Novartis India Ltd, Mumbai vs Assessee

BEFORE HON'BLE S/SHRI H.L. KARWA, PRESIDENT AND B.R.BASKARAN (AM) सव ी एच.एल. कावा , अ य एवं बी.आर.बा करन, लेखा सद य

आयकर अपील सं./I.T.A. No.2308/Mum/2012 ( नधा रण वष / Assessment Year : 2009-10)

Dy. Commissioner of Income बनाम/ Centrum Direct Ltd., (Formerly Tax,2(1), Room No.561, known as FCH Centrumdirect Ltd) Vs. 5th floor, Neptune Apartment II, Aayakar Bhavan, Shop No.02 M K Road, Smt.Nargis Dutt road, Mumbai-400020. Pali Hill, Bandra,(W) Mumbai-400050 (अपीलाथ /Appellant) .. ( !यथ / Respondent)

आयकर अपील सं./I.T.A. No.2712/Mum/2012 ( नधा रण वष / Assessment Year : 2009-10)

Centrum Direct Ltd., बनाम/ Asstt. Commissioner of Income Neptune Apartment II, Tax,2(1), Aayakar Bhavan, Vs. Shop No.02 M K Road, Smt.Nargis Dutt road, Mumbai-400020. Pali Hill, Bandra, Mumbai-400050 (अपीलाथ /Appellant) .. ( !यथ / Respondent)

थायी ले ख ा सं . /जीआइआर सं . /PAN/GIR No. :AABCC4763G

अपीलाथ ओर से / Appellant by Shri J D Mistry

!यथ क% ओर से/ Respondent by Shri Neil Phuilip

सन ु वाई क% तार)ख / Date of Hearing :29.12.2014 घोषणा क% तार)ख /Date of Pronouncement : 20.2.2015 2 ITA. No2308/Mum/2013 and 2712/M/13

आदे श / O R D E R

Per B.R.BASKARAN, Accountant Member:

These cross-appeals are directed against the order dated 21.1.2013 passed by Ld CIT(A)-4, Mumbai and they relate to the assessment year 2009-10.

2. Both the parties are aggrieved by the decision of the ld.CIT(A) with regard to the disallowance made under section 14A of the Act.

3. We have heard the parties and perused the record. The assessee had earned dividend income of Rs.4.69 crores. However, it had disallowed only administrative expenses as per Rule 8D(2)(iii) of the Income Tax Rules, 1962 (the Rules) and did not make any disallowance out of interest expenditure. The AO by applying the provisions of Rule 8D computed the disallowance to be made under section 14A of the Act at Rs.1.55 crores as against disallowance of Rs.23,90,324/- (but mentioned as Rs.10,71,363/- in the statement of facts filed before Ld CIT(A)) made by the assessee. Before the ld.CIT(A) the assessee submitted that it had invested only the amounts received by way of share capital in purchasing the Mutual Fund units. It was further submitted that the borrowings were utilized for specific purposes for which the loans were taken. Accordingly, it was contended that there is no requirement to make any disallowance of interest expenditure. The assessee also furnished all the details before the ld. CIT(A). Hence, the ld. CIT(A) restored the issue to the file of the AO. The decision rendered by the ld. CIT(A) is extracted below, for the sake of convenience:

"4. I have considered the facts of the case and submissions of the assessee. Hon'ble Bombay High Court has held in the case of Godrej & Boyce Mfg. Co. Ltd. vs. CIT 328 ITR 81 that Rule 8D is applicable from A.Y.08-09, therefore, A.O. has rightly applied Rule 8D for disallowance, whereas, assessee does not have any objection as far as the disallowance of administrative expenses is concerned. The 3 ITA. No2308/Mum/2013 and 2712/M/13

dispute relates to interest only. As per Rule 8D the payment of interest which is directly relatable to other activities other than the dividend yielding investment are not to be disallowed under Rule 8D, whereas, the interest which is directly relatable to such investment which yields dividend is to be disallowed in toto. For interest which is not directly relatable to either such investment or other activities of the assessee, mainly for the reason that borrowed funds and assessee's own funds are mixed up in other accounts or for any other reason, then as per Rule 8D proportionate interest is disallowed presuming that proportionate borrowed funds have been used for dividend yielding investment. The A.O. has made the same presumption in the case of the assessee and, therefore, disallowed the interest accordingly as per Rule 8D, whereas, assessee- has claimed that the entire investments have been made directly out of its own funds, out of share capital money only. Assessee has claimed to have paid no interest to Ratnakar Bank and HDFC Bank, during the period or for the period when the investments were acquired and whatever fund was lying in those two accounts at the time of investment were assessee's own funds only and, therefore, it is claimed that no interest is allocable for disallowance.

