When there are substantial interest free and own funds, presumption would be that the investment and/or advances were made out of such funds.

Present appeal is filed at the instance of the Revenue against order of ld.CIT(A)-7, Ahmedabad dated 3.10.2017 passed for the Asstt.Years 2014- 15.

2. In the grounds of appeal, Revenue has raised mainly two issues, viz. the ld.CIT(A) has erred in law and on facts in deleting the addition of Rs.1,19,90,822/- of interest on advance given for purchase of immovable property under section 36(1)(iii) (of Income Tax Act, 1961) and (ii) in deleting disallowance of Rs.2,88,48,738/-.

3. It is to be noted that in the grounds of appeal Revenue has pleaded that the ld.CIT(A) has erred in deleting the addition of Rs.1,19,90,822/- which was added by the AO by making disallowance under section 36(1)(iii) (of Income Tax Act, 1961). It appears that this figure has wrongly been mentioned by the Revenue. A perusal of the order of the CIT(A), in para 4.2 reveals that the assessee has subsequently filed a rectification application before the AO under section 154 (of Income Tax Act, 1961), and the order for rectification was passed on 17.2.2017. The AO worked out the disallowance after rectification at Rs.51,84,596/-. Thus, the ld.CIT(A) treated the subject matter of appeal to the extent of amount of Rs.51,84,596/- disallowed under section 36(1)(iii) (of Income Tax Act, 1961). The Revenue has erred in mentioning the figure of Rs.1,19,90,822/- in its grounds mentioned above. Taking note of the above facts, we proceed to decide the issue on merit.

4. Brief facts of the case are that the assessee is engaged in trading in bullion, commodities, shares and securities etc. and also engaged in import and export through SEZ unit. It has filed its return of income declaring total income at Rs.1,21,54,668/-, which was processed under section 143(1) (of Income Tax Act, 1961). Thereafter, the case of the assessee was selected for scrutiny assessment by issuing and serving notice under section 143(2) (of Income Tax Act, 1961) on 3.9.2015. During the course of assessment proceedings it was noticed by the AO that the assessee has given interest free advances to M/s.Applewood Estate P.Ltd., Ahmedabad and M/s.Obero Estate Pvt.Ltd., Mumbai of Rs.10,15,03,188/- and Rs.1,96,32,248 respectively for purchase of immovable property. The assessee was show caused as to why interest expenses should not be disallowed, as the possession of the property was not given to the assessee. Since reply of the assessee was not satisfactory, the AO calculated ratio of interest expenses claimed to the total fund available with the assessee and worked out proportionate disallowance of interest of Rs.4,83,675/-, 18,30,579/-, 44,91,972/- and Rs.51,84,596 at the rate of 1.227% , 5.04%, 3.76% and 4.28% of advance given for the Asstt.Year 2011-12 to 2014-15 and thus made a cumulative addition of Rs.1,19,90,822/- to the total income of the assessee. However, as stated in the foregoing paragraph of this order, after a rectification application the figure of disallowance was restricted to Rs.51,84,596/-. Aggrieved by the disallowance made by the AO, the assessee went in appeal before the ld.first appellate authority, who by following various judgments of jurisdictional High Court, and also considering the fact that similar disallowance was deleted in assessee’s own case for the Asstt.Year 2011-12, 2012-13 and 2013-14, deleted the disallowance of Rs.51,84,596/- for the year under consideration. Aggrieved by the action of the CIT(A), Revenue is now before the Tribunal.

5. Before us, the ld.Sr.DR supported the order of the AO and reiterated that since the assessee has not established nexus between the amount advanced to the sources of interest free funds, the ld.AO has justified in working out rate of interest expenses claimed to the total fund available with the assessee, and therefore, his order on this issue be confirmed and that of the CIT(A) be set aside. On the other hand, the ld.counsel for the assessee relied upon the order of the CIT(A), and submitted that similar disallowances were deleted for the Asstt.Years 2011-12, 2012-13 and 2013-14 by the Tribunal and dismissed the appeals of the Revenue. The ld.counsel for the assessee has placed on record copies of orders of the Tribunal passed in ITA No.2683/Ahd/2017 and 3115/Ahd/2015. Therefore, the ld.counsel for the assessee submitted that the appeal of the Revenue in the present year also to be dismissed on the same footing.

6. We have considered rival submissions and gone through the record carefully. We do not need to delve into it, as the issue is no more new or untouched. As recorded by the ld.CIT(A) and argued by the ld.counsel for the assessee before us that, the similar issue of issuance has been raised in earlier years also i.e. from 2011-12 to 2012-13. In all these years, such disallowances were deleted and claim of the assessee was allowed by the Tribunal. We have gone through the orders of the CIT(A) and the Tribunal on this issue. We do not find any dissimilarity of facts of this year with that of earlier years. As noted in the assessment order itself that the assessee has sufficient interest free and own funds so as to make investment/advances. In number of authoritative judgments it is held that when there are substantial interest free and own funds, presumption would be that the investment and/or advances were made out of such funds. We do not find any infirmity in the finding of the ld.CIT(A) on this issue. Accordingly following the orders of the Tribunal in the case of assessee for the earlier years, cited (supra), we uphold the action of the ld.CIT(A) and dismiss this ground of appeal of the Revenue.

