TMI Blog2017 (10) TMI 235X X X X Extracts X X X X X X X X Extracts X X X X ..... of the ld AR that the assessee has incurred net interest cost of 0.25% and not 9.5% at which overdraft facility was availed from the bank. The bank overdraft account, out of which the funds have been withdrawn and invested in the mutual fund units during the year, is clearly in the nature of loan account and certificate issued by the Central Bank of India supports the case of the Revenue. Accordingly, we are unable to accede to the contention of the ld AR that it is assessee’s own money which has been taken out of the FDR account temporarily and invested in the mutual fund units. Whether the transactions in the bank overdraft account are limited to the borrowings and subsequent withdrawal for meeting expenditure and making the investments or it also includes other transactions in form of deposit of various business receipts including course fees as contended by the ld. AR? - Held that:- We find that there are deposits of ₹ 115.53 Cr and withdrawal of ₹ 120.85 Cr. The said numbers therefore supports the contention advanced by the ld. AR during the course of the assessment proceedings that all types of business receipts and all type of payments are routed through th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ient interest free funds, as aforesaid. He wrongly confused the OD a/c with an interest bearing loan/borrowings. admittedly the assessee neither took any such loan in the past nor in this year, as evident from the Audited Balance Sheet as on 31.03.2009 - ITA. No. 10/JP/13 - - - Dated:- 27-9-2017 - SHRI KUL BHARAT, JM AND SHRI VIKRAM SINGH YADAV, AM For The Assessee : Shri Mahendra Gargieya (Adv) : Shri Hemang Gargieya (Adv) For The Revenue : Shri R.A. Verma (Addl.CIT) ORDER PER SHRI VIKRAM SINGH YADAV, A.M. This is an appeal filed by the assessee against the order of Ld. CIT(A), Kota dated 26.11.2012 for A.Y. 2009-10 wherein the assessee has taken the following grounds of appeal are as under:- 1. The impugned additions and disallowance made in the order dated 29.12.2011 u/s 143(3) of the Act, bad in law and on facts of the case, for want of jurisdiction and various other reasons and hence the same kindly be deleted. 2. ₹ 20,45,751/-: The ld. CIT(A) erred in law as well as on the facts of the case in confirming the disallowance of ₹ 20,45,751/- out of interest expenses alleging not for business purpose and further erred in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Date Mutual Fund Units Amount (Rs) 12.06.2008 UTI Mutual fund-FMP 1.00 Crore 20.06.2008 HDFC Mutual Fund-FMP 1.00 Crore 05.09.2008 SBI Mutual fund-FMP 1.00 Crore A show cause notice was issued by the Assessing officer to the assessee to explain why disallowance of ₹ 20,45,751/- being interest @ 9.5% paid on the borrowed funds which are used for making the investment in the Mutual Funds units should not be disallowed. 6. In response, the assessee submitted that it is engaged in providing coaching to students preparing for the competitive examinations and coaching fees are received through the bank drafts at the beginning of the course from the students. It was further submitted that the assessee firm does not maintain a current account with any bank rather it deposits the fees received from the students in bank FDR accounts and for meeting monthly recurring expenses, avail overdraft facility on such FDRs. It was further submitted that all types of rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account of interest on borrowed money should be restricted to net interest outgo calculated @ 0.25%. 11. The Assessing Officer however did not find any of the contentions of the assessee acceptable and relying on the decision of the Hon ble Punjab and Haryana High Court in the case of CIT Vs. Abhishek Industries Ltd. 286 ITR 1, held that onus is on the assessee to prove that whatever loans were raised by the assessee, the same were used for business purposes. It was further held that the business of the assessee is running of coaching classes for students and not purchase sale of Mutual Funds Units. It was further held that the assessee has failed to prove any business expediency to make aforesaid investments in Mutual Funds Units. The Assessing Officer distinguished the decisions relied upon by the assessee and thereafter concluded the matter with the following final findings which are reproduced as under:- It is observed that interest @ 9.5% per annum has been paid by the assessee on Bank Over Draft Account. Therefore, interest related to investment in Mutual Funds Units is worked out as under:- On ₹ 1.00 Crore from 12.06.08 to 19.06.08 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ernative of bank FDRs. It was submitted that bank FDRs are managed by banks while Fixed maturity plans (FMP) are issued and managed by mutual funds. Both are debt instruments wherein the mutual funds invest in government security and corporate debt and the object behind making such investment is getting better post tax returns than Bank FDRs due to indexation benefit where mutual funds units are held for a period of greater than one year. 14. The assessee further relied on the decision of Bombay High Court in the case of CIT vs. Reliance Utilities and Power Ltd. 313 ITR 340 and the decision of Hon ble Delhi High Court in the case of CIT V. Bharti Televenture Ltd. 51 DTR 98. The assessee has relied upon the decision of Coordinate Bench in case of ACIT vs. Sh. Ram Kishan Verma Prop. M/s Resonance, Kota stating that the facts of the said case are exactly identical to the facts of the assessee. 