Sarwankumar D. Saraf, Mumbai vs Assessee

IN THE INCOME TAX APPELLATE TRIBUNAL "E" BENCH, MUMBAI BEFORE SHRI G.S. PANNU, ACCOUNTANT MEMBER AND SHRI AMIT SHUKLA, JUDICIAL MEMBER

आयकर अपील सं./I.T.A. No. 4891 /Mum/2013 ( नधा रण वष / Assessment Year : 2010-2011

Shri Sawan Kumar D. बनाम/ Addl. Commissioner of Saraf, Income Tax 14(3), Vs. 418, Kalbadevi Road, Earnest House, Mumbai - 400 002. 6 t h Fllor, Nariman Point, Mumbai 400 021. थायी ले खा सं . /PAN : AALPS7121H (अपीलाथ /Appellant) .. ( यथ / Respondent)

अपीलाथ क ओर से / Appellant by : Dr. K. Shivram & Shri Rahul R. Sarda यथ क ओर से/ Respondent by : Smt. N.V. Nadkarni

ु वाई क तार ख / Date of Hearing सन : 27-04-2015 घोषणा क तार ख /Date of Pronouncement : 29.05.2015 [

आदे श / O R D E R PER G.S. PANNU, A.M.

जी.एस. प&न,ु लेखा सद य

This appeal by the assessee is directed against the order passed by the ld. CIT(A) - 25, Mumbai dated 22-05-2013 for the A.Y. 2010-11 in the matter of order passed by the Assessing Officer dated 01.01.2013 u/s 143(3) of the Income Tax Act, 1961 (in short 'the Act')

2. In this appeal, although the assessee has raised multiple Grounds of appeal but the solitary grievance of the assessee is against the action of the income tax authorities in determining the disallowance of Rs. 7,91,184/- out of interest expenditure by applying Rule 8D(2)(ii) of the Income Tax Rules, 2 ITA 4891/M/13

1962 (in short 'the Rules') r.w.s. 14A of the Act. Notably, by application of Rule 8D(2)(iii) read with section 14A of the Act a disallowance of Rs.67,879/- has also been made, which is not in dispute as the same was suo moto made by the assessee in the return of income.

3. Briefly stated, relevant facts of the case are that the assessee is an individual who is engaged in the business of trading in paper. The assessee filed a return of income declaring total income of Rs.91,46,063/-, which inter- alia included incomes by way of dividend of Rs. 23,857/- as well as long term capital gain of Rs. 1,18,140/- exempt u/s 10(34) and 10(38) of the Act respectively. The A.O. show caused the assessee as to why the disallowance u/s 14A of the Act should not be made with respect to the interest expenditure incurred by the assessee apart from the disallowance already made by the assessee with respect to the administrative expenditure, in the return of income.

4. The plea of the assessee was that no separate books/records were maintained for activity of investment in shares and the same is independently handled by the assessee himself and the expenses incurred on D-mat charges, interest to brokers for late payment etc. amounting to Rs. 11,677/- were debited to Capital account and not claimed against business income. As regards the payment of interest, assessee pointed out that he had own funds in the capital account and interest-free un-secured loans which were enough to cover the total investments which had given rise to the exempt income. Therefore, assessee contended that no portion of interest expenditure was disallowable u/s 14A of the Act and that the interest bearing funds have been utilized for the purpose of business of trading in paper. For this proposition, assessee relied upon the judgment of Hon'ble Bombay High Court in the case of CIT vs. Reliance Utilities and Power Limited, 313 ITR 340 (Bom).

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5. The A.O. noted that the accounts of the assessee are mixed and no separate balance sheet is prepared for the activity of investment in shares. Therefore, he applied the formula laid down in Rule 8D(2)(ii) of the Rules and considered the entire interest expenditure of Rs. 72,44,664/- as interest expenditure which is not directly attributable to any particular income, and accordingly computed a disallowance of Rs. 7,91,184/- under section 14A of the Act, which was added back to the returned income. The assessee carried the matter aforesaid in appeal before the ld. CIT(A), but without success. Against the aforesaid, assessee is in further appeal before us.

