TMI Blog2018 (12) TMI 1654X X X X Extracts X X X X X X X X Extracts X X X X ..... lities and Power Ltd. [ 2009 (1) TMI 4 - BOMBAY HIGH COURT] and HDFC BANK LTD. [ 2014 (8) TMI 119 - BOMBAY HIGH COURT] - thus no disallowance of interest expense claimed by the assessee can be made on account of investments Administrative expenses we note that there was no submission made by the assessee either before the AO or Ld. CIT(A). CIT(A) has given the direction to the AO to exclude those investments while working out the disallowance under rule 8D r.w.s. 14A in respect of which income is not chargeable to tax. Thus the investments which are not capable of generating exempted income will not be considered for the purpose of disallowance under the provisions of section 14A r.w.r 8D of the income tax rule. Whether all the investments which are capable of generating the exempted income will be considered for the purpose of disallowances under section 14A r.w.r 8D? - HELD THAT:- There was no disallowance made by the assessee as per the provisions of rule 8D r.w. section 14A. Therefore there was no option available with the AO to make the disallowance as per the provisions of section 14A of the Act. Disallowance on account of the amount invested in Capital work-in-pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Ld.CIT Appeals 9 Ahmedabad has erred in law and on facts in passing appellate order dated 01.01.2015 for AY 2011- 12 in the case of app by partially confirming the addition made by AO under section 14A. 2. The Ld.CIT Appeals has erred in law and on facts in confirming disallowance of ₹ 3,75,084/- out of interest on amount invested in Capital work-in-progress. 3. The Ld CIT Appeals has erred in law and on facts in confirming disallowance of ₹ 6,49,147/- made out of interest on amount invested in Flat at Mumbai. 3. The first issue raised by the assessee is that the Ld.CIT(A) erred in confirming the disallowance made by the AO u/s 14A of the Act r.w.r.8D of Income Tax Rules, 1962. 4. Briefly stated facts are that the assessee is a limited company and engaged in the business of manufacturing, lamination, and trading of Aluminum Foils/Wire Rods/Ingots. 4.1. The assessee during the year under consideration has shown a dividend income of ₹ 10,26,283/- which was claimed as exempt u/s 10(34) of the Act. The assessee in its balance sheet as on 31/03/2011 has also shown an investment of ₹ 2,74,77,021/-. 4.2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fund was used for the purpose of business. As such, there was no borrowed fund invested in the securities as discussed above. Therefore, there cannot be any disallowance of interest expenses. 8. The Ld. CIT(A) after considering the submission of the assessee, deleted the addition made by the AO in part by observing as under:- 3.3. After considering all the details and facts it is noted that though the appellant had sufficient share capital and substantial amount and the profits during the year, it had not given any details to prove that the amount has been invested out of the interest-free funds available with it. It has given a general submission stating that since the interest-free funds were sufficient it should be presumed that the investment is out of those funds. The submission cannot be accepted as it is the claim of the appellant to say that the investment is out of the interest-free fund and therefore, the onus is on the appellant to prove the same. To prove its claim the appellant has to demonstrate specific nexus between the shares purchased and the interest free fund invested which it has not done. Therefore, the contention of the appellant that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tment or monitoring of the activities of the companies in which the appellant company has made substantial investment might have been done by the director of the appellant companies and the supporting employees must have done some activity by spending some time on the issue. Therefore, the salary paid by the appellant company to those employees and the directors have not been utilised exclusively for the purpose of the business of the company. A part of it can always be attributed to the earning of dividend which is exempt from tax. Therefore, in these circumstances also having regard to the accounts of the appellant, I am not satisfied with the correctness of the claim of the appellant in respect of no administrative expenditure in relation to income which does not form part of the total income under this Act that is the dividend income shown by the appellant. Without prejudice to above discussion, it has also been held by Hon ble ITAT Kolkata in the case of Champion Commercial Company Limited reported in 139 ITD 108 that when the assessee offers a disallowance under section 14A, provisions of section 14A(2), read with rule 8D cannot be invoked unless assessing officer i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cise Duty, Service tax and sales tax mentioned at serial number 9,10,11 should not be taken into account as it is not related to investment in shares and mutual funds and it is not on account of any funds borrowed by the appellant. The submission of the appellant is acceptable and accordingly these interest are directed to be excluded from the interest for the purpose of the 8D. The appellant has submitted that interest on Term loan mentioned at serial number 4 is paid to bank for loan obtained and capital asset. Since this interest has bee incurred for a specific purpose and therefore it should not be considered for investment. The claim of the appellant is acceptable as the term loan is directly related to capital assets and the bankers directly give the fund is to the seller of the capital asset therefore, there is no possibility of using these funds for making the investment in tax-exempt assets. Accordingly, this interest is to be excluded for the purpose of calculation f disallowance under section 14A. The interest paid for purchase of raw material, paid to bank for obtaining LC for discounting of bills raised to sale party, interest paid to Bank of Baroda ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 Interest received on Bank FDR 6313325 Interest on FDR which were obtained in earlier years and used for overdraft facility. 