15. The ld. CIT(A) however did not accept the assessee s contentions and confirmed the disallowance of interest with the following findings which are reproduced as under:- It was seen that the surplus funds of assessee were kept in the form of FDRs and the income from same was to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e taken less than 1 year, the interest earning thereon shall be treated as short Term Capital Gain and tax @ 30% flat shall be levied thereon. However, if the interest earning occurs after a period of 1 year shall be treated as Long Term Capital Gain and tax @ 10% flat it shall be levied thereon (where indexation benefit is claimed) and @ 20% wherein, it is not claimed. Thus, such interest earnings are taxable and cannot be said to be exempted income. In view of this factual matrix, Sec. 14A could and should not have been invoked and confirmed. Interestingly, the AO though made disallowance invoking Sec. 14A this year, however, in the same circumstances in A.Y. 2010-11, no such disallowance was made u/s 14A (although it was disallowed u/s 36(i)(iii) of the Act). This speaks of the fallacy in the case made out by the AO. 2. Further the written submissions filed before the ld. CIT(A), are reproduced hereunder:- 1. M/s Allen Career Institute is a partnership firm engaged in the coaching of competitive Examination. The coaching fees for the year are received only through bank drafts at the beginning of the courses, while mostly expenses are incurred monthly through ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Closing Capital 70.65 Cr. Opening Fixed Assets 19.92 Cr. Closing Fixed Assets 22.43 Cr. Opening Investments 0.00 Cr. Closing Investments 3.00Cr. Opening Bank FDRs 62.98 Cr. Closing Bank FDRs 98.04 Cr. Opening Bank overdraft 29.81 Cr. Closing Bank O/D 41.12 Cr. Interest on Bank FDRS 8.30 Cr. Interest to Bank O/D 1.73 Cr. Net Interest Income 6.57 Cr. The current year profit (before allocation between partners) is 41.5 Cr. and investment in mutual fund fixed term debt fund scheme was made for just 3 Cr. investment in mutual fund was made out of capital and reserves (including current year profit). It is very clear from the balance sheet that the assessee firm has su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly supports the contentions raised by the assessee in the above submission. These decisions relate to disallowance of any expenditure incurred in connection to the payment of any income tax. In these cases where some interest expenditure was incurred because of the payment of the taxes made out of the loan/OD a/c, the Hon ble Courts in similar factual matrix (as available in this case) has taken a view in favour of the assessee. 3.2 For this proposition, reliance is placed on Wollcombers of India Ltd. v/s CIT (1982) 134 ITR 219 (Cal), wherein it was held the assessee having overdraft account in bank entire profits in relevant year deposited in overdraft account amount of profits far exceeding advance tax liability monies withdrawn from overdraft account both for business purposes and also for payment of advance tax there is presumption that advance tax was paid out of profits and not out of overdraft account disallowance of interest on overdraft as being relatable to payment of advance tax is not justified. 3.3 In East India Pharmaceutical Works Ld. v/s CIT (1997) 224 ITR 627 (SC), provided a guideline in such case in these words (ii) ..........., the question whether a pres ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest. There is no onus on the assessee to establish that interest-free advances are out of interest-bearing advances if non-interest-bearing funds are more. Reliance is placed on the decision of the Hon ble Bombay High Court in the case of CIT vs. Reliance Utilities Power Ltd. (2009) 221 CTR (Bom) 435 : (2009) 18 DTR (Bom) 1 : (2009) 313 ITR 340 (Bom) and Hon ble Delhi High Court in the case of CIT vs. Bharti Televenture Ltd. (2011) 51 DTR (Del) 98 : 2010 TIOL-51-HC-Del. There is no provision in the Act which may compel an assessee to earn income. The assessee in the cross-objection is aggrieved against confirming of addition. After considering the facts as above, we feel that the AO was not justified in making any disallowance. Hence, disallowance is deleted. 3.7 It was submitted that the above cited decisions strongly supports the contentions raised by the assessee. These decisions relate to disallowance of the interest expenditure incurred on the loan amount used for payment of income tax/investment in the securities/capital expenditure etc. or for giving interest free advances to is sister concerns etc. sourced out of the loan/OD a/c. The Hon ble Courts in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provision in the Act which may compel an assessee to earn income. 