TaxTMI 
TaxTMI 
2016 (1) TMI 979
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....y of reactors, pressure vessels, agitators, tanks, etc.. During the course of assessment proceedings, the Assessing Officer noted that the assessee had earned exempt income of Rs. 24,18,535/- i.e. the dividend on mutual fund. The Assessing Officer also noted that in Form No.3CD of audit report in para 17(1), the assessee had declared NIL amount as amount inadmissible as a deduction in terms of section 14A of the Act. The Assessing Officer, in this regard, issued the questionnaire dated 21.07.2011 particularly para 25 thereof and the assessee was required to furnish the details of expenditure incurred for earning tax-free income and also to explain as to why disallowance should not be made under provisions of section 14A of the Act. In reply, vide letter dated 05.12.2011, the assessee stated that the assessee firm had invested Rs. 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....
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.... and therefore the investment in mutual funds was out of surplus fund available with the firm and also that there was no direct nexus between the investment and mutual fund and money borrowed from partners as capital and hence there was no question of disallowance under section 14A of the Act r.w. Rule 8D of the Rules. The CIT(A) observed that the investment in mutual fund had been made from the common pool of funds available with the assessee both were interest bearing as well as interest-free. Therefore, the assessee's claim that no interest bearing funds were utilized for investment in mutual funds was not accepted by the CIT(A). The CIT(A) relied on the decision of Chennai Bench of the Tribunal 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 v....
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..... reported in (2009) 313 ITR 340 (Bom) and the decision of Hon'ble Punjab & Haryana High Court in CIT vs. Hero Cycles Ltd. reported in (2010) 323 ITR 518 (P&H). It was further pointed out by the Ld. Authorized Representative for the assessee that the reliance of CIT(A) on the decision of the Chennai Bench of the Tribunal in M/s Lakshmi Ring Travellers vs. ACIT (supra) was incorrect. The assessee further pointed out that the CIT(A) has given a finding that the funds are mixed and hence disallowance is warranted, but this theory of mixed funds has been overruled by the Hon'ble High Court of Karnataka in Canara Bank Vs. ACIT (2014) 99 DTR 36 (Karn). 7. The Ld. Departmental 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 t....
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....ttributable to any particular income or receipt, then the disallowance is to be worked out as per the formula provided therein. Further, under Rule 8D(2)(iii) of the Rules, the amount equivalent to one half percent of the average of value of investment, income from which does not or shall not form part of total income, as appearing on the first and last day of the previous year, in the Balance Sheet, is to be disallowed while computing expenditure relatable to income not includable in total income. The first grievance of the assessee before us in the present case is that where the Assessing Officer has not recorded satisfaction under section 14A(2) of the Act, no disallowance 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 Rs. 24,18,000/-. The assessee had incurred interest expenditure of Rs. 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 assesse....
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....thereafter, issued show cause notice to the assessee to explain as to why no disallowance should be made under section 14A of the Act establishes the case of the Department that the Assessing Officer had recorded implicit satisfaction before working out the disallowance under section 14A of the Act. In terms of section 14A(2), we find merit in the claim of the Revenue in this regard and dismiss the contention of the assessee that no satisfaction was formed by the Assessing Officer before working out the disallowance under section 14A of the Act. 10. Now, coming to the second aspect of the issue i.e. whether any amount is 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 ....
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....totaling Rs. 952.54 lakhs and advances from customers at Rs. 71.78 lakhs. We find no merit in the plea of the assessee because on one hand, there was Sundry Creditors and the advances from customers, on the other hand, there was Sundry Debtors at Rs. 208.38 outstanding and also there was deposit of Rs. 229.18 lakhs and Margin money of Rs. 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 ....
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....e assessee were utilized for the remaining non-interest bearing funds. It was put to the learned 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 ....
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....see before us as pointed out in the paras hereinabove is on account of Sundry Creditors, which are 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 Rs. 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 attrac....