Kekin K Chheda, Mumbai vs Assessee

आयकर अपील य अ धकरण, 'ए' खंडपीठ मुंबई INCOME TAX APPELLATE TRIBUNAL,MUMBAI "A" BENCH सव ी आई पी बंसल , या यक सद य एवं राजे , लेखा सद य Before S/Sh. I P Bansal,Judicial Member & Rajendra,Accountant Member आयकर अपील सं/.ITA No.1166/Mum/2012, नधारण वष/Assessment Year-2008-09 Kekin K. Chheda ACIT-Circle-13(3) Prem Bhavan, 234/36,Bhat Bazar, Aayakar Bhavan Narse Natha Street,Mumbai-20. Vs Mumbai-400 020.

PAN: ASSESSEEPC 6005 F (अपीलाथ /Appellant) ( यथ / Respondent) नधा रती ओर से/Assessee by :Shri Beharilal राज व क ओर से/ Revenue by :Shri Asghar Zain V.P.(DR) सुनवाई क तार ख/ Date of Hearing : 28-05-2015 घोषणा क तार ख / Date of Pronouncement : 28-05-2015 आयकर अ ध नयम,1961 क धारा 254(1)के अ तगत आदे श Order u/s.254(1)of the Inco me-tax Act,1961(Act) लेखा सद य राजे के अनुसार PER RAJENDRA, AM-

Challenging the order dated 14/12/2011 of the CIT(A)-24,Mumbai, the Assessee has raised following Grounds of Appeal:

"1. "On the facts and in the circumstances of the case the learned Commissioner of Income Tax (Appeals) CIT(A) Mumbai erred in law as well as on facts in conforming the addition of Rs. 1,33,132/­ under section 14A of the Act.

1.2 The CIT(A) failed to appreciate that when both, interest ­free and interest­ bearing funds are available and the presumption would arise that interest free funds are utilized for investment and no disallowance of interest could be made under section 14A.

1.3 The CIT(A) erred in drawing incorrect inference, by wrongly interpreting the facts and reasons assigned are wrong & incorrect.

1.4 The provisions of section 14A are wrongly construed

2. The Appellant craves leave to add any other ground at the time of hearing or before that."

Assessee,an individual,filed his return of income on 22.10.2008,declaring income of Rs.40.27 lacs.Assessing Officer(AO)completed the assessment on 30.11.2010,u/s. 143(3) of the Act,deter

-mining the income of the assessee at Rs.42,33,000/-.

2.Effective ground is about addition Rs.1.33 lacs u/s. 14A of the Act.During the assessment proceedings,the AO found that the total income of the assessee comprised of remuneration, share or profit from firm, profit on trading in shares and income from other sources. He further found that the assessee was earning exempt income on account of capital gains, that he had not shown any expenditure attributable to earning of exempt income. He directed the assessee to explain as to why the provisions of sec.14A r.w.r 8D of the Income Tax Rules,1962 (Rules) should not be applied to calculate the expenses attributable to the exempt income.In its reply,the assessee stated that his capital was 3.59 crores,that out of the above the capital investment in assets was only Rs.1.66 crores(46.2%),that the investment in assets,income from which was exempt,was out of capital and not out of borrowed funds,that in the immediate past year the AO had accepted the ITA No.1166/Mum/12,AY.08-09-Kekin C

income returned by him and had not made any disallowance, that in that year the quantum of investment was 1.25 crores,that the additional investment was only of Rs.41.26 lacs, that the gross inflow was much more during the year under consideration, that the increase in capital was of Rs.44.93 lacs.After considering the submission of the assessee,the AO made addition of Rs.1, 33,132/- u/r.8D(2)(ii). He further made addition of Rs.72,857/-. In short,he added back Rs.2.05 lacs to the total income of the assessee.

3.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority(FAA).Before him,it was argued that no part of the borrowed funds was utilised for investment in tax free securities, that the copy of bank account clearly proved the approximate utilsation of borrowed funds,that the AO had not established the primary fact that expenses incurred by the assessee were relatable to exempt income, that the burden of proof was always on AO, that the AO was required to give demonstrative proof that the use of borrowed funds was for tax free investment.The assessee relied upon the cases of Wimco Seedling Ltd. (293 ITR-AT

261),Maruti Udyog Ltd. 9(2 TTJ 987), Zuari Industries Ltd. (298 ITR-AT,97) and Eicher Ltd. (101 TTJ 369).After considering the submission of the assessee the FAA held that the assessee was not able to substantiate that new acquisition in shares was made out of interest free funds available with him,that the bank account statement contained transactions relating to both loans on which interest has been paid as well as investments in shares,that a presumption could be drawn that some part of the borrowed funds had been used in purchasing the shares,that the use of borrowed funds for investments in shares could not be completely ruled out.Confirming the order of the AO,he held that disallowance made by him,of Rs.1.33 lakhs as per Rule 8D(2)(ii) of the Rules,was justified.However,he deleted the addition of Rs.72,857/- made by the AO.

