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2019 (2) TMI 1996 - AT - Income TaxDisallowance u/s 14A r/w Rule 8D - assessee had claimed that since shares are held as stock-in-trade as well Free Reserves were utilised for investing in these securities and no interest was payable with respect to investments made in these securities, no disallowance of expenditure incurred in relation to earning of an exempt income is warranted u/s 14A - HELD THAT - We are afraid that this contention of the assessee cannot be accepted in view of decision of Hon ble Supreme Court in the case of Maxopp Investment Ltd. 2018 (3) TMI 805 - SUPREME COURT wherein it has been held by Hon ble Supreme Court that the dominant purpose/intention of parties of investing in securities from which exempt income is received, is irrelevant for the purpose of computing disallowance of expenditure incurred in relation to earning of an exempt income as is mandated u/s 14A and Section 14A of the 1961 Act will be applicable wherein expenditure is incurred in relation to earning of an exempt income and the same shall not be allowed while computing income even when investments are made in shares and securities as strategic investments or stock-in-trade. Assessee has its own interest free funds available with it which are in excess of investments made in shares/securities from which dividend income was received/receivable - We agree with the contentions of the assessee that presumption will apply that assessee invested its own interest free funds for making investments in shares and securities from which exempt income was received and no disallowance of interest expenditure u/s. 14A r.w.r. 8D2(ii) of the 1962 Rules can be made. We have also observed that the assessee has received dividend of ₹ 7,20,212/- which was claimed as an exempt income and admittedly these are mixed use funds which were utilised by the assessee for making investments in shares and securities which yielded exempt income and the Revenue has not brought on record any adverse/incriminating material to rebut the aforesaid presumption or the assessee had borrowed interest bearing funds specifically to make investments in the shares and securities and hence relying on the decision of Hon ble Bombay High Court in the case of Reliance Utilities and Power Limited 2009 (1) TMI 4 - BOMBAY HIGH COURT and HDFC Bank Limited 2014 (8) TMI 119 - BOMBAY HIGH COURT disallowance as was made by the AO u/s 14A of the 1961 Act r.w.r. 8D(2)(ii) of the 1962 Rules stood deleted. AO erred in making disallowance by invoking provisions of Section 14A of the 1961 Act read with Rule 8D(2)(iii) of the 1962 Rules. The Revenue fails on this issue Disallowance of indirect administrative expenses to the tune of 0.5% of the average investments held by the assessee -The assessee has not voluntarily made any disallowance of expenditure incurred in relation to earning of an exempt income. The assessee has earned an exempt income by way of dividend income which was claimed as an exempt income in the return of income filed with Revenue. It is admitted by the assessee that AO has recorded satisfaction while applying Rule 8D of the 1962 Rules read with Section 14A of the 1961 Act. Under these circumstances, disallowance of administrative expenses computed @ 0.5% of the average investments amounting to ₹ 2,28,396/- by invoking Section 14A of the 1961 Act read with Rule 8D(2)(iii) of the 1962 Rules cannot be faulted with, which we sustain/confirm by upholding the appellate order passed by learned CIT(A). The assessee fails on this issue. We order accordingly. Grant of interest free loan and advances - AO was not satisfied with the contentions of the assessee that these interest free loans and advances granted by the assessee were for the purpose of business purposes and the AO was of the view that interest paid by the assessee is to be disallowed to the tune of 15% of the said amount granted by the assessee as interest free loans and advances - HELD THAT - CIT(A) after relying on few Hon ble Jurisdictional High Courts judgment correctly held that since interest free funds available with assessee are higher than the interest free loans and advances made by the assessee, presumption will apply that the assessee advanced interest free funds available with it for granting interest free loans and advances - See RELIANCE UTILITIES POWER LTD. 2009 (1) TMI 4 - BOMBAY HIGH COURT . Addition towards professional fees paid for arranging loans borrowed by the assessee - HELD THAT - no evidences is produced to substantiate and justify genuineness of these expenses nor it is substantiated as to why these expenses be allowed in the current year while the loans were purportedly sanctioned in earlier years. The TDS certificates were also not produced before the authorities below and these TDS certificates are produced for the first time before us which have not stood the test of verification by lower authorities. In any case in our considered view merely production of TDS certificates is not sufficient justification to prove genuineness of the expense or to establish that the expenses were incurred wholly and exclusively for the purposes of the business of the assessee. No agreement entered into by the assessee with these two companies are brought on record neither any evidences has been brought on record to substantiate that the services were in fact rendered by these two companies to the assessee in connection with availing of loans by assessee from IIFL and ILFS - we are afraid that the assessee s contentions cannot be accepted. The assessee fails on this ground.
Issues Involved:
1. Disallowance under Section 14A read with Rule 8D(2)(iii) for shares held as stock-in-trade. 2. Disallowance of professional fees for arranging loans. 3. Deletion of disallowance under Section 14A by CIT(A). 4. Deletion of addition under Section 36(1)(iii) for interest-free advances. Issue-wise Detailed Analysis: 1. Disallowance under Section 14A read with Rule 8D(2)(iii) for shares held as stock-in-trade: The assessee argued that disallowance under Section 14A read with Rule 8D cannot be made for shares held as stock-in-trade. The AO disallowed ?2,28,396/- under Section 14A read with Rule 8D(2)(iii). The CIT(A) confirmed this disallowance, stating that it is "unbelievable that no administrative expenditure is incurred for incurring exempt income." The Tribunal upheld this view, noting that the assessee did not voluntarily disallow any expenditure for earning exempt income and confirmed the disallowance of ?2,28,396/-. 2. Disallowance of professional fees for arranging loans: The AO disallowed ?15,00,000/- claimed as professional fees for arranging loans, questioning the genuineness of the expenses. The CIT(A) upheld this disallowance, noting the assessee's failure to prove the genuineness of the expenses or provide evidence of services rendered. The Tribunal agreed, emphasizing the lack of evidence to substantiate the claim and the fact that the loans were sanctioned in the preceding year. The Tribunal dismissed the assessee's appeal on this ground. 3. Deletion of disallowance under Section 14A by CIT(A): The AO disallowed ?79,52,228/- under Section 14A read with Rule 8D(2)(ii). The CIT(A) deleted this disallowance, relying on the judgments of the Bombay High Court in Reliance Utilities & Power Ltd. and HDFC Bank Ltd., which held that if interest-free funds are sufficient to cover investments, it is presumed that such funds were used for investments. The Tribunal upheld this deletion, noting that the assessee's interest-free funds exceeded the investments and that the Revenue failed to rebut this presumption. 4. Deletion of addition under Section 36(1)(iii) for interest-free advances: The AO added ?56,25,000/- as disallowance of interest under Section 36(1)(iii), arguing that the assessee granted interest-free loans while incurring interest on borrowings. The CIT(A) deleted this addition, again relying on the judgment in Reliance Utilities & Power Ltd., which allows the presumption that interest-free funds were used for such advances if they exceed the amount of advances. The Tribunal upheld this deletion, noting that the assessee's interest-free funds were sufficient to cover both investments and advances, and no incriminating material was brought by the Revenue to rebut this presumption. Conclusion: The Tribunal dismissed both the assessee's and the Revenue's appeals, affirming the CIT(A)'s decisions on all issues. The Tribunal confirmed the disallowance of ?2,28,396/- under Section 14A read with Rule 8D(2)(iii), upheld the deletion of ?79,52,228/- under Section 14A read with Rule 8D(2)(ii), sustained the deletion of ?56,25,000/- under Section 36(1)(iii), and dismissed the assessee's appeal regarding the ?15,00,000/- professional fees.
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