TaxTMI 
TaxTMI 
2017 (10) TMI 235
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...., is contrary to the provisions of law and facts hence, kindly be deleted in full. 3. Rs. 11,57,453/-: The ld. CIT(A) erred in law as well as on the facts of the case in confirming the disallowance of Rs. 11,57,453/- out of interest expenses alleging incurred on capital expenditure. The disallowance so made and confirmed by the ld. CIT (A), is contrary to the provisions of law and facts hence, kindly be deleted in full. 4. Rs. 4,920/-: The ld. CIT(A) erred in law as well as on the facts of the case in confirming the disallowance of Rs. 4,920/- out of interest payment on account of alleged notional interest on interest free advance. The disallowance so made and confirmed by the ld. CIT (A), is contrary to the provisions of law and facts hence, kindly be deleted in full. 5. The ld. AO further erred in law as well as on the facts of the case in charging interest u/s 234A, 234B, 234C & 234D of the Act and as also in withdrawing of interest u/s 244A of the Act. The appellant totally denies its liability of charging and withdrawal of any such interest. The interest so charged/withdrawn, being contrary to the provisions of law and facts, kindly be deleted in ful....
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.... has been brought forward from previous financial year. It was submitted that the bank overdraft account is not borrowed money, because overdraft account is against the assessee own bank FDRs and it is assessee own money taken out of FDR account temporarily. 8. It was further submitted that from the perusal of the balance sheet, it can be noted that the assessee firm has sufficient funds of its own and need not to borrow any funds. The current year profit before allocation between partners is Rs. 41.5 Cr. and investment in Mutual Funds fixed term debt fund scheme was made for just Rs. 3 Cr. The bank overdraft against FDR is just for better utilization of funds of the business. There is no direct nexus between the amount borrowed and investment in the Mutual Funds, as no amount was invested by raising an interest bearing loan. Investment in Mutual Fund was made out of capital and reserves (retained earnings and current year earnings). Therefore no disallowance on account of interest on borrowed money should be made. 9. In support, the assessee relied upon the decision of CIT vs. Dalmia Cement (Bharat) Ltd.(2002) 254 ITR 377 (Del), S.A. Builders ltd. vs. CIT(Appeal) (2007) 288 ....
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....Fund Units will be made out of interest paid on Bank Over Draft Account." 12. On perusal of the above, it is noted that the contention of the assessee before the Assessing Officer was the bank overdraft facility is not in the nature of borrowing of funds rather it is assessee's own money taken out of FDR account temporarily. It was further contended that all type of payments and receipts are routed through the bank overdraft account and by virtue of that, it cannot be held that every payment made out of the overdraft account is out of the borrowed funds. Thirdly, the assessee contended that it has sufficient internal reserves which far exceed the value of investment which has been made during the year and there are no borrowing and in turn, no direct nexus in terms of any borrowings and investment in the mutual funds. The assessee also contended that it has incurred net interest cost of 0.25%, and if the disallowance has to be made, the same has to be restricted to 0.25% and not the whole of 9.5%. Per contra, the contention of the Assessing officer is that funds withdrawn from the bank overdraft account have been utilised for making the investment in the mutual fund units and ac....
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....y for Over Draft and the source of investment was Over Draft and not it's own money. This will be clear from following example:- If an assessee has placed house property as security for taking overdraft would we allow interest expenses against income from house property? The answer is clear no. The Case laws sited by assessee are not relevant as in the case of assessee nexus between borrowed funds and investment was clearly established. The payments were directly made from overdraft account only and also admitted by assessee. Considering the above disallowance of interest of Rs. 20,45,751/- is confirmed. This ground of appeal is, therefore, dismissed." 16. During the course of hearing, the ld AR vehemently argued the matter and raised various contentions as per the written submissions which are reproduced as under. "1. Invoking of sec. 14A without jurisdiction: At the outset, it is submitted that the AO proceeded on complete misconception of law in as much as Sec. 14A can be invoked only when the AO finds that some expenditure has been incurred in relation to some exempted income. In other words, any income which is exempted e.g. u/s ....
