TMI Blog2016 (6) TMI 205X X X X Extracts X X X X X X X X Extracts X X X X ..... count of the expenditure attributable to earning of the exempt income other than the expenditure on account of IPO. Although the assessee has neither disallowed any expenditure on this account in the computation statement presumably on the ground that no expenditure has been incurred and although the AO has also not specifically discussed this issue in the body of the assessment order, however, it cannot be said that no expenditure has been incurred by the assessee for earning the tax free income. Considering the totality of the facts of the case, we are of the considered opinion that disallowance of ₹ 10 lakhs on adhoc basis on account of expenditure attributable for earning tax free income will meet the ends of justice - Decided partly in favour of assessee - ITA Nos.1656 & 1657/PN/2014 - - - Dated:- 29-4-2016 - SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM For The Assessee : Shri Nikhil Pathak For The Revenue : Shri Aseem Sharma ORDER PER R.K.PANDA, AM : The above 2 appeals filed by the assessee are directed against the common order dated 31-03-2014 of the CIT(A)-II, Pune relating to Assessment Years 2008-09 and 2009-10 respectively. For the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 507.46 crores. It was further submitted that out of the investment of ₹ 507.46 crores there are debentures to the tune of ₹ 104.33 crores and shares/debenture application money of ₹ 128.35 crores. The above amounts are to be excluded from the total investment since income arising there from is not exempt from tax. Thus, the net investment which may yield exempt income is only ₹ 278.07 crores which is much less than the total figure of share capital and free reserves available with the company. It was accordingly submitted that the assessee has surplus funds available which is much more than the investment made for earning the exempt income and therefore there is no question of making any disallowance of expenditure u/s.14A. 4. The assessee further submitted a chart giving the details of total investments made in various shares/securities/mutual funds etc. It was further submitted that the assessee company has made a public issue of shares in F.Y. 2007-08 and had received ₹ 275.54 crores as IPO fund which was kept in a separate bank account maintained with HSBC with bank vide A/c.No.105475297916 and the investments in mutual funds were made from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cr. 7. From the above, it is clear that as against availability of ₹ 424.05 crores for making investments the assessee has made investment of ₹ 507.46 crores which is higher than the interest free funds available for such investment. Thus, it is apparent that the difference of ₹ 83.35 crores has been invested through loan bearing funds. During the year the total loan bearing funds is ₹ 84.05 crores which is utilised for making investment. Therefore, the contention of the assessee that it has surplus funds to make investment of ₹ 507.4 crores is not only wrong but also based on mis-representation of facts. 8. As regards the reliance on the decision of Hon ble Bombay High Court in the case of Reliance Utilities and Power Ltd. (Supra) is concerned, the AO observed that the said judgment was given in respect of section 36(1)(iii) of the Act whereas the issue in the instant case is applicability of section 14A. Therefore, the said decision is not applicable to the facts of the present case. 9. He also rejected the contention of the assessee that amount of ₹ 424.05 crores was available for making investment which includes &# ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation to such investments. 4] The learned CIT(A) erred in holding that the assessee had utilized interest bearing borrowed funds for making tax free investments and thereby confirming the disallowance of ₹ 1,75,15,183/- made on account of proportionate interest expenditure computed as per the provisions of rule 8D(2)(ii) of the Income Tax Rules, 1962. 4.1] The learned CIT(A) erred in holding that - a. There was a nexus between the interest bearing funds raised and making of tax free investments and hence, the proportionate interest attributable to tax free investments was rightly disallowed by the learned A.O. by applying the provisions of section 14A r.w.r. 8D(2)(ii). b. The assessee had not furnished any material to establish that the interest bearing funds were not utilised for making tax free investments and therefore, the disallowance of interest u/s 14A r.w.r. 8D(2)(ii) was justified. 4.2] The learned CIT(A) failed to appreciate that the owned funds available with the assessee were far more than the amount of tax free investments and since there was no nexus between the interest bearing loans and making of tax free investments, there was no reason to hol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned exempt income and hence, if at all, any disallowance u/s 14A r.w.r. 8D is to be made in the case of the assessee, the investments on which no exempt income has been earned should have been excluded while computing the disallowance u/s 14A r.w.r. 8D. 7] Without prejudice to the above grounds, the assessee submits that the investment made in partnership firms is not a tax free investment since the income earned by the firm is subjected to income tax and hence, the investment in partnership firm may be excluded from the amount of 'tax free investments' while computing the disallowance u/s. 14A as per Rule 8D(2)(ii) and Rule 8D(2)(iii) of the Income Tax Rules, 1962. 8] Without prejudice to the above grounds, the assessee submits that the disallowance made is very high and may be reduced substantially. 