7. Now we deal with second issue of the Revenue regarding disallowance of Rs.2,88,48,738 under section 14A (of Income Tax Act, 1961).

8. During the assessment proceedings, the ld.AO noticed that the assessee has investment amounting to Rs.70,00,48,032/- which would yield tax free income. The ld.AO asked the assessee to furnish explanation in respect of disallowance of interest as per the provisions contained in section 14A (of Income Tax Act, 1961) read with Rule 8D (of Income Tax Rules, 1962). It was explained by the assessee that the investment was made out of own funds, and in fact the assessee has earned interest income, and there was a positive interest income, and therefore, disallowances under section 14A (of Income Tax Act, 1961) was not applicable. Explanation of the assessee could not satisfy the AO, who held that since assessee was not maintaining any separate books about utilization of funds, nexus between the interest free funds, borrowing funds and that of investments could not be established.

Therefore, the ld.AO applied formula given in Rule 8D (of Income Tax Rules, 1962) r.w.s. 14A (of Income Tax Act, 1961) and worked out estimated disallowances at Rs.2,88,48,738/-. Aggrieved by the action of the AO, the assessee carried the matter in appeal before the ld.first appellate authority. It was explained before the ld.CIT(A), the assessee company was having interest free funds by way of net worth and interest free unsecured loan, and therefore, no interest bearing fund was utilized for investment. It was further submitted that interest paid of Rs.3,76,78,050/-, the assessee has earned interest aggregating to Rs.5,96,88,365/- and accordingly there was positive net interest income earned came to Rs.2,20,10,315/-, and therefore, interest expenditure could not be considered for disallowances under section 14A (of Income Tax Act, 1961). After considering the submissions of the assessee, and ratio laid down Hon’ble Gujarat High Court in the case of CIT Vs. Suzlon Energy Ltd. as also the decision of ITAT in the assessee’s own case for the Asstt.Year 2011-12 to 2013-14 on identical issues, allowed the claim of the assessee, and deleted the impugned disallowance. Now, the Revenue is challenging the action of the ld.CIT(A) in deleting disallowance made under section 14A (of Income Tax Act, 1961).

9. Before us, both the parties supported orders of respective authorities. The ld.counsel for the assessee while reiterating the submissions made before the ld.CIT(A) also relied upon the decision of Hon’ble jurisdictional High Court in the case of Pr.CIT Vs. Nirma Credit & Capital P.Ltd., 85 taxmann.com 72 (Guj) for proposition that where assessee pays interest on borrowings as also earns taxable interest on investment, for purpose of applying provision of Rule 8D (of Income Tax Rules, 1962), amount of expenditure by way of interest would be interest paid by assessee on borrowings minus taxable interest earned during the financial year. Further, the AO has not recorded any satisfaction as to the incorrectness of the claim of the assessee.

10. We have considered rival submissions and gone through the record carefully. The issue before us is, whether interest income was more than the interest expenses, and thus the assessee was having net positive income, therefore, the same can be considered for disallowance. We find that the assessee has demonstrated that interest free funds available to the assessee for making investment is more than interest bearing funds utilized for investment in earning tax free income. The ld.CIT(A) has also recorded that assessee has interest paid of Rs.3,76,78,050/-, and against that the assessee has earned interest aggregating to Rs.5,96,88,365/-, and accordingly there was positive net interest income earned came to Rs.2,20,10,315/-. Hon’ble jurisdictional high Court in the case of Nirma Credit & Capital P.Ltd. (supra) has held that for application of Rule 8D(2) (of Income Tax Rules, 1962), disallowance of expenditure to be considered should be net of interest i.e. interest paid minus interest received. In the present case, the assessee has earned higher interest income than the interest paid on the borrowed funds. We find that fact the present case is similar to the issue in the case of Nirma Credit & Capital (supra), and therefore, in our view this case law supports the case of the assessee. Moreover, ITAT in the assessee’s own case for earlier years also allowed similar claim of the assessee. The facts in the present year is also similar to the facts of earlier years, and therefore, following the consistency with the earlier orders, we allow the claim of the assessee, and dismiss the ground of appeal of the Revenue.

11. In the result, the appeal of the Revenue is dismissed.

Order pronounced in the Court on 3rd December, 2020 at Ahmedabad.

Sd/-

(AMARJIT SINGH)

ACCOUNTANT MEMBER

Sd/-

(RAJPAL YADAV)

VICE-PRESIDENT