4.During the course of hearing before us,Authorised Representative(AR)stated there was no evidence that the assessee had used borrowed funds for making investment,that the assessee had not claimed any expenditure with regard to exempt income.He further argued that in identical circumstances,the Tribunal had decided the issue in favour of the brother of the assessee.He referred to the case of Ramesh Chheda (ITA/1167Mum/2012-AY.2009-09,dated 18.09. 2013). Departmental Representative(DR)supported the order of the FAA.

5.We have perused the material before us.We find that the FAA had "presumed" that borrowed funds were utilised for making investments that resulted in earning exempt income by the assessee.In our opinion,tax liability cannot be determined on presumptions. Until and unless facts are not proved by evidences the assessee cannot be asked to pay taxes.We find that the AO or the FAA not brought on record any proof that can lead to the fact that during the year under appeal,borrowed funds were used by the assessee to earn the income that was exempt.We would like to refer to the case of Ramesh Chheda(supra)wherein the appeal was allowed.Relevant portion of the said order is being reproduced here:

2.3.We have heard the rival submissions and perused the material before us.We find that while upholding the order of the AO,FAA has held that assessee had made investment of Rs. 22.58 lacs for purchasing shares of Barak Valley Cheents Ltd. and Reliance enterprises Ltd.We further find that he had taken into consideration the statement of Corporation Bank of India. Page No. 37 of the PB is the bank statement of HDFC Bank.It is seen that on 1.11.2007 closing balance of the HDFC bank account was Rs. 12.9 lacs.If the said amount is considered along with the balance available with the Corporation Bank it can be safely held that assessee had his own funds to make investment in the shares purchased.In our opinion,if borrowed funds have no proximate connection with the investment in shares proportionate disallowance 2 ITA No.1166/Mum/12,AY.08-09-Kekin C

should not have been made. Provisions of Rule 8D (2)(ii) of the Rules have to be invoked in certain eventualities only.We find that AO/FAA has not mentioned such eventualities.If the assessee has not claimed any expenditure for earning exempt income,it cannot always be held that there were always a cost involved.We find that in the case of Hero Cycles Ltd.,Hon'ble Punjab & Haryana High Court (323ITR518)has held as under:

"The contention of the Revenue that directly or indirectly some expenditure is always incurred which must be disallowed under section 14A and the impact of expenditure so incurred cannot be allowed to be set off against the business income which may nullify the mandate of section 14A, cannot be accepted. Disallowance under section 14A requires finding of incurring of expenditure where it is found that for earning exempted income no expenditure has been incurred, disallowance under section 14A cannot stand."

In these circumstances, without bringing some facts of investment made by the assessee of borrowed funds for purchasing shares addition should not have been made. Cases relied upon by the AR of the assessee also support other views.Respectfully following the above mentioned cases,we decide the effective ground of appeal in favour of the assessee."

Following the above,we decide effective ground of appeal in favour of the assessee.

As a result,appeal filed by the assessee stands allowed फलतः नधा रती वारा दा खल क गई अपील मंजूर क जाती है .

Order pronounced in the open court on 28th,May,2015.

आदे श क घोषणा खल ु े यायालय म दनांक 28 मई,2015 को क गई । Sd/- Sd/- (आई पी बंसल/I. P. Bansal) (राजे / RAJENDRA) या यक सद य / JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER मंब ु ई/Mumbai, दनांक/Date:28.05.2015 व. न.स Jv.Sr.PS. आदे श क त ल प अ े षत/Copy of the Order forwarded to : 1.Appellant /अपीलाथ 2. Respondent / यथ

3.The concerned CIT(A)/संब ध अपील य आयकर आयु त, 4.The concerned CIT /संब ध आयकर आयु त

5.DR A Bench, ITAT, Mumbai / वभागीय त न ध, ए खंडपीठ,आ.अ. याया.मुंबई

6.Guard File/गाड फाईल स या पत त //True Copy// आदे शानस ु ार/ BY ORDER, उप/सहायक पंजीकार Dy./Asst. Registrar आयकर अपील य अ धकरण, मंब ु ई /ITAT, Mumbai.

3 ITA No.1166/Mum/12,AY.08-09-Kekin C Date Initials

1. Draft dictated on 28/5/15

2. Draft placed before author 28/5/15

3. Draft proposed & placed before the Second Member

4. Draft discussed/approved by Second Member

5. Approved draft comes to the Sr.PS

6. Kept for pronouncement 28/5/15

7. Date on which the file goes to the Bench Clerk

8. Date on which file goes to the A.R. for signature of the Order

9. Date of dispatch of the Order

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