Income Tax Appellate Tribunal - Delhi
Liquid Investment & Trading Co. P. Ltd, ... vs Department Of Income Tax on 6 September, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL,
NEW DELHI, BENCH 'D'D '
BEFORE SHRI R. P. TOLANI, JUDICIAL MEMBER
AND SHRI A K GARODIA, ACCOUTANT MEMBER
ITA No. 4717 /Del/2010
(Assessment Year 2005-06)
DCIT, Circle 4(1), Vs. M/s. Liquid Investment &
New Delhi. Trading Co. Ltd.,
15, Aurangzeb Road,
New Delhi
(Appellants) (Respondents)
PAN / GIR No. AAACL0158K
Appellant by: Mrs. Banita Devi, Sr. DR
Respondent by: Shri Ajay Vohra, Shri Gaurav Jain
& Shri Janpriya Rooprai, Adv.
ORDER
PER A. K. GARODIA, AM:
1. This appeal by the revenue is directed against the order of Ld. CIT(A) VIII, New Delhi dated 06.09.2010 for the Assessment Year 2005-06. The grounds raised by the revenue read as under:
"1) The order of the Ld. CIT(A) is erroneous & contrary to facts and law.
2) On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in restricting the addition made u/s 14A to `10,58,685/- made by the Assessing Officer.
2.1) The Ld. CIT(A) has ignored the fact that the disallowance has been correctly made by the Assessing Officer u/s 14A of the Act as per the provisions of Rule 8D of the I. T. Rules."
2. The brief facts of the case are that it is noted by the Assessing Officer on page 1 of the assessment order that it was seen that interest income was of ` 1,99,73,780/- during the year under consideration against which, the assessee has claimed deduction of interest expenses of ` 2,47,05,642/-. The Assessing Officer asked 2 I.T.A.No. 4717/Del/2010 the assessee to furnish details of names of parties, transaction of loan given and taken, rate and amount of interest received and paid to justify such excess payment of interest. It is noted by the Assessing Officer that the assessee vide letters dated 20.09.2007 and 23.11.2007 filed requisite details of interest received and paid during the year. Thereafter, it was observed by the Assessing Officer that on perusal of the said details, it was seen that the assessee received an amount of ` 23 crores as loan from HDFC Ltd. on which interest of ` 1,85,70,560/- was shown as paid @ 13% p.a. It is also noted by the Assessing Officer that summary of bank statement showing receipt of such borrowed funds and utilization thereof was requisitioned which was filed vide letter dated 04.12.2007. The Assessing Officer says that it was seen that the said borrowed funds were utilized for further giving loan to its group concern M/s. Max India Ltd. of ` 14.80 crores on interest @ 10.75% and the balance amount of ` 8.20 crores was invested in units of mutual funds for earning income exempt from tax. The Assessing Officer also observed on page 2 of the assessment order that there is no justification of borrowing at cost higher than the recoupable cost. It is also observed by the Assessing Officer that likewise, no validation of explanation of investing interest bearing funds in units of mutual funds resulting in exempt income exists. The Assessing Officer held that no allowance of such interest cost yielding income exempt from tax can be allowed as per specific provisions of Section 14A of the Income tax Act, 1961. The Assessing Officer has observed that the assessee could only recoup an amount of ` 55,80,575/- as interest income from funds given to its group concern M/s. Max India Ltd. during the present year. The Assessing Officer held that under these facts, the balance payment of interest expenditure claimed as deductible expenditure of ` 1,29,89,985/- (1,85,70,560 - 55,80,575) is disallowed and added back to the assessable income of the assessee. Being aggrieved, the assessee carried the matter in appeal before the CIT(A).
3 I.T.A.No. 4717/Del/20103. It was held by the Ld. CIT(A) that only ` 10,58,385/- is disallowed u/s 14A and he confirmed the disallowance to this extent and granted relief of balance amount of ` 1,19,31,600/-. Now, the revenue is in appeal against the relief allowed by the Ld. CIT(A).
4. Ld. D.R. for the Revenue supported the assessment order whereas the Ld. A.R. for the assessee supported the order of Ld. CIT(A). It was also submitted by him that the copy of sanction from HDFC bank is available on pages 16-18 of the Paper Book where it can be seen that a loan of ` 23 crores from HDFC Ltd. was @ 10.50 and not @ 13%. It was pointed out the bench that on page 17-18 of the Paper Book is Annexure to the said sanction letter of HDFC as per which additional interest of 2% p.a. was payable by the assessee in case of delay in repayment of loan. The repayment was due on 27.12.2004 then it has to be seen as to whether the repayment was within time or not and whether any penal interest was paid by the assessee or not. The bench wanted to see and examine the exact working of interest payment to HDFC Bank on that loan of ` 23 crores along with the period for which such interest payment was made so that the actual effective rate of interest paid to HDFC Ltd. on this loan of ` 23 crores can be worked out. It was submitted by the Ld. A.R. for the assessee that the same is not readily available.
