2018 (1) TMI 143 - HC - Income Tax

Disallowance under Section 80M - establishment of nexus between the investments made during the year and the borrowed funds - Penalty proceedings initiated under Section 271(1)(c)- Held that - The issue is clearly covered in view of the decision of this Court in the Commissioner of Income Tax vs. Reliance Utilities and Powers Ltd. (2009 (1) TMI 4 - BOMBAY HIGH COURT ). We have perused the said judgment. The Division Bench held that when the funds available were both interest-free and overdraft and/or loan taken, then a presumption would arise that the investments made would be out of interest-free funds generated or available with the company, provided the interest-free funds were sufficient to meet the investments. In the case at hand, Mr.Suresh Kumar fairly conceded that the said decision holds the field as on date. In view of the above and considering the issue at hand, we are of the view that the respondent assessee is held entitled to benefit of the aforesaid presumption and accordingly, the questions proposed do not give rise to any substantial question of law. The impugned order does not call for interference and accordingly the appeal need not be entertained.

Summary

Issues:
1. Disallowance under Section 80M of the Income Tax Act
2. Interpretation of provisions of Section 80M and Section 80AA
3. Nexus between investments made and borrowed funds
4. Deduction under Section 80M based on interest-free funds
5. Verification of figures for penalty proceedings under Section 271(1)(c)

Issue 1: Disallowance under Section 80M of the Income Tax Act
The appellant, Principal Commissioner of Income Tax, challenged the deletion of disallowance under Section 80M by the Tribunal. The Assessing Officer had questioned the deduction claimed by the respondent-assessee under Section 80M, which was based on the dividend income declared and paid. The Tribunal, relying on precedents, ruled in favor of the assessee, stating that the investment in tax-free securities was presumed to be made out of interest-free funds available with the assessee.

Issue 2: Interpretation of provisions of Section 80M and Section 80AA
The appellant contended that the Assessing Officer had established a nexus between the investments made and borrowed funds, questioning the deletion of disallowance under Section 80M. The Tribunal, however, followed the decision of a Co-ordinate Bench and held that the investment made by the assessee was presumed to be out of interest-free funds available, as per the provisions of Section 80M and Section 80AA.

Issue 3: Nexus between investments made and borrowed funds
The Assessing Officer observed a correlation between the money borrowed and investments made by the assessee. The appellant argued that the Assessing Officer had not proved the required nexus between the investments and borrowed funds. However, the Tribunal found that the investments in tax-free securities were presumed to be made out of interest-free funds available with the assessee, as per relevant legal provisions.

Issue 4: Deduction under Section 80M based on interest-free funds
The appellant raised concerns about the deduction under Section 80M, emphasizing the interest payable on investments made using borrowed funds. The Tribunal noted that the assessee had paid interest in pursuance of an agreement, and investments were presumed to be made out of interest-free funds available with the company, as per relevant legal interpretations.

Issue 5: Verification of figures for penalty proceedings under Section 271(1)(c)
Penalty proceedings were initiated under Section 271(1)(c), and the Commissioner of Income Tax (Appeals) directed the Assessing Officer to verify the figures mentioned in the assessment order. The figures were found to be unverifiable, leading to appeals by both the revenue and the assessee before the Tribunal, which disposed of the matter based on the available evidence and legal interpretations.

In conclusion, the High Court of Bombay upheld the Tribunal's decision, dismissing the appeal and ruling in favor of the respondent-assessee based on the legal provisions and precedents cited during the proceedings.