TaxTMI 
TaxTMI 
2012 (9) TMI 551
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....nvestigations Pvt. Ltd. (MPIPL) which, as per the Revenue, was for earning dividend and not related to the business of the assessee. According to the Revenue, the CIT(Appeals) had come to a wrong conclusion that assessee made these investments out of its own surplus funds, and had also ignored a decision of this Tribunal in I.T.A. No. 1621/Mds/2008 which inter-alia required the CIT(Appeals) to examine the issue in the light of the judgment of Hon'ble jurisdictional High Court in the case of K. Somasundaram & Bros. v. CIT (1999) 238 ITR 939 (Mad). Revenue is also aggrieved that CIT(Appeals) held the disallowance to have been made under Section 14A of Income-tax Act, 1961 (in short 'the Act'), whereas, Assessing Officer had made the disallowance under Section 36(1)(iii) of the Act. 3. Facts apropos the above issue are that assessee-company engaged in providing security services and also selling electronic equipments for such security services, had made investment of Rs. 25 lakhs on 27.3.2003 in UTI Money Market Fund. Assessee had also acquired 1870 equity shares of M/s Modern Protection and Investigations Pvt. Ltd. (in short MPIPL) from its promoters for a price of Rs. 22.....
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....ourt in the case of K. Somasundaram & Bros. v. CIT (238 ITR 939). During the course of proceedings before the CIT(Appeals), argument of the assessee was that investment made in the shares of MPIPL was to enlarge its operations and to increase its turnover in Mumbai. As per the assessee, the said company was already established and therefore, by acquiring its shares, it could establish its business in Mumbai without incurring any additional expenditure. In other words, as per the assessee, the investment was in its regular course of business and not for any non-business purposes. Further, as per the assessee, it was having interest free fund as at the end of financial year 2002-03 totalling to Rs. 8,13,45,801/- and therefore, it was only a presumption taken by the Assessing Officer that the investments were made out of borrowed funds. As for the investment in M/s UTI Money Market Fund, submission of the assessee was that it was only for a period of ten days and there was no borrowing whatsoever made by it for the said purpose. 5. CIT(Appeals) was appreciative of these contentions of the assessee. According to him, there was no diversion of borrowed funds by the assessee. Investme....
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....nt, according to him. For this, he relied on the decision of Hon'ble jurisdictional High Court in the case of CIT v. Hotel Savera (239 ITR 795). According to him, Department had failed to prove that any borrowed funds were utilized for such investments. Reliance was also placed on the decision of Hon'ble Apex Court in the case of S.A. Builders Ltd. v. CIT (288 ITR 1). 8. We have perused the orders and heard the rival submissions. There were two investments made by the assessee for which interest disallowances were made. One was investment in UTI Money Market Fund to the tune of Rs. 25 lakhs and other was investment in shares of M/s MPIPL to the tune of Rs. 22.73 lakhs. 9. Insofar as investment made in UTI Money Market Fund is concerned, the said investment was made on 27.3.2003 and the amount was fully withdrawn by 4.4.2003. Hence, the money was with UTI Money Market Fund only for a period of ten days. As per the assessee, it had its own funds at the point of time for making such investments and such investments were all of a short-term nature. Funds available with assessee as on 31.3.2003 were as follows:- Share capital : Rs. 12,50,000/- Reserves & Surplus : Rs. ....
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....such payments to the partners were made out of contract receipts, it was found only to be a postponement of diversion. It was clearly established that there was diversion by postponement and it was for this reason the Hon'ble jurisdictional High Court held the interest disallowance to be justified. On the other hand, here, neither was the money given to any partners nor has the Revenue established any diversion of borrowed funds. We are, therefore, of the opinion that the CIT(Appeals) was justified in deleting the disallowance of interest. We do not find any reason to interfere with the orders of CIT(Appeals). 10. Appeals of the Revenue for assessment years 2003-04, 2004-05 and 2005-06 stand dismissed. 11. Now we take up appeals for assessment years 2006-07 and 2007- 08. 12. Grounds taken by the Revenue for these two years are similar. Revenue is aggrieved that the CIT(Appeals) deleted disallowance of Rs. 11,85,000/- for assessment year 2006-07 and Rs. 13,94,192/- for assessment year 2007-08 made by the A.O., relying on Section 14A of the Act. As per the Revenue, investments made by the assessee, which earned it dividends, were not out of any surplus funds or any interest ....
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....ection 14A was applicable and it was required to make a disallowance against investment made for earning tax free income. 17. Per contra, learned A.R. submitted that assessee had not incurred any expenditure for earning tax free dividend and therefore, any disallowance of interest was not called for. 18. We have perused the orders and heard the rival submissions. There is no dispute that during these two years, Rule 8D of Income-tax Rules, 1962, was not applicable in view of the decision of Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra). Nevertheless, it was clearly held by Hon'ble Bombay High Court that disallowance might be required for expenses incurred for earning tax free income based on circumstances of each case for earlier years as well. Hon'ble Delhi High Court in the case of Maxopp Investment Ltd. &Ors. v. CIT (2011) 64 DTR 122 has held at paras 30 and 31 of its order as follows:- "30. As we have already noticed, sub-s. (2) of s. 14A of the said Act refers to the method of determination of the amount of expenditure incurred in relation to exempt income. The expression used is - "such method as may be prescribed". We have already men....
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....ssets of the assessee. The third component is an artificial figure-one-half per cent of the average value of the investment, income from which does not or shall not form part of the total income, as appearing in the balance sheets of the assessee, on the first day and the last day of the previous year. It is the aggregate of these three components which would constitute the expenditure in relation to exempt income and it is this amount of expenditure which would be disallowed under s. 14A of the said Act. It is, therefore, clear that in terms of the said rule, the amount of expenditure in relation to exempt income has two aspects - (a) direct and (b) indirect. The direct expenditure is straightaway taken into account by virtue of cl. (i) of sub-r. (2) of r. 8D. The indirect expenditure, where it is by way of interest, is computed through the principle of apportionment, as indicated above. And, in cases where the indirect expenditure is not by way of interest, a rule of thumb figure of one-half per cent of the average value of the investment, income from which does not or shall not form part of the total income, is taken." We are of the opinion that in view of various judicial pr....