9] The appellant craves leave to add, alter, amend or delete any of the above grounds of appeal. 11. The Ld. Counsel for the assessee referring to page 46 of the paper book drew the attention of the Bench to the chart showing tax free investments held as on 31-03-2008 and submitted that the total investments can be categorised into 3 parts : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ores and has determined the own capital and free reserves of the assessee company at ₹ 424.05 crores. Referring to the decision of Hon ble Bombay High Court in the case of Reliance Utilities and Power Ltd.(Supra) he submitted that this is not the way to look into the availability of own capital and free reserves as done by the AO. 14. In his alternate argument, he submitted that even if the calculation of the AO is assumed as correct, however, he has to exclude the investments whose income is otherwise taxable. Referring to page 46 of the paper book the Ld. Counsel for the assessee submitted that the total investment in shares of subsidiary/associate companies, investment in mutual funds and investment in partnership forms are only to the tune of ₹ 334,79,88,547/-. However, the AO while computing the investment of ₹ 507.4 crores has included the investment in debentures etc. whose income is taxable. Since the own capital and free reserves of the assessee company at ₹ 568.58 crores is much more than the tax free investments of ₹ 334.80 crores, therefore, in view of the decision of Hon ble Bombay High Court in the case of HDFC Ltd. vide Writ Petition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal Representative on the other hand heavily relied on the order of the AO and the CIT(A). He submitted that the assessee has earned huge exempt income and no disallowance has been made u/s.14A r.w. Rule 8D. He submitted that if the contention of the assessee that it has surplus funds for investment in shares/mutual funds/partnership firms is accepted, then there was no need to borrow funds. Referring to para 4.3 of the order of the CIT(A) at page 34 he submitted that the Ld.CIT(A) has given a finding that no separate accounts are maintained. The assessee could not show that borrowed funds are not utilised in making investment in shares/mutual funds, the income of which is exempt. 18. As regards the contention of the Ld. Counsel for the assessee that there is no recording of satisfaction, the Ld. Departmental Representative referred to page 8 of the assessment order and drew the attention of the Bench to the last paragraph where the AO has clearly mentioned that it is a fit case where provisions of section 14A are applicable and applying Rule 8D(2) he has calculated the disallowance u/s.14A. He accordingly submitted that the order of the CIT(A) be upheld. 19. The Ld. Counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss of the claim of the assessee, which is mandatorily required in terms of section 14A(2) of the Act, then his action of invoking Rule 8D of the Rules to compute the disallowance is untenable. He accordingly submitted that the grounds raised by the assessee should be allowed and the disallowance made by the AO and upheld by the CIT(A) should be deleted. 22. We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Ld.CIT in the instant case has directed the AO to cause necessary enquiries as per the provisions of section 14A r.w. Rule 8D and determine the disallowance in accordance with provision to sub-section (2) and (3) of Rule 8D. We find the AO in the assessment order made disallowance of ₹ 2,20,46,829/- u/s.14A on account of investment in shares/debentures/mutual funds/partnership firms, the income of which is exempt. We find the CIT(A) has upheld the action of the AO. 23. It is the submission of the Ld. Counsel for the assessee that the assessee has sufficient own capital and free reserves whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in shares worth ₹ 117,85,71,206/- in subsidiary/associate companies no disallowance u/s.14A is called for. We find the Pune Bench of the Tribunal in the case of Goyal Ishwarchand Kishorilal (Supra) has held that when assessee has not received any dividend out of the shares held as investment, then no disallowance u/s.14A can be made. Similar view has been taken by the Hon ble Delhi High Court in the case of CIT Vs.Holsim India Pvt. Ltd. vide ITA No. 486 and 299/2014 and various other decisions Therefore, we find merit in the argument of the Ld. Counsel for the assessee that disallowance u/s.14A is not warranted on account of investment of ₹ 117,85,71,206/- in shares in subsidiary/associate companies. 26. So far as investment of ₹ 160,28,12,406/ in mutual funds is concerned we find the assessee before the AO has made the following submission which has been reproduced by the AO at page 4 and 5 of the assessment order and which reads as under : 6. Secondly, the assessee is enclosing herewith the chart giving the details of the total investments made in various shares/securities/mutual funds. Now, it may kindly be noted that the assessee company had made a publ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account. During the course of assessment proceedings the AO noted that assessee had given interest free funds to sister concerns. He, therefore, asked the assessee to explain as to why assessee should advance money to the sister concerns which inturn would earn income from interest there on while no interest accrued to the assessee on the large balances with it. He therefore disallowed a part of the interest expenditure. According to the AO since the amount of interest which the assessee would have got