TaxTMI 
TaxTMI 
2018 (12) TMI 1654
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....n facts in confirming disallowance of Rs. 3,75,084/- out of interest on amount invested in Capital work-in-progress. 3. The Ld CIT Appeals has erred in law and on facts in confirming disallowance of Rs. 6,49,147/- made out of interest on amount invested in Flat at Mumbai. 3. The first issue raised by the assessee is that the Ld.CIT(A) erred in confirming the disallowance made by the AO u/s 14A of the Act r.w.r.8D of Income Tax Rules, 1962. 4. Briefly stated facts are that the assessee is a limited company and engaged in the business of manufacturing, lamination, and trading of Aluminum Foils/Wire Rods/Ingots. 4.1. The assessee during the year under consideration has shown a dividend income of Rs. 10,26,283/- which was claimed as exempt u/s 10(34) of the Act. The assessee in its balance sheet as on 31/03/2011 has also shown an investment of Rs. 2,74,77,021/-. 4.2. The assessee during the year under consideration has also claimed the interest expenses of Rs. 1,83,86,113/- excluding interest on the term loan and bank charges in its Profit & Loss account. 4.3. However, the assessee has not made any disallowance of the expenses in relation to dividend income unde....
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....hould be presumed that the investment is out of those funds. The submission cannot be accepted as it is the claim of the appellant to say that the investment is out of the interest-free fund and therefore, the onus is on the appellant to prove the same. To prove its claim the appellant has to demonstrate specific nexus between the shares purchased and the interest free fund invested which it has not done. Therefore, the contention of the appellant that it has demonstrated that the investment was out of interest free funds is not acceptable. It has also not given any specific nexus such as the entries in the bank account or the dtes of investment to show that certain interest free funds which were available at that point of time has been invested in the case of tx exempt assets. The onus to prove that it has not incurred any expenditure is on the appellant as it is the claim made by it and the onus therefore, would be on the appellant. The reliance is placed on the recent decision of ITAT Panaji Bench in the case of Joe Marcelinho Mathias 143 ITD 132and Hercules Hoist Ltd. 35 taxman.com 592, Mumbai ITT. The onus has not been satisfactorily discharged. It is also noted that the appel....
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....elation to income which does not form part of the total income under this Act that is the dividend income shown by the appellant. Without prejudice to above discussion, it has also been held by Hon'ble ITAT Kolkata in the case of Champion Commercial Company Limited reported in 139 ITD 108 that when the assessee offers a disallowance under section 14A, provisions of section 14A(2), read with rule 8D cannot be invoked unless assessing officer is satisfied about the incorrectness of the disallowance so offered, but when assessee does not offer any disallowance under section 14A by claiming that there was no expenditure incurred to earn exempt income, provision or section 14A(2), read with rule 8D could be invoked without there being any need to express satisfaction about the correctness of such a claim. In the present case, the appellant has not offered any disallowance under section 14A and claimed that there was no expenditure incurred to earn exempt income, the provisions of rule 8D can be straightaway applied by following the above judgement of Hon'ble ITAT. Since the appellant has not made any disallowance under section 14A in the return of income, in view of this judgem....
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....ankers directly give the fund is to the seller of the capital asset therefore, there is no possibility of using these funds for making the investment in tax-exempt assets. Accordingly, this interest is to be excluded for the purpose of calculation f disallowance under section 14A. The interest paid for purchase of raw material, paid to bank for obtaining LC for discounting of bills raised to sale party, interest paid to Bank of Baroda, Bank of India, HSBC Mauritius, State bank of India for buyers credit are also directly related to purchase of raw material and obtaining buyers credit etc. The submission of the appellant that there is no possibility of using these funds otherwise for the purpose of making investment is acceptable and therefore, these items of expenditure (Sr.No.1,2, 3,7,8) are also directed to be excluded. The interest at serial number 5 and 6 are interest payment to SBBJ Pipalia Kalan and Raipur. It has been explained by the appellant that as these interest are on the funds borrowed which are used for meeting the routine expenses at the branches of the appellant at these stations. The interest has been incurred as an overdraft facility was take ag....
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....ade to various customers. The funds received on account of sales are directly deposited in IDBI account and the interest expenditure incurred from that account would be reduced it the appellant received the payment in time therefore there is a direct nexus with the interest paid on IDBI bank and the interest received from customers. The submission of the appellant is acceptable as there is a direct nexus between the interest received from customers and the interest paid by the appellant to IDBI on general borrowings. Accordingly the claim of the appellant regarding netting of the expenditure is accepted only to this extent. Therefore, to sum up the interest expenditure which is to be taken for the purpose of rule 8D for making the disallowance under section 14A would be (Rs. 1,66,42,585 - Rs. 59,94,798) 10647787 only. The second claim of the appellant is that out of the total investment that has been considered by the AO for making the disallowance under section 14A certain debt funds are also there which does not yield in tax exempt income. The appellant has submitted that the investment in such debt funds was Rs. 11 crores. It is noted that appellant had not mad....
