9911796707
TMI Blog2016 (1) TMI 979X X X X Extracts X X X X X X X X Extracts X X X X ..... created by the assessee, we find no merit in the claim of assessee that the amount due to the Sundry Creditors was the interest free funds available with the assessee for making the investments and hence, no disallowance could be made out of interest expenditure. Admittedly, the funds available with the assessee were out of common pool i.e. on account of capital investment by the partners, on which the assessee firm was paying interest and other business funds in the form of Sundry Creditors and advances from customers since the investment was made out of common pool of investments, then the provisions of section 14A of the Act were clearly attracted and the disallowance made under Rule 8D(2)(ii) of the Rules is to be upheld. The said disallowance is to be made in line with the formula provided under the said sub-rule. However, claim of the assessee before us that in view of the ratio laid down by the Hon’ble High Court of Karnataka in Canara Bank Vs. ACIT (2014 (6) TMI 929 - KARNATAKA HIGH COURT), where the assessee has not incurred any expenditure since the dividend was re-invested in the mutual funds itself, no expenditure was attributable to earn the said income. Admittedly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 14A of the Act. In reply, vide letter dated 05.12.2011, the assessee stated that the assessee firm had invested ₹ 3.25 crores in mutual funds during February, 2008 for the first time. It was further stated that during the financial year 2008-09, the assessee had made investment in mutual fund out of proceedings of redemption, dividend re-investment and additional investment from accumulated balances. According to the assessee, the provisions of section 14A and Rule 8D of the Income Tax Rules, 1962 (in short the Rules ) were not applicable, since there was no direct cost to earn exempt income. The contention of the assessee before the Assessing Officer was that only direct expenses incurred for earning income would be covered by section 14A of the Act and since the assessee had not incurred any direct expenses, in relation to earning of exempt income, the provisions of section 14A of the Act were not applicable. The Assessing Officer noted that the major chunk of the interest debited related to partner s capital i.e. interest to the tune of ₹ 36,42,957/- out of total interest expenditure of ₹ 37,06,006/-. As per the Balance Sheet, the partner s capital account t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal in M/s Lakshmi Ring Travellers vs. ACIT in ITA No.2083(Mad)/2011 for assessment year 2008 -09. Reliance placed by the assessee on the ratio laid down by the Hon ble Bombay High Court in CIT vs. Reliance Industries Ltd. reported in 339 ITR 632 (Bom) was held to be not applicable as the Hon ble High Court had not admitted the appeal observing that the issue had arisen out of question of fact. Further, reliance of the assessee on the ratio laid down by the Hon ble Bombay High Court in CIT vs. Reliance Utilities and Power Ltd. reported in 313 ITR 340 (Bom) was distinguishable on facts, since the said decision was in the context of disallowance of interest under section 36(1)(iii) and not in the context of the disallowance under section 14A of the Act. The CIT(A), thus, upheld the order of t he Assessing Officer in disallowing the sum of ₹ 11,40,553/- under section 14A of the Act r.w. Rule 8 D of the Rules. 5. The assessee is in appeal against the aforesaid order of the CIT(A). 6. The Ld. Authorized Representative for the assessee has furnished written submissions and had also made oral submissions. The Ld. Authorized Representative for the assessee before us submitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ental Representative for the Revenue, on the other hand, pointed out that the quantum of disallowance has been quantified under Rule 8D(ii) and 8D(iii) of the Rules. The assessee may not have incurred any direct expenditure under Rule 8D(i) of the Rules, but the disallowance was warranted in view of provisions of section 14A r.w. Rule 8D of the Rules. The Ld. Departmental Representative for the Revenue further pointed out that where the firm was paying interest on the capital of the partners which money was available to the assessee for investment in mutual fund, interest relatable to such investment was disallowable in the hands of the assessee. The Ld. Departmental Representative for the Revenue pointed out that theory of non-interest bearing funds available with the assessee on account of sundry creditors, outstanding liabilities and advance from customers had no basis and in the absence of assessee establishing the utilization of funds, there was no merit in the claim of the assessee. Further, our attention was drawn to the provisions of Rule 8D of the Rules, wherein it is provided that the expenditure of interest which is not directly attributable to any particular of income i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowance under the said section read with Rule 8D of the Rules could be made in the hands of assessee. It is an admitted fact that the assessee for the year under consideration had not disallowed any expenditure being relatable to the dividend income earned from mutual funds totaling ₹ 24,18,000/-. The assessee had incurred interest expenditure of ₹ 11,657/- being interest paid to Union Bank of India Cash Credit Account. The borrowing was claimed towards working capital of the partnership firm. Further, the assessee had incurred interest expenditure of ₹ 51,392/- against the vehicle