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....verdraft account against FDRs, at a nominally higher rate of interest (.25 extra). Accordingly as a prudent businessman and to maximize its earning, assessee firm is in the regular practice to keep the fee received from the students in Bank in FDR's account and availing overdraft facility on the FDR's. All types of receipts (including fees) and all types of payments (whether capital or revenue) are made through overdraft account. But it does not mean that every payment made out of barrowed money. This is totally a part of the assessee's business financial management planning. Needless to say by not investing in FDRs the assessee of course would not have incurred interest cost but at the same time would not have earned interest. The net result would have been loss to the revenue. Here it should be clear that fixed term debt fund scheme - FMP (Fixed Maturity Plan) of mutual fund is simply an alternative of Bank FDRs. Bank fixed deposits are managed by banks while FMPs are issued and managed by mutual funds. Bank fixed deposits (FDs) are deposits in bank debt instruments, FMPs are also debt instruments managed by mutual funds in Govt. securities, and corporate debt. ....
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....ces of the case. No businessman can be compelled to maximize its profit. The IT authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own viewpoint but that of a prudent businessman. In another case, where the assessee argued that (a) The advance has been made to sister company out of bank account account wherein both its own and borrowed funds were mixed up, so that there was no direct nexus between borrowing and advance: and (b) The loan to a sister company which in this case was a subsidiary company is one which should be treated as promoted by commercial expediency, The Supreme Court upheld the argument of the assessee and interest was not disallowed in the case of S.A. Builders Ltd. Vs. CIT(Appeal) (2007) 288 ITR 1 (SC) Also see CIT vs. Prem Heavy Engg. Works Pvt. Ltd. (2006) 285 ITR 554 (All), CIT vs. Radico Khaitan Ltd. (2005) 142 Taxman 681 (All.). Reliance is also placed on the decision of the Hon'ble Bombay High Court in the case od CIT v. Reliance Utilities and Power Ltd. 313 and Hon'ble Delhi High Court in the case of CIT v. Bhar....
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....ble to the tax payments. (ii) That the entire interest paid by the assessee on the overdraft account was an allowable deduction. It was held that if the amount of the profit generated were higher than the amount of the advance tax paid, it should be presumed that the profit itself were invested/diverted in the payment of the advance tax and therefore, the deduction claimed on account of the interest on loan even for the purpose of payment of tax is allowance. 3.5 Recently this view has been taken by the Hon'ble ITAT M/s Madhu Silica Pvt. Ltd. v/s ACIT in ITA No. 2230/Ahd/2010 vide order dated 20.09.2013 (DPB 38-43) following the decision in the case of Munjal Sales Corporation v/s CIT (2008) 298 ITR 298 (SC). 3.6 On this aspect also kindly refer decision ACIT v/s Ramkishan Verma (2012) 143 TTJ (Jp) (UO) 1 (DPB 10-22) wherein, para 9.5 the relevant portion is as under: "We have heard both the parties. The assessee is having sufficient capital. If there are mixed funds then non-interest-bearing funds are to be considered s utilized for non-interest-bearing advances. It is the assessee who has to take a business decision. Fees is generally received at the beginning and ....
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....ing expenditure on monthly basis. As a part of financial management/planning and to maximize its income, that assessee also used to deposit the entire fees in the FDRs and got OD A/c from which funds were utilized as per need. This way, it was claimed that it was assessee's own money only who did not borrow any fresh money. the disallowance made by the AO u/s 36(i)(iii) was fully deleted by holding that "10.4 We have heard both the parties. The assessee is having sufficient capital. If there are mixed funds then non-interest-bearing funds are to be considered as utilized for non-interest-bearing advances. It is the assessee who has to take a business decision. Fees is generally received at the beginning and surpluses are used for making fixed deposits as receipts are in advances while expenses are spread out throughout the year. Since interest-free advances are less than the capital and the AO has not brought on record any nexus of interestbearing loans used the AO could not have disallowed the interest. There is no onus on the assessee to establish that interest-free advances are out of interest-bearing advances if non-interest-bearing funds are more. Reliance is placed o....
