2013 (10) TMI 1304 - AT - Income Tax

Tribunal Remands Case for Correct Apportionment Method, Requires Specific Findings

Kunal Corporation Versus Asst. CIT, Circle 12 (3), Mumbai

The Tribunal upheld the Commissioner of Income-tax (Appeals)'s approach but identified errors in the apportionment method. The case was remanded to the ... Disallowance under section 14A - quantifying the borrowing attributable to the balance investment in shares and units (Rs. 156.12 lakhs), i.e., after deducting the amount of borrowings for the said investment made from Kotak Mahindra Prime Ltd. at ₹ 205 lakhs - Held that:- CIT(A) has in applying the average method, erred inasmuch as he has adopted the figure of the total investment (at ₹ 795 lakhs), i.e., as per balance-sheet, even as investment to the extent of ₹ 205 lakhs stands already confirmed to be sourced from the borrowings from Kotak Mahindra Prime Ltd., so that it is only the balance investment in business that is to be taken into account, i.e., in the denominator, excluding ₹ 205 lakhs both from the value of the exempt investment as well as the total investment. Needless to add, if the bank loans are dedicated funds, toward financing working capital, application of which is demonstrated, the same would also warrant a similar exclusion to the extent it is funding by borrowed capital is established. Unless, however, the same is perceptibly demonstrated, the common pool of funds hypothesis, could apply, being reasonable, so that all the funds, howsoever derived, are construed as having financed the relevant investments proportionately. Thus consider it fit and proper that the matter qua the disallowance under section 14A with reference to the interest attributable to the balance investment of ₹ 156.12 lakhs is restored back to the file of the learned Commissioner of Income-tax (Appeals), so as to allow the assessee an opportunity to present its case before him, and who shall decide the same in accordance with law, issuing definite findings of fact, and after hearing both parties, giving the assessing authority due opportunity to examine and rebut the assessee's case. Decided in favour of assesse by way of remand. Issues Involved:1. Disallowance under Section 14A of the Income-tax Act, 1961.2. Enhancement of disallowance by Commissioner of Income-tax (Appeals).3. Allocation of interest expenditure between business and investment purposes.4. Proportionate method of allocating interest by the Commissioner of Income-tax (Appeals).5. Correctness of indirect expense disallowance.Detailed Analysis:1. Disallowance under Section 14A of the Income-tax Act, 1961:The primary issue involves the disallowance under Section 14A, initially effected by the Assessing Officer (A.O.) at Rs. 95,084 and subsequently enhanced by the Commissioner of Income-tax (Appeals) to Rs. 16,64,980. The assessee contended that the disallowance was improperly enhanced by treating the disallowance under Section 36(1)(iii) as under Section 14A. The assessee argued that it had sufficient own funds, negating the need for disallowance under Section 14A for interest expenditure, referencing the decision in CIT v. Reliance Utilities and Power Ltd. [2009] 313 ITR 340 (Bom).2. Enhancement of Disallowance by Commissioner of Income-tax (Appeals):The Commissioner of Income-tax (Appeals) enhanced the disallowance by reclassifying the interest expense initially disallowed under Section 36(1)(iii) by the A.O. as under Section 14A. The assessee argued that this reclassification was done without providing an opportunity to explain its case, and the authorities failed to adjust the suo motu disallowance of Rs. 1,97,249.3. Allocation of Interest Expenditure Between Business and Investment Purposes:The assessee had made significant investments during the relevant year, primarily funded through borrowings and partners' capital. The A.O. disallowed the interest on the borrowed funds used for these investments, amounting to Rs. 6,37,555, and the Commissioner of Income-tax (Appeals) confirmed this under Section 14A. Additionally, the A.O. found that the assessee had incurred interest costs on unsecured loans, leading to a further disallowance of Rs. 12,34,388, later adjusted to Rs. 9,32,341 by the Commissioner of Income-tax (Appeals) using a proportionate formula.4. Proportionate Method of Allocating Interest by the Commissioner of Income-tax (Appeals):The Commissioner of Income-tax (Appeals) applied a proportionate method to allocate interest, considering the entire interest incurred for the year except the interest against mutual fund loans. The Tribunal found merit in the Revenue's application of the common pool of funds hypothesis, stating that unless the assessee could demonstrate dedicated funds for specified purposes, the proportionate method was reasonable. The Tribunal emphasized the need for a detailed fund flow statement to discern the sources and applications of funds.5. Correctness of Indirect Expense Disallowance:The third limb of disallowance, Rs. 95,084 towards indirect expenses (other than interest), was worked out at 0.5% of the average value of investments held during the year. This disallowance was not disputed before the Tribunal.Conclusion:The Tribunal found no infirmity in the approach of the Commissioner of Income-tax (Appeals) in principle but noted errors in the method of apportionment. The Tribunal directed the matter back to the Commissioner of Income-tax (Appeals) to allow the assessee an opportunity to present its case and to decide the matter in accordance with the law, issuing definite findings of fact. The appeal was disposed of in these terms.Order Pronounced:The order was pronounced in the open court on October 11, 2013.