5. We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. We find that relief was allowed by the Ld. CIT(A) on this basis that loan of ` 23 crores was taken from HDFC Ltd. @ 10.50% and not @ 13% as has been noted by the Assessing Officer in the assessment order. We find that it has been noted by the Assessing Officer in the assessment order that from the perusal of details filed by the assessee, it was seen that the assessee received a sum of ` 23 crores as loan from HDFC Ltd. on which interests of ` 1,85,70,560/- was shown @ 13% p.a. Hence, in our considered 4 I.T.A.No. 4717/Del/2010 opinion, this working is required as to what is the effective rate of interest actually paid by the assessee to HDFC Ltd. and the same can be worked out on the basis of period for which this interest of ` 185.70 lacs was paid by the assessee to HDFC bank on this loan of ` 23 crores obtained on 29.06.2004. In the absence of this detail, it is not possible to decide as to what was the effective rate of interest paid by the assessee to HDFC Ltd. We also find that part of interest was disallowed by the Assessing Officer on this basis that the same has to be disallowed u/s 14A because out of this loan of ` 23 crores, the assessee has made investment of ` 8.20 crores in mutual funds on which the income to be received by the assessee was exempt income. Ld. CIT(A) has given a finding in para 4.9 of his order that regarding this investment of ` 8.2 crores in mutual funds, it is found that income of ` 4,78,352/- derived from mutual funds was offered to tax by the assessee in its return of income for the present year. We fail to understand the basis of this finding of CIT(A) because generally, any income from investment in mutual fund is exempt income. On page 20 of the Paper Book is the details regarding income of ` 4,78,352.39. As per these details, it is seen that the assessee is showing investment of ` 8.20 crores on 30.06.2004 and ` 2.80 crores on 04.07.2004 totaling ` 11 crores. The assessee is showing redemption of units on four dates i.e. 01.08.2004, 02.08.2004, 15.08.2004 and 28.09.2004 for a total consideration of ` 11,04,78,302.39. The total income from investment in units is shown at ` 4,78,352.39. From these details available on page 20 of the Paper Book, it appears that this income is not on account of interest from units / mutual funds but on account of short term capital gain on sale of units and hence, CIT(A) is not justified to say that since the assessee has reported its income of ` 4.78 lacs on account of investment of ` 8.20 crores in the units of mutual funds, no disallowance u/s 14A is to be made on account of such investment of interest bearing borrowed funds in the units of mutual funds. Ld. CIT(A) has also observed in para 4.9 of his order that the 5 I.T.A.No. 4717/Del/2010 assessee has made new investment of ` 96,99,190/- in the purchase of 7.50 lacs equity shares of Doon Holiday Resorts Pvt. Ltd. which is being considered for proportionate disallowance in terms of Section 14A of the Income tax Act, 1961. Ld. CIT(A) worked out disallowance on the basis of this investment in shares and although he has not observed that he is making this disallowance as per Rule 8D but the working given by him on page 13 of his order is similar to the working prescribed in Rule 8D. As per the decision of Hon'ble High Court of Bombay rendered in Godrej & Boyce Manufacturing Pvt. Ltd. Vs DCIT as reported in 43 DTR 177, Rule 8D is prospective and hence, the same is applicable from the Assessment Year 2008- 09 onwards and therefore, the same is not applicable in the present year but reasonable disallowance has to be made by the Assessing Officer. Considering all these facts, we feel that this issue should go back to the file of the Assessing Officer for a fresh decision in the light of the decision of Hon'ble High Court of Bombay rendered in the case of Godrej & Boyce Manufacturing Pvt. Ltd. (supra). The Assessing Officer shall also examine the factual aspect as to whether the income earned by the assessee of ` 4.78 lacs on account of investment in units of mutual funds on its redemption has been offered by the assessee as interests income under the head 'income form other sources' or as short term capital gain and if it is found that such income has been offered as short term capital gain and assessed as such, then this investment should also be considered for the purpose of making disallowance u/s 14A along with the investment of ` 96,99,190/- invested by the assessee in purchase of 7.50 lacs equity shares of Doon Holiday Resorts Pvt. Ltd. The Assessing Officer should also examine as to how the money was invested by the assessee on red emption of units in August 2004 because out of borrowed funds of ` 23 crores, ` 8.20 crores was invested by the assessee in the units of Franklin Templeton Mutual Funds on 30.06.2004 and those units were redeemed partly on 01.08.2004 and balance on 02.08.2004 and 6 I.T.A.No. 4717/Del/2010 hence, it has to be examined as to how the amount was utilized by the assessee thereafter for the purpose of deciding the allowability of interest paid by the assessee on the loan of ` 23 crores taken from the HDFC Ltd. With these observations, we set aside the order of Ld. CIT(A) and restore the entire issue back to the file of the Assessing Officer for a fresh decision. The Assessing Officer shall also examine the effective rate of interest paid to HDFC Ltd. on the loan of ` 23 crores taken by the assessee by working as to for how much period, the assessee made payment of interest on ` 23 crores. The Assessing Officer shall pass necessary order as per law as per above discussion and in the light of judgement of Hon'ble High Court of Bombay rendered in Godrej & Boyce Manufacturing Pvt. Ltd. (supra) after providing adequate opportunity of being heard to the assessee.
6. In the result, appeal filed by the revenue stands allowed for statistical purposes.
7. Order pronounced in the open court on 30th March 2011.
Sd./- Sd./- (R. P. TOLANI) (A K GARODIA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated:30th March, 2011 Sp. Copy forwarded to 1. Appellant 2. Respondent 3. CIT True copy: By order 4. CIT(A) 5. DR Dy. Registrar, ITAT, New Delhi