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2016 (1) TMI 979 - ITAT PUNE

2016 (1) TMI 979 - ITAT PUNE - TMI - Disallowance u/s 14A - satisfaction formed by the Assessing Officer before working out the disallowance - Held that:- Working of disallowance as per Rule 8D of the Rules was furnished along with letter dated 09.10.2011. In view of the above said findings of the Assessing Officer, wherein the Assessing Officer had noted that the assessee had declared Nil amount as the amount to be disallowed in terms of section 14A of the Act and thereafter, issued show cause .....

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ction 14A of the Act.

In view of the business funds available with the assessee and the business assets created by the assessee, we find no merit in the claim of assessee that the amount due to the Sundry Creditors was the interest free funds available with the assessee for making the investments and hence, no disallowance could be made out of interest expenditure. Admittedly, the funds available with the assessee were out of common pool i.e. on account of capital investment by the pa .....

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at in view of the ratio laid down by the Hon’ble High Court of Karnataka in Canara Bank Vs. ACIT (2014 (6) TMI 929 - KARNATAKA HIGH COURT), where the assessee has not incurred any expenditure since the dividend was re-invested in the mutual funds itself, no expenditure was attributable to earn the said income. Admittedly, the assessee has not incurred any direct expenses for making the aforesaid investments. However, some part of the administrative expenses is attributable for making the aforesa .....

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3/PN/2013 - Dated:- 30-10-2015 - MS. SUSHMA CHOWLA, JM AND SHRI PRADIP KUMAR KEDIA, AM For The Appellant : Shri S. K. Tyagi and Shri Abhay Gundecha For The Respondent : Shri Achal Sharma, JCIT ORDER PER SUSHMA CHOWLA, JM : This appeal filed by the assessee is against the order of CIT(A)-V, Pune dated 07.11.2012 relating to assessment year 2009-10 passed under section 143(3) of the Income-tax Act, 1961. 2. Through the assessee has raised several grounds of appeal but the Ld. Authorized Representa .....

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tc.. During the course of assessment proceedings, the Assessing Officer noted that the assessee had earned exempt income of ₹ 24,18,535/- i.e. the dividend on mutual fund. The Assessing Officer also noted that in Form No.3CD of audit report in para 17(1), the assessee had declared NIL amount as amount inadmissible as a deduction in terms of section 14A of the Act. The Assessing Officer, in this regard, issued the questionnaire dated 21.07.2011 particularly para 25 thereof and the assessee .....

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redemption, dividend re-investment and additional investment from accumulated balances. According to the assessee, the provisions of section 14A and Rule 8D of the Income Tax Rules, 1962 (in short the Rules ) were not applicable, since there was no direct cost to earn exempt income. The contention of the assessee before the Assessing Officer was that only direct expenses incurred for earning income would be covered by section 14A of the Act and since the assessee had not incurred any direct expe .....

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capital account being interest bearing one, any surplus out of the profits became an interest bearing amount as far as the firm was concerned. The situation would have been totally different had partner s capital not attracted any interest. Therefore, every investment whether taxable or not, whether used for business or otherwise from the surplus fund would directly attract interest liability since such surplus fund out of profits of the business becomes partner s capital. Hence in this case the .....

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the Act r.w. Rule 8D of the Rules are squarely applicable. The Assessing Officer computed the disallowance under section 14A of the Act r.w. Rule 8D of the Rules by taking the average of value of investment and average of total assets and also made the disallowance both under Rule 8D(ii) and 8D(iii) of the Rules. The Assessing Officer computed the disallowance under section 14A of the Act at ₹ 11,40,553/-. 4. The CIT(A) considered the argument of the assessee that the partner s capital was .....

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th the assessee both were interest bearing as well as interest-free. Therefore, the assessee s claim that no interest bearing funds were utilized for investment in mutual funds was not accepted by the CIT(A). The CIT(A) relied on the decision of Chennai Bench of the Tribunal in M/s Lakshmi Ring Travellers vs. ACIT in ITA No.2083(Mad)/2011 for assessment year 2008 -09. Reliance placed by the assessee on the ratio laid down by the Hon ble Bombay High Court in CIT vs. Reliance Industries Ltd. repor .....

