2017 (10) TMI 235 - AT - Income Tax

Disallowance of interest expenses incurred by the assessee on availing the bank overdraft facility - whether the bank overdraft account, out of which the funds have been withdrawn and invested in the mutual fund units during the year, is in the nature of loan account or not? - 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.? Held that - In the instant case, the assessee has not brought on record any verifiable evidence which is contrary to above understanding. Infact, the assessee has shown interest on fixed deposits in his return of income as income under the head Income from other sources and interest paid on bank overdraft facility has been claimed as expenditure under the head business income . The said treatment in the financial statements doesn t merely show the accounting treatment and reflection thereof but also underscore the basic essence and character of both the transactions being independent of each other. Therefore, we are unable to accept the contention 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 The bank overdraft account, out of which the funds have been withdrawn and invested in the mutual fund units during the year, is clearly in the nature of loan account and certificate issued by the Central Bank of India supports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 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 between the borrowings and the investments in the mutual funds, it can safely be concluded that the investments in the mutual fund units have been made out of mixed funds. The funds in the FDRs accounts clearly reflect the interest free funds which are available with the assessee which is far in excess of the amount of investments which has been made in the Mutual Funds units amounting to ₹ 3 Cr. Accordingly, on appreciation of the said facts and in absence of anything to the contrary, as per the settled legal proposition, a presumption can be drawn that the investments in the mutual fund units have been made out of interest- free funds and not out of interest bearing funds. Addition u/s 14A - Where the amount is invested in such funds for less than a year, the maturity proceeds are taxable as short term capital gain @ 30% and where the amount is invested in such funds for the period exceeding one year, the maturity proceeds are taxable @ 10% with the indexation benefit and @ 20% without indexation benefits. In other words the investment in Mutual Funds schemes are not tax free investments. In support of its contentions, the ld. AR has also submitted a copy of the computation of income for the subsequent assessment year 2010-11 wherein the maturity proceeds amounting to ₹ 3,32,35,500 of all these Mutual Funds units wherein the assessee has invested ₹ 3,00,00,000 during the impunged assessment 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. 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

Issues Involved:
1. Jurisdiction and validity of impugned additions and disallowances.
2. Disallowance of ?20,45,751/- out of interest expenses.
3. Disallowance of ?11,57,453/- out of interest expenses incurred on capital expenditure.
4. Disallowance of ?4,920/- out of interest payment on account of notional interest.
5. Charging of interest under sections 234A, 234B, 234C & 234D and withdrawal of interest under section 244A.

Issue-wise Detailed Analysis:

1. Jurisdiction and Validity of Impugned Additions and Disallowances:
The assessee did not press during the hearing the grounds relating to the jurisdiction and validity of the impugned additions and disallowances. Consequently, these grounds were dismissed as not pressed.

2. Disallowance of ?20,45,751/- out of Interest Expenses:
The assessee challenged the disallowance of ?20,45,751/- out of interest expenses incurred on availing the bank overdraft facility. The Assessing Officer (AO) observed that the assessee had made investments in mutual fund units from the bank overdraft account and issued a show cause notice. The assessee contended that the bank overdraft was against its own FDRs and not borrowed money, and that it had sufficient internal reserves to cover the investments. The AO, however, disallowed the interest, stating that the assessee failed to prove business expediency for the investments and relied on the decision of CIT Vs. Abhishek Industries Ltd. The CIT(A) upheld the AO's decision, invoking Section 14A, stating that the income from mutual funds was exempt and the overdraft was not the assessee's own money.

During the hearing, the assessee argued that Section 14A was wrongly invoked as the mutual fund investments were not tax-free and provided evidence of taxable maturity proceeds in the subsequent year. The Tribunal found that the bank overdraft was indeed in the nature of a loan, but the investments were made from mixed funds, not solely borrowed funds. It held that the assessee had sufficient interest-free funds to cover the investments, and the provisions of Section 14A were not applicable. Thus, the disallowance of ?20,45,751/- was deleted.

3. Disallowance of ?11,57,453/- out of Interest Expenses Incurred on Capital Expenditure:
The AO observed that the assessee used borrowed funds from the bank overdraft account for acquiring capital assets and disallowed ?11,57,453/- under the proviso to Section 36(1)(iii). The assessee argued that the overdraft was against its own FDRs and not borrowed money, and the advance payments for capital assets were made from current year profits. The CIT(A) upheld the AO's decision.

The Tribunal, referring to its findings in ground no. 2, held that the assessee had sufficient interest-free funds to cover the capital investments and no direct nexus between the borrowings and capital expenditure was established. Thus, the disallowance of ?11,57,453/- was deleted.

4. Disallowance of ?4,920/- out of Interest Payment on Account of Notional Interest:
The assessee did not press this ground during the hearing. Consequently, it was dismissed as not pressed.

5. Charging of Interest under Sections 234A, 234B, 234C & 234D and Withdrawal of Interest under Section 244A:
The assessee did not advance any arguments on this ground during the hearing. The Tribunal noted that the levy and withdrawal of interest were consequential in nature and dismissed this ground.

Conclusion:
The Tribunal allowed the appeal of the assessee in part, deleting the disallowances of ?20,45,751/- and ?11,57,453/- out of interest expenses, while dismissing the grounds relating to jurisdiction, notional interest, and charging/withdrawal of interest as not pressed or consequential.

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