loan. The partnership firm had further incurred the expenditure of interest paid to the partners capital account totaling ₹ 36,42,957/-. With regard to the investment of ₹ 4.5 crores, the assessee claimed that investment of ₹ 3.25 crores in mutual funds was made for the first time in February, 2008. Further, sum of ₹ 1.30 crores was invested on 17.09.2009. The said investments were made out of proceedings of redemption of mutual funds, dividend re-investment and some additional investment from the accumulated balances. As pointed out earlier, the assessee had ea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disallowable as being expenditure relatable to earning of income, which does not form part of the total income, in line with the provisions of Rule 8D of the Rules. The case of the assessee was that no direct expenditure was incurred, hence, the provisions of Rule 8D of the Rules were not applicable. As pointed out by us in the paras hereinabove, under Rule 8D(2)(i) of the Rules, in case any direct expenditure is incurred which is relatable to the income which does not form part of total income, then such expenditure is to be disallowed. However, the perusal of working of the disallowance as per Rule 8D(2) of the Rules at page 4 of the assessment order reflects that no expenditure directly relatable to income which does not form part of total income, has been disallowed in the hands of the assessee. On the other hand, the disallowance of ₹ 11,40,553/- has been worked out on account of interest expenditure and the administrative expenditure as per Rule 8D(2)(ii) and (iii) of the Rules, respectively. The assessee is a partnership firm and as per the terms of Partnership Deed, the assessee firm is paying interest on the capital balance of the partnership firm. The copy of the Ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee because on one hand, there was Sundry Creditors and the advances from customers, on the other hand, there was Sundry Debtors at ₹ 208.38 outstanding and also there was deposit of ₹ 229.18 lakhs and Margin money of ₹ 242.08, besides other investment and the fixed assets. The funds available with the assessee were a common pool of funds, which included both the interest bearing and interest free funds. Where the assessee has not been able to establish that it had made the investment in the mutual funds, income from which is not includable in the total income, from independent sources on which, no interest expenditure was incurred and where the investment is from a common pool of funds, the provisions of section 14A of the Act are squarely applicable. The business funds i.e. in the form of Sundry Creditors cannot be said to be interest free funds available to the assessee for making the aforesaid investments in mutual funds. On the other hand, if the assessee s profit reserves or its surplus funds in the form of capital account of the partners, did not bear any burden of interest, then the same could be said to be available with the assessee. In the absence of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Authorized Representative for the assessee that what was the basis for the said bifurcation. The learned Authorized Representative for the assessee fairly admitted that the details on page 10 of the Paper Book were re-drafted Balance Sheet prepared by the assessee. In the absence of any details in the form of bank statements or the movement of funds being filed by the assessee, we find no merit in the reliance placed upon by the learned Authorized Representative for the assessee on the aforesaid re-drafted Balance Sheet. As pointed out by us in the paras hereinabove, it is incomprehensive to understand that the business funds on account of so-called Sundry Creditors were utilized for making investments in mutual funds. The business funds being available in a common pool of funds, which were for both interest bearing and non-interest bearing funds and in the absence of the assessee having established the interest free funds being available with it on account of reserves and surpluses or profit reserves, we find no merit in the claim of the assessee and dismiss the reliance placed on the re-drafted Balance Sheet. 13. The learned Authorized Representative for the assessee has plac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re clearly relatable to the business carried on by the assessee and such funds cannot be said available for making investments and not for carrying on the business. On the other hand, the assessee had invested in the business assets i.e. fixed assets, stock in trade, etc. and also placed margin money for carrying on the business with bank totaling ₹ 2.42 crores. In view of the business funds available with the assessee and the business assets created by the assessee, we find no merit in the claim of assessee that the amount due to the Sundry Creditors was the interest free funds available with the assessee for making the investments and hence, no disallowance could be made out of interest expenditure. Admittedly, the funds available with the assessee were out of common pool i.e. on account of capital investment by the partners, on which the assessee firm was paying interest and other business funds in the form of Sundry Creditors and advances from customers since the investment was made out of common pool of investments, then the provisions of section 14A of the Act were clearly attracted and the disallowance made under Rule 8D(2)(ii) of the Rules is to be upheld. 15. Now, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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