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nce under section 14A of the Act. The CIT(A), thus, upheld the order of t he Assessing Officer in disallowing the sum of ₹ 11,40,553/- under section 14A of the Act r.w. Rule 8 D of the Rules. 5. The assessee is in appeal against the aforesaid order of the CIT(A). 6. The Ld. Authorized Representative for the assessee has furnished written submissions and had also made oral submissions. The Ld. Authorized Representative for the assessee before us submitted that the assessee had earned divide .....

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es was made in assessment year 2008-09 and a sum of ₹ 1.30 crores was invested during the year under consideration, making total investment at ₹ 4.55 crores. Our attention was drawn to the summary of sources and utilization of funds prepared by the assessee, copy of which is placed at page 10 of the Paper Book. It was pointed out by the assessee that non-interest bearing funds available with the assessee firm were to the extent of ₹ 10,29,39,131/-, whereas the investment in the .....

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he assessee further relied upon the ratio laid down by the Hon ble Bombay High Court in CIT vs. HDFC Bank Ltd. reported in (2014) 107 DTR 140 (Bom) and CIT vs. Reliance Utilities & Power Ltd. reported in (2009) 313 ITR 340 (Bom) and the decision of Hon ble Punjab & Haryana High Court in CIT vs. Hero Cycles Ltd. reported in (2010) 323 ITR 518 (P&H). It was further pointed out by the Ld. Authorized Representative for the assessee that the reliance of CIT(A) on the decision of the Chenn .....

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er Rule 8D(ii) and 8D(iii) of the Rules. The assessee may not have incurred any direct expenditure under Rule 8D(i) of the Rules, but the disallowance was warranted in view of provisions of section 14A r.w. Rule 8D of the Rules. The Ld. Departmental Representative for the Revenue further pointed out that where the firm was paying interest on the capital of the partners which money was available to the assessee for investment in mutual fund, interest relatable to such investment was disallowable .....

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f interest which is not directly attributable to any particular of income is to be considered for working out the disallowance. Second plea raised by the assessee that the Assessing Officer had not recorded any satisfaction, the Ld. Departmental Representative for the Revenue referred to para 3.2 at page 3 of the assessment order and pointed out that after noting the fact that the assessee had disallowed NIL expenditure relatable to earning of exempt income, the Assessing Officer had show-caused .....

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ll determine the amount of expenditure incurred in relation to such income, which does not form part of total income under the Act, in accordance with the method prescribed, where the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of such expenditure relating to the income. Under Rule 8D of the Rules, the method is prescribed for computing the disallowance under section 14A of the Act. Rule 8D(2)(i) of the Rules talks of the amount of expenditure .....

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lf percent of the average of value of investment, income from which does not or shall not form part of total income, as appearing on the first and last day of the previous year, in the Balance Sheet, is to be disallowed while computing expenditure relatable to income not includable in total income. The first grievance of the assessee before us in the present case is that where the Assessing Officer has not recorded satisfaction under section 14A(2) of the Act, no disallowance under the said sect .....

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essee had incurred interest expenditure of ₹ 51,392/- against the vehicle loan. The partnership firm had further incurred the expenditure of interest paid to the partners capital account totaling ₹ 36,42,957/-. With regard to the investment of ₹ 4.5 crores, the assessee claimed that investment of ₹ 3.25 crores in mutual funds was made for the first time in February, 2008. Further, sum of ₹ 1.30 crores was invested on 17.09.2009. The said investments were made out of .....

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icer vide para 3.1 at pages 2 and 3 noted that in the audit report furnished in Form No.3CD, the assessee had declared Nil amount as inadmissible as a deduction in terms of section 14A of the Act. The Assessing Officer issued a questionnaire dated 21.07.2011 to the assessee and vide para 25, the assessee was required to furnish the details of expenditure for earning tax free income and also to explain as to why disallowance should not be made as per the provisions of section 14A of the Act. In r .....

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sions and it was contended that section 14A of the Act was not applicable since there was no direct expenditure. However, working of disallowance as per Rule 8D of the Rules was furnished along with letter dated 09.10.2011. In view of the above said findings of the Assessing Officer, wherein the Assessing Officer had noted that the assessee had declared Nil amount as the amount to be disallowed in terms of section 14A of the Act and thereafter, issued show cause notice to the assessee to explain .....

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ming to the second aspect of the issue i.e. whether any amount is disallowable as being expenditure relatable to earning of income, which does not form part of the total income, in line with the provisions of Rule 8D of the Rules. The case of the assessee was that no direct expenditure was incurred, hence, the provisions of Rule 8D of the Rules were not applicable. As pointed out by us in the paras hereinabove, under Rule 8D(2)(i) of the Rules, in case any direct expenditure is incurred which is .....