3 Interest on I.T. refund 951489 4 Interest on security deposit of Power Bill 352473 Total 12308123 It is noted from the above table that interest received on Bank FDR has no nexus with the interest expenditure made by the appellant and therefore the same cannot be considered for the purpose of setting off or reducing the same from the interest expenditure. The interest received from customers is the interest which is received for extending the credit period or discounting of LC. The appellant has explained that this interest has been charged from the customers as it has extended the credit period of payment to against sales made to various customers. The funds received on account of sales are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10.1 On the other hand, the Ld. DR vehemently supported the orders of the authorities below. 11. We have heard the rival contentions and perused the materials available on records. The assessee in the case on hand has earned dividend income which was claimed as exempt under section 10(34) of the Act. However, the assessee has not made any disallowance of the expenses incurred in relation to such dividend income. Accordingly the AO invoked the provisions of rule 8D r.w.s 14A of the Act and made the disallowances as under: Sr. No. Particulars Amount (Rs.) 1 Direct Expenses under rule 8D(2)(i) 2,42, 517/- 2 Interest Expenses under rule 8D(2)(ii) 22,47,916/- 3 Administrative Expenses under Rule 8D(2)(iii) 8,40,874/- 11.1. As regards the direct expenses we note that the assessee has not made any argument either before the AO or the Ld. CIT(A). We also note that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the judgment of Hon ble Bombay High Court in the case of Reliance Utilities and Power Ltd. reported in 313 ITR 340 wherein it was held as under:- The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the CIT(A) and Tribunal . 11.4. Similarly, we also rely on the judgment of the Hon ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd reported in 366 ITR 505 (Bom). The relevant extract of the order is reproduced below:- Where assessee's capital, profit reserves, surplus and current account deposits were higher than the investment in tax-free securities, it would have to be presumed that investment made by the Assessee would be out of the interest-free funds available with Assessee and no disallowance was warranted u/s 14A. 11.5. Similarly, we also find support from the judgment of Hon ble ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome' in section 14A envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year for the purpose of disallowing any expenditure incurred in relation to the said income. In other words, section 14A will not apply if no exempt income is received or receivable during the relevant previous year 13. The learned counsel for the assessee before us also submitted that there could not be any disallowance on account of administrative and interest expenses in terms of the judgment of Hon ble Gujarat High Court in the case of principal Commissioner of income tax vs. syntax industries Ltd. in tax appeal No. 268 of 2017 wherein it was held as under: 9.Considering the aforesaid facts and circumstances, more particularly the fact that the assessee was already having its own surplus fund and that too to the extent of ₹ 2319.17 Crores against which investment was made of ₹ 111.09 Crores, there was no question of making any disallowance of expenditure in respect of interest and administrative expenses under Section 14A of the Act, therefore, there was no question of any estimation of e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e made as per rule 8D of income tax rule after taking into account only those investments which have generated exempted income during the year. 15.1. Thus, the ground of appeal of the assessee is partly allowed. 16. The second issue raised by the assessee is that ld. CIT(A) has erred in confirming the disallowance of ₹ 3,75,084/- on account of the amount invested in Capital work-in-progress. 16.1. The assessee in its balance-sheet as on 31.3.2011 has shown capital work-in-progress in its Schedule E of fixed assets amounting to ₹ 1,00,66,098/- only. 16.2. The AO during the assessment proceedings observed that the interest expenses incurred on the borrowed fund utilized for such capital work-in-progress had not been capitalized. Therefore, the AO worked out the proportionate interest expenses of ₹ 3,75,084/- and added to the total income of the assessee. 17. Aggrieved assessee preferred an appeal to the Ld.CIT(A). 18. The assessee before the Ld.CIT(A) submitted that the entire investment was made out of its fund. Therefore, there is no question of capitalizing any interest on the money invested in the capit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court in the case of Reliance Utilities and Power Ltd. reported in 313 ITR 340 wherein it was held as under:- The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the CIT(A) and Tribunal . 22.1. Similarly, we also rely on the judgment of the Hon ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd reported in 366 ITR 505 (Bom). The relevant extract of the order is reproduced below:- Where assessee's capital, profit reserves, surplus and current account deposits were higher than the investment in tax-free securities, it would have to be presumed that investment made by the Assessee would be out of the interest-free funds available with Assessee and no disallowance was warranted u/s 14A. 22.2. Similarly, we also find support from the judgment of Hon ble Gujarat High Court in the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dered view the A.O. was justified in making addition as no cogent evidences has been submitted in support of that no borrowed funds was used. Accordingly, the contention of the company is rejected as it is without any evidence and proportionate interest is disallowed. In the facts and circumstances, the A.O. was justified in disallowing proportionate interest cost relatable to flat. This ground of appeal is therefore dismissed. 26. Being aggrieved by the order of the Ld. CIT(A), the assessee is in appeal before us. 27. The Ld.AR before us reiterated the submissions made before the Ld.CIT(A). 28. On the other hand, Ld. DR vehemently supported the orders of the authorities below. 29. We have heard the rival contentions and perused the material available on record. At the outset, we note that the own interest-free fund available with the assessee exceeds the amount of investment made in the Flat located at Mumbai. Therefore, we can presume that the assessee in such flat invested the own fund. In holding so, we find support and guidance from the judgment of Hon ble Bombay High Court in the case of Reliance Utilities and Power Ltd. reported in 31 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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