TMI Blog2019 (11) TMI 1298X X X X Extracts X X X X X X X X Extracts X X X X ..... aking investments, by furnishing cash flow state for the respective assessment years. Disallowance u/s. 36(1)(iii) on account of funds having been diverted for non business purposes - disallowing the portion of interest paid by the assessee as huge amount had been lent by the assessee to its partners - HELD THAT:- The contention of the assessee is that since the assessee was following the cash system of accounting, the interest receivable from partners on the amount lent to the partners cannot be offered to tax and it would be offered to tax only on receipt basis which was not actually received by the assessee in the year under consideration. Hence, it was not offered for tax. For this purpose, he relied on the judgment of the Jurisdictional High Court in the case of CIT vs. Muthoot Finance Corporation [ 2018 (10) TMI 1773 - ITAT COCHIN] . In the present case, we observe that the Assessing Officer disallowed the portion of interest paid by the assessee as the interest bearing borrowings were diverted by the assessee by lending money to the partners without any interest and had not used for the purpose of the assessee s business. Assessing Officer had not brought to tax the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... artners have compensated such borrowed funds. 5. Treatment of interest earned from bank under other sources was not in order as these are in the nature of investment in trade and to be charactered as income from business. 3. The first ground, Ground Nos. 1 2 in ITA Nos. 92 93/Coch/2019 is with regard to addition of ₹ 18,36,878/- on account of disallowance u/s. 14A r.w.s. Rule 8D of the Act. 4. The facts of the case as narrated in ITA No. 92/Coch/2015 are that during the course of verification it was found that in the computation of income, the dividend earned during the year was ₹ 40,51,846.68/- which is exempt u/s. 10 of the I.T. Act. While going through the accounts and other details, the Assessing Officer noticed that the assessee has not segregated the expenditure in respect of dividend income. On verification of balance sheet, it was noticed that the assessee had made investments to the tune of ₹ 19,17,67,946.92 as on 31.03.2010 and during preceding assessment year the total investment was ₹ 19,22,23,220/-. Section 14A of the I.T. Act specifies the methodology to be adopted for computation of expenditure ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1) For the purposes of computing the total income under this Chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not for part of the total income under this Act. (2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not for part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this 5.1 Thus, according to the CIT(A), as per section 14A, if an expenditure has a relation or connection with or pertains to exempt income, it cannot be allowed as a deduction even if it otherwise, qualifies under the other provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est free funds available. It was submitted that the Assessing Officer could not establish that any interest bearing funds had been diverted for earning exempt income. 7. The Ld. DR relied on the order of the authorities below. 8. We have heard the rival submission and perused the material on record. We find that a similar issue came up for our consideration in the case of Muthoot Bankers vs. ACIT in ITA Nos. 12 to 17/Coch/2018 dated 03/10/2018 for the assessment years 2008-09 to 2013-14 wherein it was held as under: 6. We have heard the rival submissions and perused the material on record the Assessing Officer had made disallowance by invoking the provisions of section 14A of the I.T. Act r.w. Rule 8D(2)(iii) and Rule 8D(2)(iii) of the I.T. Rules. The disallowance made by invoking Rule 8D(2)(iii) of the I.T. Rules is for administrative and common expenses when the assessee derives exempted income. In the instant case, in each of the assessment year s huge investments are made which is given rise to exempted dividend income. Investment decisions are very complex and strategic and obviously they would have incurred admin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... /s. 36(1)(iii) of the I.T. Act on account of funds having been diverted for non business purposes. 10. The facts of the case as narrated in ITA No.92/Coch/2015 are that on verification of records it was noticed that the assessee had taken secured loans of ₹ 2,59,288/- from Dhanalakshmi Bank, ₹ 25,18,151/- from HDFC and ₹ 66,23,178/- from Syndicate Bank. For the above loans, during the year the assessee had paid interest of ₹ 48,94,127/- (₹ 17,99,941.49 + ₹ 30,94,186) which was debited to P L account. During the verification of Partners Current Account of Shri Thomas Muthoot, it was noticed that he had shown a debit balance of ₹ 7,29,10,831/- and withdrawn an amount of ₹ 21,66,556/- during the year from his current account which he had utilized for his personal use. Therefore, the Assessing Officer made proportionate disallowance of interest bearing fund. For this purpose, the Assessing Officer relied on the judgment of the Jurisdictional High Court in the case of CIT vs. V.I. Baby Co. 254 ITR 248 and the judgment of the Allahabad High Court in the case of Marolia Sons vs. CIT 129 ITR 475. Section 36(1)(iii) of the I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of the Jurisdictional High Court in the case of in the case of CIT vs. Muthoot Finance Corporation 284 ITR 704. The firm is having the same system of accounting for all transactions. The matter is not clear from the order of the Tribunal. Further, Counsel for the Revenue on the basis of the decision of CIT vs. A. Krishnaswami Mudaliar 53 ITR 122; Sundaram and Co. Ltd. vs. CIT 35 ITR 162 (Mad) and CIT vs. British Paints India Ltd. 188 ITR 44 (SC) contends that even if in the system of accounting, the Assessing Officer can exercise the power under the proviso when he finds that the method of accounting is not propr. Hence, the High Court set aside the order of the Tribunal and directed the Tribunal to reconsider the matter on the basis of the above directions. 13. The Ld. DR relied on the order of the authorities below. 14. We have heard the rival submissions and perused the material on record including the case laws cited by the parties. The AO made addition u/s. 36(1)(iii) of the Act by disallowing the portion of interest paid by the assessee as huge amount had been lent by the assessee to its partners. The contention of the assessee is that since t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome falling within the parameters of being incidental to business can fall within the scope of the business of the assessee, yet it cannot be said to have been derived from the eligible industrial undertaking of the assessee so as to be eligible for deduction u/s. 80IA of the Act. Thus, the CIT(A) held that irrespective of the nature of business of the assessee, if interest is earned from Bank deposits, the same is to be assessed as income from other sources. 18. Against this, the assessee is in appeal before us. The Ld. AR submitted that the assessee was acting as a controlling firm for various firms in the Group which were carrying on the business of money lending and investment. It was contended that such deposits had twin advantage of liquidity and security, apart from earning reasonable income by way of interest. Hence, it was argued that such Bank deposits form integral part of assessee s business and therefore, interest on such Bank deposits was business income of the assessee. It was submitted that the department had treated such interest income as business income in the earlier years. 19. The Ld. DR relied on the order of the au ..... X X X X Extracts X X X X X X X X Extracts X X X X
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