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....tion of evidence, in our view no substantial question of law arise on this question as well. It can be observed that this court in similar circumstances and on identical facts, when the capital of the partner/proprietor being more than the interest free short term advances, has in the case of CIT v/s M/s. Vijay Solvex Ltd. (2015) 274 CRT (Raj.) 384 while relying on the judgments rendered in (a) S.A. Builders Ltd. V/s CIT (2007) 288 ITR 0001 (SC); (b) Munjal Sales Corporation v/s CIT (2008) 298 ITR 298 (SC) ; (c) CIT V/s Radico Khaitan Ltd. (2005) 274 ITR 354; (d) CIT v/s Dalmia Cement (Pvt.) Ltd. (2002) 254 ITR 377; (e) CIT v/s Britannia Industries Ltd. (2006) 280 ITR 525; and (f) CIT v/s Motors Sales Ltd. (2008) 304 ITR 123 (Allahabad), held as under:- 14. Therefore, the finding reached by the Tribunal is essentially a finding of fact based on the appreciation of the evidence, and we find no perversity or infirmity in the order impugned, and no question of law arises out of the order of ITAT." 7. It was further submitted that the ld. CIT(A) proceeded on misconception & misreading of the judicial guidelines provided through various decisions which were in the cont....
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....e Branch Manager, Central Bank of India in support of its contentions and it would be relevant to reproduce the same in verbatim as under: "This is to certify that M/s Allen Career Institute has been given overdraft facility upto 90% of FDRS amount during the financial year 2009-10, 2010-11 & 2011-12. This is not a CC facility. The customer was not entitled to take loan or advance over and above 90% amount of the FDR." 20. Drawing support from the said certificate, the ld AR has contended that it was a normal Overdraft A/c which was against the FDRs of the assessee pledged with the bank and the assessee was entitled to withdraw only up to 90% of the FDR. In other words, there was a margin of 10%. The assessee was not entitled to withdraw more than 90%. Also it was not a CC A/c. Thus, there was no possibility for the assessee to have borrowed funds more than the FDR amounts. Thus, effectively it was nothing but assessee's own money which was put into the FDRs to earn handsome amount of interest thereon and at the time of need of funds, the same could be made available by paying a marginally extra amount of interest thereon being 0.25 and was a part of its financial manag....
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....e pledge of such FDRs are clearly in the nature of its liabilities. In the instant case, the assesee has not brought on record any verifiable evidence which is contrary to above understanding. Infact, the assessee has shown interest on fixed deposits in his return of income as income under the head "Income from other sources" and interest paid on bank overdraft facility has been claimed as expenditure under the head "business income". The said treatment in the financial statements doesn't merely show the accounting treatment and reflection thereof but also underscore the basic essence and character of both the transactions being independent of each other. Therefore, we are unable to accept the contention of the ld AR that the assessee has incurred net interest cost of 0.25% and not 9.5% at which overdraft facility was availed from the bank. 23. In light of above discussions, we are of the considered view that the bank overdraft account, out of which the funds have been withdrawn and invested in the mutual fund units during the year, is clearly in the nature of loan account and certificate issued by the Central Bank of India supports the case of the Revenue. Accordingly, we are u....
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.... assessee which is far in excess of the amount of investments which has been made in the Mutual Funds units amounting to Rs. 3 Cr. Accordingly, on appreciation of the said facts and in absence of anything to the contrary, as per the settled legal proposition, a presumption can be drawn that the investments in the mutual fund units have been made out of interest- free funds and not out of interest bearing funds. 26. Lastly coming to the contention of the ld.CIT(A) that provisions of section 14A are applicable as income from the Mutual Funds are exempt, we find that the said finding is contrary to the facts on record. The appellant has invested in the fixed maturity plans of the various Mutual Funds which are basically fixed term debt funds schemes. Where the amount is invested in such funds for less than a year, the maturity proceeds are taxable as short term capital gain @ 30% and where the amount is invested in such funds for the period exceeding one year, the maturity proceeds are taxable @ 10% with the indexation benefit and @ 20% without indexation benefits. In other words the investment in Mutual Funds schemes are not tax free investments. In support of its contentions, the....