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dministrative expenditure as per Rule 8D(2)(ii) and (iii) of the Rules, respectively. The assessee is a partnership firm and as per the terms of Partnership Deed, the assessee firm is paying interest on the capital balance of the partnership firm. The copy of the Balance Sheet as on 31.03.2008 is placed at page 4 of the Paper Book, which shows closing balance of the partners capital account at ₹ 3,60,49,025/-. The copy of Balance Sheet as on 31.03.2009 is placed at page 7 of the Paper Book .....

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al account of partners Rs.461.70 lakhs Secured loans Rs.29.61 lakhs Sundry Creditors Rs.952.54 lakhs Advances from customers Rs.71.78 lakhs Outstanding liabilities Rs.0.50 lakhs 11. On comparison of the assets owned by the assessee and the liabilities outstanding against the assessee, it transpires that in case the assets, loans and advances and the liabilities relating to carrying on of the business are segregated, then the same balance each other leaving the capital account of the partners at .....

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#8377; 71.78 lakhs. We find no merit in the plea of the assessee because on one hand, there was Sundry Creditors and the advances from customers, on the other hand, there was Sundry Debtors at ₹ 208.38 outstanding and also there was deposit of ₹ 229.18 lakhs and Margin money of ₹ 242.08, besides other investment and the fixed assets. The funds available with the assessee were a common pool of funds, which included both the interest bearing and interest free funds. Where the ass .....

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s in mutual funds. On the other hand, if the assessee s profit reserves or its surplus funds in the form of capital account of the partners, did not bear any burden of interest, then the same could be said to be available with the assessee. In the absence of the assessee having failed to establish the source of making the aforesaid investments other than from common pool of funds, the provisions of section 14A of the Act are attracted and are squarely applicable. The provisions of Rule 8D of the .....

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s available with it in the form of Sundry Creditors and advances from customers. The said liabilities of the assessee are relatable to its business and even the investments in the assets held by the assessee squarely balance and where the assessee is paying interest on the capital balance of the partners totaling ₹ 4.61 crores and the investment on the other hand being ₹ 4.55 crores along with interest, the disallowance worked out by the CIT(A) merits to be upheld. 12. The learned Au .....

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presentative for the assessee that for certain funds i.e. interest bearing were utilized for earning taxable income, which partly was funded from the interest bearing funds and partly from non-interest bearing funds i.e. the investment in the fixed assets and margin money with the banks. With regard to balance investments i.e. on account of mutual funds and also in its business current assets i.e. Sundry Debtors, stock in trade, advances to employees, balance with the Excise Department, Balance .....

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nt of funds being filed by the assessee, we find no merit in the reliance placed upon by the learned Authorized Representative for the assessee on the aforesaid re-drafted Balance Sheet. As pointed out by us in the paras hereinabove, it is incomprehensive to understand that the business funds on account of so-called Sundry Creditors were utilized for making investments in mutual funds. The business funds being available in a common pool of funds, which were for both interest bearing and non-inte .....

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by the Tribunal that the assessee s own funds and other non-interest bearing funds were more than investment in tax free securities, then it would be presumed that the investment was made by the assessee even with interest free funds of it. The Hon ble Bombay High Court had upheld the order of Tribunal in deleting the disallowance made under section 14A of the Act. However, the facts of the present case are at variance where the assessee has failed to establish its case of availability of inter .....

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ntroduction of provisions of Rule 8D of the Rules i.e. the method to be applied for computing disallowance under section 14A of the Act, hence, the same is not applicable. Similarly, the decision of Hon ble Delhi High Court in Maxopp Investment Ltd. & Ors. Vs. CIT (2012) 247 CTR (Del) 162 is relate to assessment years 1998-99 to 2005-06 i.e. to the period when the provisions of Rule 8D of the Rules are not applicable. The learned Authorized Representative for the assessee also placed relianc .....

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funds generated or available with the company, if the interest free funds were sufficient to meet the investments. The nature of interest free funds in the case of assessee before us as pointed out in the paras hereinabove is on account of Sundry Creditors, which are clearly relatable to the business carried on by the assessee and such funds cannot be said available for making investments and not for carrying on the business. On the other hand, the assessee had invested in the business assets i. .....

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