6. Before us, the ld. Representative of the assessee has reiterated that the aggregate of own funds plus and interest-free un-secured loans was enough to cover the impugned investments, which have given rise to the tax-free incomes, and, therefore no expenditure by way of interest can be attributable to such investments following the ratio of the judgment of the Hon'ble Bombay High Court in the case of Reliance Utilities and Power Ltd. (supra). It was submitted that a similar situation has been considered by the Mumbai Bench of this Tribunal in ITA No. 5861/Mum/2011 for A.Y. 2008-09 dated 20-08-2014 in the case of Sharekhan Financial Services (P) Ltd. vs. ACIT. On the strength of the said precedent, it was contended that if the interest-free funds available with the assessee are sufficient to meet the exempt-income generating investments and at the same time assessee has raised interest bearing loan, it can be presumed that such investments were made from the interest-free funds available and therefore no interest expenditure could be subject to disallowance in terms of section 14A of the Act. Reliance has also been placed on the judgment of Hon'ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd. [2014] 366 ITR 505 (Bom) and DIT vs. BNP Paribas SA [2013] 214 Taxmann 548 (Bom).

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7. On the other hand, the Ld. D.R. appearing for the Revenue supported the orders of authorities below and pointed out that it was difficult for the assessee to justify that entire interest-bearing funds were used for business, and no interest expenditure was attributable to the investment in shares because no separate account books/records have been maintained for such purpose. It was pointed out that the accounts of the assessee in personal capacity and in respect of the business activity are mixed, therefore, the disallowance made by applying Rule 8D(2)(ii) of the Income Tax Rules, 1962 with respect to the interest expenditure was justified.

8. We have carefully considered the rival submissions. Section 14A of the Act postulates that for the purpose of computing total income under Chapter IV, no deduction shall be allowed in respect of expenditure incurred in relation to income which does not form part of the total income under the Act. Sub section (2) of section 14A further prescribes that the Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under the Act in accordance with such method as may be prescribed. The method so prescribed can be found in terms of Rule 8D of the Income Tax Rules, 1962. So, however, sub-section (2) of section 14A itself contains a caveat that the aforesaid method can be applied only if the Assessing Officer having regard to accounts of the assessee is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to the income which does not form part of the total income under the Act. Sub-section (3) of section 14A of the Act prescribes that sub-section (2) shall also be applicable in a situation where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under the Act.

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9. In fact, the Hon'ble Delhi High Court in the case of Joint Investments Pvt. Ltd. vs. CIT in ITA No. 117/2015 decided on 25-02-2015 reiterated that having regard to the peculiar wordings of section 14A(2) of the Act, the computation or disallowance made by the assessee or claim that no expenditure was incurred for earning exempt income should be examined with reference to the accounts and only if the assessee's explanation is not found satisfactory, can the Assessing Officer proceed further. In other words, as per the Hon'ble High Court, the computation under Rule 8D(2) of the Rules can be resorted to only when the computation or disallowance made by the assessee or claim that no expenditure was incurred to earn exempt income has not been found satisfactory by the Assessing Officer, have regard to the accounts.

