in ITO V/s.Daga Capital Management (P.) Ltd. [2009] 117 ITD 169 (MUM.) (SB). However, following the decision of Hon ble Karnataka High Court in the case of CCI Ltd (supra), the Tribunal held that the disallowance of interest in relation to dividend received from shares held as stock-in-trade cannot be made. 14. In the resul .....

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the following paragraphs 3 to 22. 3. We shall first take up the appeal filed for assessment year 2009-10, wherein the assessee is challenging the addition made u/s 36(1)(iii)of the Act. The assessing officer noticed that the assessee has given interest free advances to certain parties, where as it has availed interest bearing loans and was paying interest. The assessee submitted that the interest free advances were given to purchase shares. However, the AO noticed that the said advances have be .....

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rendered by the Hon ble Bombay High Court in the case of Reliance Utilities & Power Ltd (313 ITR 340) is not applicable to the facts of the instant case and accordingly confirmed the addition again. 4. We heard the parties on this issue and perused the record. At the time of hearing, the Ld A.R invited our attention to pages 102 to 106 of the paper book wherein the details of utilization of loans taken by the assessee are given. The Ld A.R submitted that the unsecured loans have been fully u .....

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s. He further submitted that the assessee had given advances only to purchase the shares and hence the tax authorities are not justified in rejecting the claim without bringing any other material on record. On the contrary, the Ld D.R placed strong reliance on the order passed by Ld CIT(A). 5. Having heard rival contentions, we find that there is merit in the submissions made by Ld A.R. First of all, the assessee s claim that the interest free advances were given in connection with the purchase .....

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capital, share application money and reserves and surplus are more than the amount of interest free advances given by the assessee. Hence, even if the said advances were not considered to be for the purposes of business of the assessee, disallowance of interest is not warranted. We notice that the interest free advances noticed by the AO were ₹ 5.75 crores, whereas the assessee has availed interest free unsecured loans to the tune of ₹ 8.10 crores. Besides the above, the assessee is .....

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allowance made out of interest expenditure. 6. We shall now take up the appeal filed for assessment year 2010-11, wherein following issues are agitated:- (a) Disallowance of interest u/s 36(1)(iii) (b) Disallowance made u/s 14A of the Act. 7. In this year also, the assessing officer noticed that the assessee has paid interest expenditure of ₹ 48,92,738/- on the unsecured loans taken by it. The AO examined about the utilization of loan and took the view that the interest to the extent of &# .....

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, the assessee has furnished the details of utilization of loans in pages 47 to 49 of the paper book. A perusal of the same shows that the assessee has used major portion of the loans for purchasing shares and giving interest bearing advances. With regard to the interest free advances of ₹ 1.90 crores given by the assessee, we notice that the assessee is having following funds as explained in page 112 of the paper book. Own Funds in the form of Share holders fund Less accumulated losses 10 .....

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ade out interest expenditure. 9. The next issue relates to the disallowance made u/s 14A of the Act. In this year, the assessee earned dividend income of ₹ 2,52,781/-, but did not make any disallowance u/s 14A of the Act. However, the assessing officer worked out the disallowance as per the provisions of Rule 8D of I.T rules at ₹ 55,46,090/- and added the same. The Ld CIT(A) also confirmed the said addition in principle. However, since there was some error in the computation of avera .....

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) (b) CIT Vs. India Advantage Securities Ltd (ITA No.1131 of 2013 dated 17-03-2015 of Bombay High Court) (c) Ganjam Trading Co. P Ltd Vs. DCIT (ITA No.1384/Mum/2007 dated 20-07-2012) The Ld A.R further submitted that the assessing officer, in the case of India Advantage Securities Ltd (supra) had worked out disallowance as per Rule 8D for the assessment year 2008-09 at ₹ 48,73,485/-, but the Ld CIT(A) computed the disallowance by excluding the value of shares held as stock in trade. Accord .....

