2019 (4) TMI 192 - AT - Income Tax

Disallowance of interest u/s 36(1)(iii) - allegation that fund were used for purchase of mutual fund - HELD THAT - Neither the AO nor the CIT(A) has verified the source of these credits in the OD account whether these transfers in the OD account were made from the other loan account or assessee s own fund. If these transfers in the OD account are made from the assessee s own fund then certainly the disallowance to the extent of the interest charged on the OD account can be considered for the purpose of investment made in the mutual funds but if the said transfer of fund in the OD account is from other loan account or any part of fund is from some other loan account then the disallowance has to be calculated based on the actual borrowed fund utilized for investment in mutual funds. Since the Assessing Officer has considered the amount therefore, the disallowance should not exceed the amount which was disallowed by the Assessing Officer in the impugned order. Hence, in the facts and circumstances, we find that despite the second round, the assessee has not produced the relevant details to show the moment of the fund in the OD account and specifically the credit/deposits made in the OD account so as to support its contention that the assessee s own fund was utilized for investment in mutual funds and not the borrowed funds. In absence of the relevant details and evidence, the issue cannot be decided conclusively. Hence, we are constrained to remand the matter to the AO for verification of the source of fund. Disallowance u/s 14A - HELD THAT - Disallowance U/s 14A of the Act on account of interest expenditure, this issue is common to the disallowance of interest expenditure made by the Assessing Officer U/s 36(1)(iii) of the Act in ground No. 1 of the appeal. Hence, in view of our finding and observation on ground No. 1 of the revenue s appeal, this issue is set aside to the record of the Assessing Officer on same terms for verification of the moment of the fund and actual source of investment in the mutual funds. Disallowance on account of common/indirect administrative expenditure being 0.5% of the average investment as per Rule 8D(2)(iii) of the Rules - Since the dividend income during the year is only ₹ 1,81,392/-, therefore, in view of the binding precedents on this issue, the disallowance made U/s 14A read with Rule 8D(2)(iii) of the Rules, cannot be more than the exempt income. The Hon ble Delhi High Court in the case of Cheminvest Ltd. v. Commissioner of Income-tax-IV 2015 (9) TMI 238 - DELHI HIGH COURT has held that if there is no exempt income earned by the assessee during the year, no disallowance can be made on account of administrative expenditure, therefore, we find that the disallowance restricted by the CIT(A) to the extent of exempt income is proper and justified.

Summary

Issues Involved:
1. Disallowance of interest expenses on OD facilities.
2. Disallowance under Section 14A of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Disallowance of Interest Expenses on OD Facilities

The first issue pertains to the disallowance of interest expenses amounting to ?66,26,803/- by the Assessing Officer (A.O.) under Section 36(1)(iii) of the Income Tax Act, 1961, which was later restricted to ?77,733/- by the Commissioner of Income Tax (Appeals) [CIT(A)]. The A.O. had identified that the assessee made investments in mutual funds using an overdraft (OD) account and calculated the disallowance based on the debit balance in the OD account, applying an average interest rate of 12.6%. The CIT(A), however, limited the disallowance to the actual interest charged on the OD account, which was ?77,733/-, citing that the total interest expenses on the OD account during the year were only ?77,732/-.

The Revenue argued that the A.O. had correctly considered the entire interest expenditure, not just the OD account, for the disallowance. The CIT(A) was criticized for not examining the actual flow of funds and ignoring other interest expenditures debited by the assessee. The Tribunal found that neither the A.O. nor the CIT(A) verified the source of credits in the OD account. Consequently, the Tribunal remanded the matter back to the A.O. for verification of the source of funds deposited in the OD account and to decide the issue after giving the assessee an opportunity to present necessary details.

Issue 2: Disallowance under Section 14A of the Income Tax Act, 1961

The second issue involves the disallowance under Section 14A, which was restricted by the CIT(A) to ?1,81,392/- against the A.O.'s disallowance of ?1,62,04,699/-. The A.O. had included the balance interest expenditure of ?27,39,19,108/- for the disallowance under Section 14A read with Rule 8D, resulting in an interest disallowance of ?1,48,51,556/- and an indirect administrative expenditure disallowance of ?13,53,143/-.

The CIT(A) concluded that the investment in mutual funds was made from the assessee's own funds, thus no disallowance was warranted for interest expenditure under Section 14A. For the indirect administrative expenditure, the CIT(A) limited the disallowance to the dividend income of ?1,81,392/- earned by the assessee.

The Tribunal agreed with the CIT(A) that the disallowance under Section 14A read with Rule 8D cannot exceed the exempt income, referencing the Delhi High Court's decision in Cheminvest Ltd. v. Commissioner of Income-tax-IV, which held that no disallowance can be made if there is no exempt income. However, the Tribunal remanded the issue of interest expenditure disallowance back to the A.O. for verification of the source of funds used for the investment in mutual funds, similar to the first issue.

Conclusion:

The Tribunal partly allowed the appeal for statistical purposes, remanding the matter back to the A.O. for further verification and decision. The Tribunal emphasized the necessity of verifying the source of funds used for investments and ensuring that disallowances under Section 14A do not exceed the exempt income. The Tribunal upheld the CIT(A)'s restriction of administrative expenditure disallowance to the extent of the exempt income earned.