10. In the present case, the assertion of assessee is that insofar as the interest expenditure of Rs.72,44,664/- considered by the Assessing Officer is concerned, it has been incurred on loan funds used in the business of trading in paper, and no expenditure was incurred in relation to earning of exempt income and therefore no disallowance was maintainable by the application of Rule 8D(2)(ii) of the Rules. The aforesaid assertion is sought to be supported by the proposition laid down by the Hon'ble Bombay High Court in the case of Reliance Utilities and Power Ltd. (supra). In terms thereof, it is contended that own funds in capital account was Rs. 1,95,68,261/- as on 31-3-2010, and that unsecured loans of Rs. 38,33,021/- were interest-free, thus total interest-free funds available with the assessee were Rs. 2,34,01,282/-, which was more than the total investment in shares of Rs. 1,56,20,586/-, which has given rise to the tax-free incomes. At the time of hearing the ld. Representative of the assessee has also furnished details showing availability of funds and investments during the previous year relevant to the assessment year under consideration in order to point out that the interest bearing funds were not utilized for the investments which have given rise to tax free income. The Hon'ble Bombay High Court has upheld the proposition that if there be 6 ITA 4891/M/13

interest free funds available to an assessee sufficient to meet its investments and at the same time assessee has raised interest-bearing loans, it can be presumed that the investments have been made from interest free funds available. In the course of hearing the Ld. Representative referred to a chart which chronologically enumerates the availability of interest free funds with the assessee prior to the purchase of shares during the year under consideration. In terms of the said tabulation, assessee has purchased shares amounting to Rs.50,68,494/- during the year under consideration on various dates, and the availability of interest-free funds prior to each purchase is detailed as under:-

FUND AND INVESTMENT PERIOD 01.04.09 TO 31.03.10 DATE PARTICULARS AMOUNT AMOUNT BALANCE CREDIT DEBIT 01.04.2009 CAPITAL AS ON 5808219 5808219 01.04.09 01.04.2009 INTERESE FREE 258951 6067170 LOAN 17.07.2009 SHARES SOLD 1013677 7080847 14.08.2009 SHARES 36800 7044047 PURCHASE 28.08.2009 SHARES 25668 7018379 PURCHASE 28.08.2009 SHARES 479956 6538423 PURCHASE 29.08.2009 INTERST FREE 40500 6578923 LOAN 15.10.2009 SHARES 4240759 2338164 PURCHASE 15.01.2010 INTEREST FREE 1516570 3854734 LOAN 11.02.2010 INTEREST FREE 97000 3951734

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LOAN 26.03.2010 SHARES 285311 3666423 PURCHASE 31.03.2010 INTEREST FREE 1920000 5586423 LOAN

Thus, on the above basis claim of the assessee was that no interest expenditure was incurred for making investment in shares.

11. In our considered opinion, a perusal of the assessment order does not reveal any credible reasoning to show as to how the aforesaid assertion of the assessee was found un-satisfactory by the Assessing Officer. Therefore, in the context of the above fact-situation the legal position laid down by the Hon'ble Delhi High Court in the case of Joint Investments P. Ltd. (supra), is fully attracted, and Assessing Officer was precluded from proceeding to compute the disallowance by applying Rule 8D(2)(ii) of the Rules with respect to the interest expenditure.

12. In view of the aforesaid discussion, we set-aside the order of the ld. CIT(A) and direct the Assessing Officer to delete the addition of Rs. 7,91,184/- made by applying Rule 8D(2)(ii) of the Rules r.w.s. 14A of the Act. Thus, on this aspect assessee succeeds.

13. In the result, appeal of the assessee is allowed.

Order pronounced in the open court on 29.05.2015.

आदे श क घोषणा खल ु े &यायालय म) *दनांकः 29.05.2015 को क गई ।

Sd/- Sd/- (AMIT SHUKLA) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER मुंबई Mumbai; *दनांक Dated 29.05.2015 व.:न.स./ RK , Sr. PS 8 ITA 4891/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 आयु;त(अपील) / The CIT(A), 13, Mumbai

4. आयकर आयु;त / CIT, - 7,Mumbai

5. >वभागीय :त:न@ध, आयकर अपील य अ@धकरण, मुंबई / DR, ITAT, Mumbai E Bench

6. गाडC फाईल / Guard file.

ु ार/ BY ORDER, आदे शानस

स या>पत :त //True Copy// उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील य अ धकरण, मुंबई / ITAT, Mumbai