if he had charged interest on these amounts, far exceeded the amount of interest paid by it to outsiders in this year, therefore he disallowed the entire amount of interest claimed by the assessee as a deduction. The AAC confirmed the action of the AO. On further appeal, the Tribunal held that the assessee was entitled to the entire amount of interest as an allowable deduction u/s.10(2)(iii) of the I.T. Act. On further appeal by the revenue, the Hon ble High Court observed as under : As we have already pointed out, it is undisputed that the amounts borrowed from outsiders on which interest has been paid have been used for the purpose of the business of the assessee. It appears to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we find the assessee before the AO had demonstrated that no borrowed funds have been utilized for investment in tax free investments. Once the assessee submits that there is no diversion of interest bearing funds for tax free investments, the onus shifts to the AO. We find in the instant case the AO has not conclusively proved that borrowed funds have been diverted for investment in tax free funds. We further find investments, the income of which is taxable like debentures, NSC etc. have been considered by the AO as tax free investments. Further, for the purpose of computing the surplus amount available with the assessee the AO has reduced the net fixed assets and net current assets from such free reserves and own capital which in our opinion is not justified in the light of various decisions including the decision of Hon ble Bombay High Court in the case of Reliance Utilities and Power Ltd. (Supra) and HDFC Bank Ltd. (Supra). 30. We find the Hon ble Bombay High Court in the case of HDFC Bank Ltd. (Supra) at para 15 and 16 of the order has held as under : 15. It is clear that for the first time in the case of HDFC Bank Ltd. (Supra) that this Court took a view that the presu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stand the above submission. The Assessing Officer passed the Assessment order on 22nd December, 2010 under section 143(3) of the Act. The CIT(A) passed an order on 21st November, 2011 dismissing the petitioner s appeal. On both the dates, when the orders were passed by the Assessing Officer and CIT(A), the authorities did not have the benefit of the order of this Court in HDFC Bank Ltd. (Supra) rendered on 23rd July, 2014. Once the issue is settled by the decision of this Court in HDFC Bank Ltd. (Supra), there is now no need for the assessee to establish with evidence that the amounts which has been invested in the tax free securities have come out of interest free funds available with it. This is because once the assessee is possessed of interest free funds sufficient to make the investment in tax free securities, it is presumed that it has been paid for out of the interest free funds. Consequently, we do not find any merit in the above submission made at the hearing on behalf of the Revenue. 31. Since the assessee in the instant case has conclusively proved that it s own capital and free reserves is far more than the investment in shares/mutual funds/partnership firms, the in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given any cogent reasons as to how the claim of the assessee was incorrect, the disallowance made u/s 14A was not justified at all. 3] Without prejudice to the above grounds, the assessee submits that the investments in shares of various group companies or capital contribution in partnership firms were made on account of business expediency and not with an intention to earn exempt income and hence, there was no reason to make any disallowance u/s 14A r.w.r. 8D in relation to such investments. 4] The learned CIT(A) erred in holding that the assessee had utilized interest bearing borrowed funds for making tax free investments and thereby confirming the disallowance of ₹ 1,62,11,508/- made on account of proportionate interest expenditure computed as per the provisions of rule 8D(2)(ii) of the Income Tax Rules, 1962. 4.1] The learned CIT(A) erred in holding that - a. There was a nexus between the interest bearing funds raised and making of tax free investments and hence, the proportionate interest attributable to tax free investments was rightly disallowed by the learned A.O. by applying the provisions of section 14A r.w.r. 8D(2)(ii). b. The assessee had not fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tual funds were sourced out of funds raised through IPO of shares of the assessee company and no expenses in respect of the IPO issue have been claimed by the assessee and therefore, the investments in mutual funds should have been excluded from the amount of tax free investments while computing the disallowance u/s 14A r.w.r. 8D(2)(iii). 6] Without prejudice to the above grounds, the assessee submits that the disallowance u/s 14A is attracted only in cases where the assessee has earned exempt income and hence, if at all, any disallowance u/s 14A r.w.r. 8D is to be made in the case of the assessee, the investments on which no exempt income has been earned should have been excluded while computing the disallowance u/s 14A r.w.r. 8D. 7] Without prejudice to the above grounds, the assessee submits that the investment made in partnership firms is not a tax free investment since the income earned by the firm is subjected to income tax and hence, the investment in partnership firm may be excluded from the amount of 'tax free investments' while computing the disallowance u/s. 14A as per Rule 8D(2)(ii) and Rule 8D(2)(iii) of the Income Tax Rules, 1962. 8] Without prejudice ..... 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