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2023 (1) TMI 1122 - AT - Income TaxDisallowance u/s 14A r.w.r. 8D - As argued AO failing to enquire the allowability of relevant expenditure - HELD THAT - it is imperative for the learned CIT(A) to consider the statement of the assessee that no expenditure is incurred for making and maintaining such a huge investment, and in that process, the learned CIT(A) has necessarily to delve deeper and record a satisfaction. There is a subtle difference between the learned Assessing Officer exercising jurisdiction 14A of the Act without recording satisfaction leaving it to be recorded by the learned CIT(A), and the learned CIT(A) looking into the aspect of learned Assessing Officer treating the exempt income as such but failing to enquire the allowability of relevant expenditure. This case falls in the second category whereas all the cases relied upon by the assessee fall in the first category. With this view of the matter, we reject the first contention of the assessee. Enough own funds available in the hands of the assessee to invest in shares - On this analysis, learned CIT(A) returned a finding that less than Rs. 8 crores was available in the hands of the assessee for investment, after exhausting the own funds in business assets, whereas the investment of the assessee to the tune of Rs. 304 crores which was obviously from out of the borrowed funds. No contrary material is placed on record to convert this finding of the learned CIT(A). We agree with the learned CIT(A) and reject this contention. Disallowance shall be restricted to the dividend income that was earned during the year under consideration and cannot exceed the same, there cannot be any quarrel with this proposition - AR drew our attention to the statement where the details of amount of investments from borrowed funds, dates of borrowal and investment are provided and such information as available - Basing on this, he submitted that at best, an amount of Rs. 29,89,465/- alone could be disallowed. This is a verifiable fact. learned Assessing Officer has to verify these figures, the interest expense viz-a-viz the quantum of exempt income to recompute the disallowance. In the interest of justice to set aside this issue to the file of the learned Assessing Officer for verification of the facts and figures and to compute the disallowance under section 14A of the Act read with rule 8D of the Rules. These grounds are accordingly treated as allowed for statistical purposes. Computation of long term capital gains - complains of the violation of the principles of natural justice - grievance of the assessee is that AO referred to the confessional statement of Mr. Raghurama Krishna Raju recorded under section 132(4) of the Act but such a document was not furnished to the assessee - HELD THAT - Even if we exclude the so called statement of Mr. Raghurama Krishna Raju, the facts narrated in the preceding paragraph do not inspire any confidence to believe that the sale of shares under buy back at Rs. 10/- per share. When the assessee made huge investment in M/s. Ind Barath Power Infra (P) Ltd., and when M/s. Ind Barath Power Infra (P) Ltd., raised funds in October, 2009 from equity funds by allotting shares at a premium of Rs. 187.58/-, it cannot be said that the assessee will be totally ignorant of such a fact. It could be seen from the orders of the authorities below that while computing the long term capital gains, they are influenced by the statement of Mr. Raghurama Krishna Raju, and the assessee complains that the copy of it was never furnished it. Record does not reveal and for that matter, it is not the case of the assessee that the assessee made any attempt to secure such a copy or sought an opportunity to cross examine Mr. Raghurama Krishna Raju to controvert the so called statement made by him. What all assessee pleads that without furnishing a copy, the Revenue cannot made any addition, because, the principles of natural justice are violated in its case. Since we reached a conclusion that the authorities are justified in not believing the transaction of sale of shares at Rs. 10/- per share, and seems to have based the computation of capital gains on the statement of Mr. Raghurama Krishna Raju, we are of the considered opinion that the ends of justice would be met by directing the learned Assessing Officer to furnish a copy of the statement of Mr. Raghurama Krishna Raju to the assessee and to have a fresh look on this aspect. With this view of the matter, we set aside the findings of the authorities below on this issue also and restore it to the file of the learned Assessing Officer for considering it afresh. Disallowance u/s 14A r.w.r 8D - necessity of recording satisfaction - assessee had taken the plea that it did not utilize any borrowed funds for investment and, therefore, no disallowance could be made in respect of the exempt income to earn which no borrowed funds were utilized - AY. 2011-12 - HELD THAT - We find that the learned Assessing Officer dealt with this issue in a detailed manner. He referred to the total amount of investment, dividend yielding net investment, figures in the P L Account referring to the interest expense etc. he also sought the explanation of the assessee while proposing to make disallowance under section 14A of the Act read with rule 8D of the Rules. He considered the decisions relied upon by the assessee viz-a-viz the CBDT Circular No. 5 of 2014 to reach a conclusion that when once there is an exempt income from the investments and there is a claim of interest expenses in the P L Account, provisions under section 14A of the Act read with rule 8D of the Rules are applicable. There is no specific form to record the satisfaction or otherwise of the learned Assessing Officer under the Act or Rules and it is only the conclusions reached by the learned Assessing Officer when having regard to the accounts of the assessee, he is not satisfied with the correctness of the claim of the assessee, that would constitute the requisite dissatisfaction. The quantum of interest and administrative expenses is a different matter, but