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....ction 36(1)(iii). In response, the assessee replied as under: "The assessee firm has no current account in the bank, it has only overdraft account. It does not been understood that every payment made out of borrowed money. The advance payment made for plot was out of current year profit. The current profit (before allocation between partners) is 41.5 Crore and advance made for plot was just 4.00 Crore." The assessee was again asked to explain why interest of Rs. 5,77,808/-, Rs. 1,94,863/- and Rs. 3,84,782/- calculated @ 9.5% per annum on the borrowed funds used for paying advance of Rs. 4.00 Crore for purchase of land, construction work-in-progress and construction of shed in CP-14 be not disallowed in view of proviso to section 36(1)(iii) since while land and construction work-in-progress were not put to use during the year, the shed was put to use only at the fag end of the year. In response, the assessee contended as under:- "Section 36(1)(iii) reads as under: "the amount of the interest paid in respect of capital borrowed for the purpose of the business or profession: Provided that any amount of the interest paid, in respect....
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....Power Ltd. had invested certain amounts in Reliance Gas Ltd. and Reliance Strategic Investments Ltd. It was the case of the Assessee that they themselves were in the business of generation of power and they had earned regular business income therefrom. The investments made by the Assessee in M/s Reliance Gas Ltd. And M/s Reliance Strategic Investments Ltd. were done out of their own funds and were in the regular course of business and therefore no part of the interest could be disallowed. It was also pointed out that the Assessee had borrowed Rs. 43.62 crores by way of issue of debentures and the said amount was utilised as capital expenditure and inter-corporate deposit. It was the Assessee's submission that no part of the interest bearing funds (viz. Issue of debentures) had gone into making investments in the said two companies. It was pointed out that the income from the operations of the Assessee was Rs. 313.53 crores and with the availability of other interest free funds with the Assessee the amount available for investments out of its own funds were to the tune of Rs. 398.19 crores. In view thereof, it was submitted that from the analysis of the balancesheet, the Assesse....
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.... were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the CIT(A) and Tribunal." 32. It was submitted that in the instant case also the facts are the same as were obtaining in the case of Reliance Utilities (supra) in as much as in both the cases, the investments were made in capital asset (whether in the shares of the two companies as was the case with Reliance Utilities (supra) or investment in the capital asset i.e. plot purchase, construction etc which makes no difference but at both the places, the common contentions of the assessee are that there were no borrowing made as such in as much as the assessee was already having sufficient interest free funds at its disposal therefore, such investment/outgoing on capital account should be treated to have gone out of the availability of interest free funds but not from the interest bearing funds, if any. This way, there was no occasion for the assessee to make a claim of deduction nor for the AO to have made disallowance u/s 36(1)(iii) of the Act. 33. In the case of CIT vs. HDFC Bank LTD. (2016) 284 CTR 0409 (Bom), it was held that "Where assessee&....
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....bmitted that the AO stressed over the alleged absence of the commercial expediency behind giving of the subjected loans & advances in as much as, such a consideration was relevant only in a case where the interest free funds were given out of the interest bearing funds only and there was admittedly no availability of the interest free funds. In our case, such facts are not available and even otherwise the utilization of the funds was for commercial expediency in as much as the major utilization of the funds was towards capital investment in building for coaching, and partly in the mutual funds but income from both were duly taxed. It was not the case of AO that assessee diverted the funds to relatives etc. for personal purposes. In the case of SA Builders also, the decision was rendered in the context of diversion of the interest bearing funds to the interest free advances. The Hon'ble Rajasthan High Court in Ram Kishan Verma (Supra) has also taken a note and interpreted the decision of SA Builder (Supra) in the same manner and therefore, held that to the conclusion that to the extent of his own capital the assessee could advance money without interest for business expediency or....