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....irect expenses of Rs. 2,42,517 only. 11.2. As regards the interest expenses of Rs. 22,47,916/- we note that the own fund of the assessee exceeds the amount of investment as evident from the financial statement of the assessee which is reproduced as under: SCHEDULE AS AT 31.3.2011 SOURCES OF FUNDS SHARES HOLDERS'S FUNDS (a) Capital A 85861025 (b) Reserves & Surplus B 687152562 LOAN FUNDS (c) Secured Loans C 560373057 (d) Unsecured Loans D 0 (e) DEFERRED TAX LIABILITY (Net) 5375715 TOTAL 1338762359 Application of funds Fixed assets E (a) Gross Block 608929834 (b) Less : Depreciation 359080796 (c) Net Block 249849038 (d) Capital Work in Progress 10066098 TOTAL 259915136 INVESTMENTS F 2 2477021 11.3. It is settled Law that there cannot be any disallowance on account of interest expenses if the own fund of the assessee exceeds the investment. In holding so, we find support and guidance from th....
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....ssued by the Ld. CIT(A) in any appeal before us. Thus the order of Ld. CIT(A) attained the finality. 12. The next controversy arises whether all the investments which are capable of generating the exempted income will be considered for the purpose of disallowances under section 14A r.w.r 8D of the income tax rule. It means the investments which have not generated any exempted income during the year will also be considered for the purpose of disallowance under section 14A r.w.r. 8D of Income Tax Rule as per the direction of the Ld. CIT(A). However, to this extent, we disagree with the direction of the Ld. CIT(A). As per our understanding the investments which have generated exempted income in the year under consideration will only be considered for the purpose of disallowance under section 14A r.w.r 8D of income tax rule. In this regard, we find support and guidance from the judgment of Hon'ble Delhi HC in case of Cheminvest Ltd. Vs. CIT reported in 378 ITR 33 wherein it was held as under: "In the context of the facts enumerated the question framed was answered by holding that the expression' does not form part of the total income' in section 14A envisages that t....
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....ation amounting to Rs. 52,000/- against the exempted income of Rs. 22.50 lacs. The AO in that case i.e. syntax industries Ltd made the disallowance under section 14A r.w.r 8D of income tax rule without pointing out any defect in the disallowance made by the assessee in its income tax return. But in the case before us, there was no disallowance made by the assessee as per the provisions of rule 8D r.w. section 14A of the Act. Therefore there was no option available with the AO to make the disallowance as per the provisions of section 14A of the Act. Therefore we are reluctant to place our reliance on the judgment cited by the learned AR. Accordingly, we hold that the disallowance under section 14A r.w.r. 8D needs to made for the administrative expenses in terms of the above. 15. In view of above we hold as under: 1. The direct expenses of Rs. 2,42,517/- stands disallowed as discussed above. 2. There will be no disallowance of interest expenses for the reasons discussed in the preceding paragraph. 3. Regarding the administrative expenses the disallowance will be made as per rule 8D of income tax rule after taking into account only those investments which....
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....d not be ruled out in view of mixed funds. In the facts and circumstances, the A.O. was justified in disallowing proportionate interest cost relatable to capital WIP u/s.36(1)(iii) of the Act and transferring the same to the capital WIP as per proviso to Section 36(1)(iii) of the Act. This ground of appeal is therefore dismissed." 19. Being aggrieved by the order of the Ld. CIT(A), assessee is in appeal before us. 20. The Ld.AR before us reiterated the submissions made before the Ld.CIT(A). 21. On the other hand, Ld. DR vehemently supported the orders of the authorities below. 22. We have heard the rival contentions and perused the material available on record. At the outset, we note that the own interest-free fund available with the assessee exceeds the amount of investment made in the capital work-in-progress. Therefore, we can presume that the assessee in such capital work-in-progress invested the own fund. In holding so, we find support and guidance from the judgment of Hon'ble Bombay High Court in the case of Reliance Utilities and Power Ltd. reported in 313 ITR 340 wherein it was held as under:- "The principle therefore would be that if there are funds av....
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.... to the total income of the assessee. 25. Aggrieved assessee preferred an appeal to the Ld.CIT(A). However the Ld.CIT(A) disregarded the contention of the assessee and confirmed the order of the Assessing Officer by observing as under: "5.2. I have carefully considered the rival contentions. I have carefully considered the facts of the case. It was an admitted fact that the appellant's funds were mixture of own funds as well as borrowed funds. In the facts and circumstances it could not be said that which fund was utilized for which purpose. Though the appellant claimed that the investment in flat had been made out of internal accruals as well as from reserves and surpluses, but the appellant failed to furnish the nexus during assessment proceedings as well as during appellate proceedings to disprove the AO's finding that the borrowed funds were not at all utilized for investment in flat. In the facts and circumstances, in my considered view the A.O. was justified in making addition as no cogent evidences has been submitted in support of that no borrowed funds was used. Accordingly, the contention of the company is rejected as it is without any evidence and proportionat....