11.2 After considering the facts as above, we feel that the AO was not justified in making any disallowance. Hence, disallowance is deleted. 6. The Hon ble Rajasthan High Court has also affirmed the above orders vide para 12 14 in the case of CIT v/s Ram Kishan Verma (2016) 132 DTR 107 (Raj.) holding as under: 12. As far as the disallowance of interest is concerned, admittedly the assessee had an opening capital of ₹ 5,70,74,967/- of his own and the advances, if at all, being interest free, is to the extent of ₹ 98,93,950/- which is far below the capital of the assessee and, therefore, the tribunal has rightly come to the conclusion that to the extent of his own capital the assessee could advance money without interest for business expediency or/and relatives, and none can be forced to charge interest. It is also noticed by the lower authorities that assessee earned bank interest to the extent of ₹ 24,48,843/- out of which he paid total amount of ₹ 10,99,099/- to the bank against loan and over draft, and it is out of the amount which has been paid by the assessee at 10,99, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest free loans advances would be out of interest free fund generated or available with the assessee, if the interest-free funds were sufficient to meet the investments and in such situation the specific nexus between utilization being of interest bearing bank overdraft towards interest free advances, looses significance/relevance. 17. The ld. DR is heard who has vehemently argued the matter, took us through the findings of the AO and the ld CIT(A) and supported the order of the lower authorities. Our findings 18. We have heard the rival contentions and perused the material available on record. In the above factual matrix, the issues that arise for consideration are firstly, whether the bank overdraft account, out of which the funds have been withdrawn and invested in the mutual fund units during the year, is in the nature of loan account or not. Alternatively, whether it is assessee s own money which has been taken out of the FDR account temporarily and invested in the mutual fund units as contended by the ld. AR. The second issue which arise for consideration is whether the transactions in the bank overdraft account are limited to the borrowings and subsequ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the latter results in borrowing of bank funds. We have given a careful consideration and are unable to accept the said contention advanced by the ld AR. In our view, both the overdraft account and cash credit accounts are clearly in the nature of borrowings advanced by the banks however carrying their individual characteristics in terms of tenure, rate of interest, quantum of borrowing, repayment terms, utilization of such borrowings and the underlying security against which the borrowing have been so advanced. Both these facilities are well-recognised line of credit/finance in the banking industry. In the instant case, the certificate of the Central Bank of India itself suggests that the assessee has been granted an overdraft facility whereby the assessee is entitled to take loan or advance up to 90% value of the FDRs. The FDRs are basically underline security which are placed with the banks providing the overdraft facility and provides necessary security to the bank to offer a better rate of interest as compared to any other unsecured loans without underlying security which carried a higher rate of interest. The assessee on basis of such pledge of FDR has been granted facility t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hdrawal for meeting expenditure and making the investments or it also includes other transactions in form of deposit of various business receipts including course fees as contended by the ld. AR, we find, on review of bank overdraft accounts summary details available at APB 45, that the assessee has an overdraft account with the Central Bank of India, Talwandi Branch, Kota wherein the opening credit balance is ₹ 28 Cr. and closing credit balance is ₹ 33 Cr and during the year, we find that there are deposits of ₹ 115.53 Cr and withdrawal of ₹ 120.85 Cr. The said numbers therefore supports the contention advanced by the ld. AR during the course of the assessment proceedings that all types of business receipts and all type of payments are routed through the bank overdraft account. It also proves the fact that the assessee was having mixed funds both in form of business receipts and borrowings in the form of overdraft from the bank from time to time. However, there is nothing which has been brought on record to prove that the investments have been made at the relevant point in time out of the borrowed funds. In absence of establishing the necessary nexus being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment year have been offered to tax as long term capital gains. In light of the same, we do not think that the ld. CIT(A) was correct in invoking provisions of section 14A of the Act. 27. In light of above discussions and in the entirety facts and circumstances of the case, we are of the view that the Assessing officer was not correct in disallowing interest expense of ₹ 20,45,751/- in the hands of the assessee and ground No. 2 of the assessee s appeal is accordingly allowed. Ground no. 4 28. In respect of ground no. 4, briefly the facts of the case are that during the assessment proceedings, the AO observed that the assessee had used borrowed funds out of Bank Over Draft Account for acquisition of the following capital assets during the year:- i) Advance Given for Purchase of Land The assessee has given advance of ₹ 1.00 Crore on 20.12.2008, ₹ 1.00 Crore on 23.01.2009 and ₹ 2.00 Crore on 04.03.2009 to M/s Trafco Agencies P. Ltd., Kota for purchase of plot of land. This plot was subsequently purchased on 22.05.2009 and construction of the building known as CP-7 was started on this plot. ii) Construction of Shed in the Building C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the asset till the date on which such asset was first put to use, shall not be allowed as deduction Section 36(1)(iii) is applicable only in case of capital borrowed. As explained in earlier para, there was no borrowed money in the case of the assessee. Simply payment through bank overdraft account against FDRs, where the assessee have no bank current account and sufficient own funds, could not be mean as capital borrowed for the applicability of Section 36(1)(iii). The assessee s contentions were not found acceptable to the AO and he held that the assessee has met the expenditure mentioned above but of Bank over Draft Account i.e. out of bank loan taken against its FDRs, which constitutes borrowed money. The assessee has also claimed deduction in respect of interest paid on bank over draft account. Therefore, proviso to Section 36(1)(iii) is squarely applicable to the case of assessee. Accordingly, disallowance of ₹ 11,57,453/- ( 577808-194863+3847827) was made out of interest paid on bank over draft account. 30. The relevant findings of the ld. CIT(A) is reproduced as under:- In view of specific provisions of Section 36(1)(iii) (proviso), no interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessing Officer and directed him to allow the same under the provisions of the Income Tax Act, 1961. The Revenue being aggrieved by the order preferred an Appeal before the ITAT who upheld the order of the CIT (Appeals) and dismissed the Appeal of the Revenue. From the order of the ITAT, the Revenue approached this Court by way of an Appeal. On the above factual matrix, the Hon ble court held as under: 10. If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interestfree funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd. (supra) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. (supra) where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e funds available with Assessee and no disallowance was warranted u/s 14A. 34. It is further submitted that a comparatively recent decision in the case of Hero Cycle P. Ltd vs CIT (2015) 128 DTR 0001 / 379 ITR 347 (SC) also directly supports the case of the assessee. In that case, the company had given Loans Advances of ₹ 34 lacs to its directors and charged interest @ 10% only, whereas it availed the loan @ 18% hence, disallowance was made by the AO saying that the money borrowed by the assessee can t be treated for the purposes of the business of assessee. Before the CIT(A), the assessee demonstrated that there was a sufficient credit balance, while advancing loan to the directors and even that still there was a credit balance of ₹ 4.95 lacs left. The CIT(A) therefore held that such loan was not given out of the borrowed funds and the interest liability in relation to the banks borrowing, had no bearing because the assessee had its own sufficient funds, which the assessee could advance and the AO should have established a nexus between the borrowing and the advancing for non-business purposes however, the AO failed to do so. Further appeal of the revenue wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Supreme Court in the case of S.A. Builders Ltd. v. CIT(Appeals) [2007] 288 ITR 1 (SC) would not be applicable to the facts of the present case . 38. Further the case of Abhishek Industries has already been impliedly overruled in Munjal sales (supra) and was also so considered in the case of Ram Kishan Verma by ITAT Jaipur. The AO wrongly ignored the decisions in the case of Dalmia cement (Supra) and Radico Khaitan (Supra), merely on misconception and mis-reading thereof and without any valid reason. 39. The ld.AO completely failed to deny and disprove the facts as argued although vide first para at pg 9, he alleged that the assessee had used a part of the borrowed funds available in the OD a/c and worked out the disallowable amount of the interest yet however, he completely failed to prove/ to bring contrary material to disprove that the assessee was having sufficient interest free funds, as aforesaid. He wrongly confused the OD a/c with an interest bearing loan/borrowings. admittedly the assessee neither took any such loan in the past nor in this year, as evident from the Audited Balance Sheet as on 31.03.2009. 40. We have heard the rival contentions and purused ..... X X X X Extracts X X X X X X X X Extracts X X X X
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