The assessee has claimed that the initial investment of Rs.8 crore in HSBC Ultra Short Term Bond Fund made on 20/4/07 was out of the share capital of Rs.8 crore received on the same day in Ratnakar Bank Ltd. and with the existing balance in the account assessee's credit balance stood at Rs.8,44,09,281/-, out of which the investment of Rs.8 crore is made. Subsequently in the HDFC Bank assessee received share capital money of Rs.75,13,62,734/- in HDFC Bank and with the existing credit balance, the total credit balance stood at Rs.76,18,86,838/-on 12/3/08, out of which investment has been made by the assessee on 12/3/08 of Rs.75,13,62,734/- in OLPIPD HSBC Liquid Plus Scheme and accordingly subsequently also the scheme were switched off for Rs.69 crore from OLPIPD HSBC Liquid Plus to Reliance Mutual Fund on 25/3/08, directly without receiving the money in any bank account and, therefore it is claimed that none of these investment have been made out of borrowed funds. Subsequently also, the assessee has claimed of similar switch over from existing funds to other funds without any new investment or without routing through the bank.

In this manner assessee has claimed that all the investments in dividend yielding funds are from its own capital /funds and, therefore, no interest is disallowable. A.O.does not appear to have examined this aspect, therefore,A.O. is directed to examine the above mentioned claim of the assessee of direct nexus of its own funds/share capital to the investments which have yielded dividend income which is exempt and accordingly restrict the disallowance as per Rule 8D on proportionate 4 ITA. No2308/Mum/2013 and 2712/M/13

basis to such investment which does not have direct nexus with assessee's own funds. In result, the Grounds No.1 and 3 are treated as partly allowed and Ground No.2 which is the alternative ground, which does not survive in view of the above decision, therefore, the same is treated as dismissed."

4. Before us, the Ld A.R submitted that the own funds of the assessee are more than the loan funds and hence the investments should be taken as gone out of Own funds only. In this regard, he placed reliance on the decision of the Bombay High Court rendered in the case of HDFC Bank. A perusal of the written submissions made before the Ld CIT(A) would show that the assessee has furnished sufficient documents to substantiate its contentions that the amounts received as Share Capital only has been invested in Mutual Fund units and thereafter the redemption funds were used to make re-investments. Hence, there is prima facie case in favour of the assessee. However, as held by the Ld CIT(A), all these financial statements needs to be verified by the department. Accordingly, we set aside this issue to the file of the AO with the direction to examine this issue afresh by duly verifying the financial statements of the assessee and also by duly following the decision of Hon'ble Bombay High Court rendered in the case of HDFC Bank Ltd.

5. In the result, the appeals of both the parties are treated as allowed for statistical purposes.

The above order was pronounced in the open court on 20th Feb, 2015.

घोषणा खल ु े ,यायालय म. /दनांकः 20th Feb, 2015 को क% गई ।

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(एच.एल.कावा /H.L.KARWA) (बी.आर.बा करन/B.R.BASKARAN) या यक सद य /JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER

मंब ु ई Mumbai: 20th Feb,2015. व. न.स./ SRL , Sr. PS 5 ITA. No2308/Mum/2013 and 2712/M/13

आदे श क त ल!प अ"े!षत/Copy of the Order forwarded to : 1. अपीलाथ / The Appellant 2. !यथ / The Respondent. 3. आयकर आयु7त(अपील) / The CIT(A)- concerned 4. आयकर आयु7त / CIT concerned 5. 8वभागीय त न:ध, आयकर अपील)य अ:धकरण, मुंबई / DR, ITAT, Mumbai concerned 6. गाड फाईल / Guard file. आदे शानस ु ार/ BY ORDER, true copy सहायक पंजीकार (Asstt. Registrar) आयकर अपील)य अ:धकरण, मुंबई /ITAT, Mumbai