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was upheld by the Tribunal by following the decision of Hon ble Karnataka High Court rendered in the case of CCI Ltd (supra). The order of the Tribunal was found by Hon ble High Court of Bombay to be neither perverse nor vitiated by any error law apparent on the face of the record. In view of the above, the Ld A.R prayed that the shares held as stock in trade should be excluded for computing the disallowance u/s 14A of the Act. 11. On the contrary, the Ld D.R placed strong reliance on the order .....

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account the words of the Rule and found that the figures as derived by the Assessing officer cannot be taken into consideration. The Ld CIT(A) had observed that, one can at best disallow the expenses which are incurred for earning dividend income and for that purpose, the figures under the head Investment could be taken and some charges apportioned for the purpose of computing expenses. The decision rendered by the Tribunal in the case of India Advantage Securities Ltd (supra) was found to be n .....

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of ITO V/s. Daga Capital Management (P.) Ltd. [2009] 117 ITD 169 (Mum)(SB) also. However, following the decision of Hon ble Karnataka High Court in the case of CCI Ltd (supra), the Tribunal held that the disallowance of interest in relation to dividend received from shares held as stock-in-trade cannot be made. In view of the above, by following the observations made by Hon ble jurisdictional High Court in the case of India Advantage Securities Ltd (supra) and the decision rendered by Hon ble Ka .....

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notice that the assessee has held all the shares as stock in trade. The value of stock in trade at the end of year, i.e., as on 31.3.2010 was ₹ 16.82 crores. The assessee has sold shares for a sum of ₹ 11.07 crores and the cost of shares so sold by the assessee was ₹ 10.67 crores. Thus the assessee has earned gross profit of ₹ 40.00 lakhs, where as the dividend received by the assessee was ₹ 2.52 lakhs only. Thus we notice that the dividend received by the assessee .....

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hs alone was related to the purchase of shares. The remaining loans have been used to give advances to others. We may at this stage notice that the co-ordinate bench of Tribunal has held in the case of DCIT Vs. Damani Estates & Finance Pvt Ltd (ITA No.3029/Mum/2012 dated 17.07.2013) that the interest expenditure to the extent of 20% may be apportioned towards the dividend income, by considering the facts prevailing in that case. However, in the instant case, we are of the view that there is .....

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the dividend income as exempt, we feel that a reasonable amount out of other expenses should be disallowed. The assessee before us has furnished copies of Rule 8D workings made by the Ld CIT(A) in the case of India Advatage Securities Ltd (supra) at page 35 of the case law paper book. We notice that the Ld CIT(A), in the case of India Advantage Securities Ltd (supra), has disallowed 10% of bank charges under Rule 8D(2)(i). We further notice that the Hon ble Bombay High Court, in its order, has o .....

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der of Ld CIT(A) on this issue and direct the AO to restrict the addition to 5% of the dividend income. 16. We shall now take up the appeal filed for assessment year 2011-12, wherein also following two issues are agitated:- (a) Disallowance out of interest expenses. (b) Disallowance made u/s 14A of the Act. 17. The first issue relates to the disallowance made u/s 36(1)(iii) of the Act. In this year also, the AO noticed that the closing balance of interest free advances to the tune of ₹ 1.9 .....

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M/s Essem Consultacy P Ltd subsequent to June, 2010 and also receiving back the amount. Hence the AO took the view that the interest should be worked out on the debit balances of M/s Essem Consultancy P Ltd and accordingly worked out the interest under product method at ₹ 5.80 lakhs and disallowed the same. The Ld CIT(A) also confirmed the same. 18. However, the contention of the assessee is that the interest free funds available with the assessee in the form of share holders funds (Rs.1.3 .....

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icient to cover up the above said advances. Further, we notice from the working of interest given in the assessment order that the assessing officer has worked out interest only on debit balances and he did not consider the availability of credit balances on some other days. In our view, the approach of the AO would give distorted working of interest. In any case, since the assessee was possessing sufficient amount of interest free advances, we are of the view that the decision rendered by the j .....

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