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TMI Blog2023 (1) TMI 1122X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 learn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 conclusion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. - ITA Nos. 385/Hyd/15, 386/Hyd/15, 1730/Hyd/16 - - - Dated:- 16-1-2023 - SHRI RAMA KANTA PANDA, ACCOUNTANT MEMBER AND SHRI K. NARASIMHA CHARY, JUDICIAL MEMBER For the Assessee : Shri H. Srinivasulu, AR For the Revenue : Shri Kumar Aditya, DR ORDER PER K. NARASIMHA CHARY, JM: Aggrieved by the orders passed by the learned Commis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed Rs. 1,52,31,379/-. 6. Further, learned Assessing Officer found that the assessee acquired Rs. 1,53,980/- shares of M/s. Ind-Barath Power Infra Ltd., at a premium of Rs. 240/- per share on 30/09/2006, which the assessee claims to have sold to the same company during the assessment year 2010-11 at the face value of Rs. 10/- thereby incurring a long term capital loss of Rs. 4,53,36,579/- against the indexed cost of acquisition at Rs. 4,68,76,378/-. 7. On this aspect, observation of the learned Assessing Officer was that just two months prior to the selling of shares by the assessee at Rs. 10/- per share, M/s. Ind-Barath Power Infra Ltd., raised money from private equity funds by allotting shares at a premium of Rs. 187.58 in October, 2009. Learned Assessing Officer also considered the statement of one Mr. K. Raghurama Krishna Raju to the effect that he paid the un-recorded consideration of Rs. 3,69,55,200/- to the assessee in that sale. Considering these aspects, learned Assessing Officer did not believe the statement of the assessee that they sold the shares at Rs. 10/- per share to incur the losses. He, therefore, added the difference between the purchase price and sale co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ets, whereas the investment of the assessee to the tune of Rs. 304 crores which was obviously from out of the borrowed funds. 11. Learned CIT(A), therefore, took a view that interest expense only to the tune of Rs. 43,59,091/- alone could be attributed for business purpose and the balance out of Rs. 3,40,59,486/- claimed by the assessee as interest has to be treated as for non-business purpose. Since the learned Assessing Officer disallowed only a sum of Rs. 1,52,31,375/- on this score, learned CIT(A) thought it fit that the allowance of the balance must be subject to the restriction that the depreciation on building from which rent was earned not to be allowed, disallowance under section 14A of the Act and interest on borrowed capital allowed under section 24(b) of the Act has to be disallowed. 12. Learned CIT(A) found that the assessee earned Rs. 16,67,49,213/- towards exempt income on capital gains and dividend @ Rs. 16,36,95,597/- on account of long term capital gain and Rs. 30,53,616/- on account of dividend. Since this income flows from investments without making the statutory disallowance under section 14A of the Act, learned CIT(A) proposed to make disallowance. Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g interest income from interest expenditure debited to P L Account should have been considered by the learned CIT(A) while quantifying the interest amount, in which event, interest disallowable under rule 8D(2)(ii) of the Rules has to be quantified in the proportion average investment in share capital bears to the average total assets. It is further stated that the learned CIT(A) failed to consider that the expenditure disallowable under section 14A of the Act read with rule 8D of the Rules, shall not exceed the interest expenditure debited to P L Account plus administrative expenditure reduced by the interest allowed under the head business . 17. On the aspect of section 14A by the learned CIT(A), argument of learned AR is threefold. Firstly, according to him, the satisfaction under section 14A(2) of the Act has to be recorded by the learned Assessing Officer and learned Assessing Officer alone and not by the learned CIT(A). According to him, learned Assessing Officer did not record any such satisfaction, and, therefore, the satisfaction recorded by the learned CIT(A) has to be precluded from consideration. In support of this contention, he placed reliance on the decisions rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 14.59 crores, namely, equity: Rs. 2 crores; Reserve and surplus: Rs. 12.59 crores as on 31/03/2009; that as against that, it had fixed assets of Rs. 3.64 crores and net current assets of Rs. 30.25 crores (total Rs. 33.89 crores); that any accretion to its own fund was only on account of amalgamation of ILS Park Pvt. Ltd., with the assessee company during the financial year 2009-10 by way of revaluation of shares and land and transfer of profits; and that, therefore it is incomprehensible that it had made investment out of its own funds because such fund was grossly inadequate to meet its regular business requirement. 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. 21. Coming to the last contention urged by the learned AR that the disallowance under section 14A of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remium of Rs. 187.58 just two months prior to the sale of assessee to the company in buy back. He further submitted that at no point of time, the assessee sought an opportunity to controvert the statement of Mr. Raghurama Krishna Raju nor did the assessee seek a copy of such a statement. He, therefore, submits that non furnishing of the copy of statement is not at all relevant. 25. Facts on this aspect relied upon by the Revenue except the statement of Mr. Raghurama Krishna Raju, go uncontroverted. Assessee purchased the shares in question at Rs. 250/- per share, i.e., at a premium of Rs. 240/- per share. The very same shares fetched a premium of Rs. 187.58 just two months prior to the buy back of the shares of assessee by the company took place. No special reasons are assigned for the sale of such shares at the face value of Rs. 10/- to the very same company. Assessee pleaded before the learned Assessing Officer that since the investment in such shares did not yield any return, even after five years of investment, when Mr. Raghurama Krishna Raju approached the assessee with buy back proposal the Board of the assessee company decided to exit and said investment. It is further pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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. 29. 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 after furnishing a copy of the statement of Mr. Raghurama Krishna Raju to the assessee. ITA No. 385/Hyd/2015, is, accordingly, treated as allowed for statistical purposes. ITA Nos. 386/Hyd/2015 1730/Hyd/2016 (AY. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ific finding of the learned CIT(A) is that as on 31/03/2011, the reserves and surplus of the assessee include the revalued assets of land and equity shares to the tune of Rs. 85,04,26,779.40, such amount of revaluation does not give rise to any cash flow and, therefore, has to be excluded to get a clear position as to the source of funds available to the assessee for investment in shares. After undertaking that exercise, learned CIT(A) found that the assessee s own funds were sufficiently exhausted in its business asset and less than Rs. 15 crores was available for investment, whereas the assessee invested to the tune of Rs. 311.51 crores which is obvious that such funds flown from borrowed funds also. 35. According to the learned CIT(A), there is no scope for allowing the deduction of interest expense on the borrowed funds utilized for making investment. She recorded that such investment yields either capital gains or dividend. in respect of capital gains, there is no provision in the Act to allow deduction of interest while computing capital gains and in respect of the dividend, no question of allowing deduction of interest expense attributable to exempt income arise because, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tation of disallowance under section 14A of the Act read with rule 8D of the Rules by considering the administrative charges at one half percentage only by taking such investments which yielded exempt income, no question of enhancement would arise in this matter. 40. On a perusal of the assessment order, 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. 41. 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 learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 44. Further, learned Assessing Officer originally computed the disallowance under section 14A of the Act read with rule 8D of the Rules at Rs. 3,71,27,320/- by taking the entire interest expense and added the administrative expenses to it by taking the average v ..... X X X X Extracts X X X X X X X X Extracts X X X X
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