according to us, it is suffice if the learned Assessing Officer considers the objections of the assessee before proceeding to invoke the provisions under section 14A of the Act read with rule 8D of the Rules. The discussion of the learned Assessing Officer at paragraph Nos. 4.1 to 4.7 of the assessment order really constitutes the recording of dissatisfaction and nothing more is required. The first contention of the assessee is accordingly rejected. Sufficiency of own funds - When once the assessee contracted loans for business purpose, and it is found that there is investment, it is for the assessee to establish with reference to the cash/funds flow that the borrowed amount is exhausted for business purpose. When once there is no evidence to show that the borrowed funds are not utilized fully and exclusively for the purpose of business, it cannot be said that the assessee is entitled to claim deduction of the entire interest expense. When this fact is coupled with the observation of the learned CIT(A) that after exhausting the own funds in the business assets, the assessee holds only Rs. 15 crores or less in its hands where the investment was found to the tune of Rs. 311.51 crores, considering disallowance under section 14A of the Act read with rule 8D of the Rules is imperative. Learned CIT(A) has taken care to see that out of the total interest expense, such portion as could reasonably be attributed to the Business is not brought to the disallowance. It is quite fair and reasonable. We uphold the same and reject the contention of the assessee. AO originally computed the disallowance by taking the entire interest expense and added the administrative expenses to it by taking the average value of the entire investment and thereafter, restricted the same to the expense claimed - CIT(A), however, excluded that portion of interest which is attributable to the business and took into consideration only the interest attributable to the investment. Apart from this, she also directed AO to consider the half percentage only in respect of the exempt income yielding investments. This action of the learned CIT(A) tends to reduce the disallowance, but will not enhance it. Administrative charges at one half percentage shall only be in respect of the investment which yielded the exempt income and the total disallowance under section 14A of the Act read with rule 8D of the Rules shall not exceed the exempt income that is earned during the year under consideration, it is in consonance with the settled principles of law. We, therefore, while accepting the contention of the assessee, direct the learned Assessing Officer to recompute the disallowance while taking the average value only of the exempt yielding investment into consideration and by restricting the disallowance to the exempt income earned during the year under consideration. With this view of the matter, we allow the appeals in part.
Issues Involved:
1. Classification of rental income as 'income from house property' vs. 'income from business'. 2. Classification of interest income from money lending as 'income from other sources'. 3. Disallowance of interest expenses on borrowed funds. 4. Treatment of long-term capital loss on the sale of shares. 5. Disallowance under section 14A of the Income Tax Act, 1961 read with Rule 8D of the Income Tax Rules, 1962. Issue-wise Detailed Analysis: 1. Classification of Rental Income: The assessee treated a sum of Rs. 38,86,827/- as income from business, though derived by way of rent. The Assessing Officer (AO) reclassified it as 'income from house property'. The CIT(A) directed the AO to allow the deduction under section 24(b) of the Income Tax Act, 1961 upon the assessee furnishing the relevant figure of interest. 2. Classification of Interest Income from Money Lending: The AO classified the interest income from money lending as 'income from other sources' due to lack of RBI approval. The CIT(A) disagreed, stating that registration is not a prerequisite for conducting money lending business and treated it as 'business income'. However, CIT(A) found that the assessee's own funds were inadequate and the investments were made from borrowed funds. 3. Disallowance of Interest Expenses: The AO disallowed Rs. 1,52,31,379/- of interest expenses on borrowed funds, as no portion of such funds was used for the business. The CIT(A) attributed only Rs. 43,59,091/- as business-related interest expense and disallowed the rest. The CIT(A) also proposed disallowance under section 14A of the Act. 4. Treatment of Long-Term Capital Loss on Sale of Shares: The AO added Rs. 3,69,55,200/- to the income of the assessee, suspecting the sale of shares at face value of Rs. 10/- per share when they were purchased at a premium of Rs. 240/- per share. The CIT(A) upheld this addition, referencing the confessional statement of Mr. Raghurama Krishna Raju. The Tribunal directed the AO to furnish the statement to the assessee and reconsider the matter afresh. 5. Disallowance under Section 14A read with Rule 8D: For AY 2010-11, the CIT(A) directed the AO to compute disallowance under section 14A read with Rule 8D, rejecting the assessee's plea that no expenditure was incurred for earning exempt income. The Tribunal set aside this issue to the AO for verification and recomputation, ensuring the disallowance does not exceed the exempt income. For AY 2011-12, the AO made a disallowance of Rs. 3,71,27,320/-, which was restricted to the expense claimed. The CIT(A) found that the assessee's own funds were insufficient for the investments and directed the AO to recompute the disallowance, attributing only the interest related to investments and considering only the exempt income yielding investments. The Tribunal upheld this approach and directed the AO to ensure the disallowance does not exceed the exempt income. Conclusion: ITA No. 385/Hyd/2015 was allowed for statistical purposes, and ITA Nos. 386/Hyd/2015 & 1730/Hyd/2016 were partly allowed. The Tribunal directed the AO to reconsider certain aspects and recompute disallowances as per the principles discussed.
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