No Dis allowance under Section 14 on the basis of Common pool of Funds

By | December 10, 2015

Facts of the case

The assessee had kept all the funds in one common pool and in the absence of separate cash flow statement maintained by the assessee, it was not possible to establish that the investment in the tax-free bonds was made only out of its own funds. The Assessing Officer applied an estimation and proceeds to hold that since the borrowed funds of the assessee at the relevant time were 69.9 per cent. of the total funds, the utilisation of the borrowed funds for making tax-free bonds of Rs. 10.50 crores at Rs. 716.58 lakhs and the interest attributable to the said borrowed funds would have to be taken into account. The average rate of interest was applied by the Assessing Officer and which he proceeded to disallow in the assessment completed by him.

Held

No interest expenditure can be allocated to the earning of the tax-free income received by the assessee on tax-free bonds.

HIGH COURT OF BOMBAY

Commissioner of Income-tax

v.

SBI DHFL Ltd.

S.C. DHARMADHIKARI AND A.K. MENON, JJ.

IT APPEAL NO. 1472 OF 2013

APRIL  8, 2015

Suresh Kumar for the Appellant. Sanjiv M. Shah for the Respondent.

JUDGMENT

1. This appeal of the Revenue challenges the order passed by the Income-tax Appellate Tribunal, Bench at Mumbai, and for the assessment year 2003-04.

2. The order passed on January 31, 2013, and impugned in this appeal deals with the Revenue’s questions and grounds. The principal ground on which the Revenue was aggrieved was a relief that the assessee obtained and from the first appellate authority. The argument of the Revenue’s representative and throughout appears to be that interest bearing borrowed funds were utilised by the assessee entirely for the purpose of its business and investment in tax-free bonds having been made by the assessee out of its own funds. The disallowance made under section 14A was uncalled for and that is the conclusion which was reached by the first appellate authority. The Assessing Officer, on the other hand, had held that the assessee had kept all the funds in one common pool and in the absence of separate cash flow statement maintained by the assessee, it was not possible to establish that the investment in the tax-free bonds was made only out of its own funds. The Assessing Officer applied an estimation and proceeds to hold that since the borrowed funds of the assessee at the relevant time were 69.9 per cent. of the total funds, the utilisation of the borrowed funds for making tax-free bonds of Rs. 10.50 crores at Rs. 716.58 lakhs and the interest attributable to the said borrowed funds would have to be taken into account. The average rate of interest was applied by the Assessing Officer and which he proceeded to disallow in the assessment completed by him.

3. The Commissioner of Income-tax (Appeals) and the Tribunal both held that there was no warrant for such an estimation. The Commissioner of Income-tax (Appeals) held that no interest expenditure can be allocated to the earning of the tax-free income received by the assessee on tax-free bonds. The Tribunal held that the Commissioner of Income-tax (Appeals) rightly interfered with the order of the Assessing Officer. The decision of the Commissioner of Income-tax (Appeals) was upheld by the Tribunal and the view taken by the Commissioner of Income-tax (Appeals) as also the Tribunal is inconsonance with the law laid down by this court in the case of CIT v. Reliance Utilities & Power Ltd . [2009] 313 ITR 340 The view taken also has been in consonance with the law laid down by this court in the case ofGodrej and Boyce Mfg. Co. Ltd. v. Dy. CIT [2010] 328 ITR 81.

4. In these circumstances, we find that merely because that there is a common pool of funds, a presumption that the investment yielding tax-free returns is made by the assessee out of its own funds cannot be raised. Such a view of the Tribunal, therefore, does not raise any substantial question of law.

5. However, Mr. Suresh Kumar relied upon paragraphs 71, 72 and 73 in the judgment of Godrej and Boyce Mfg. Co. Ltd.(supra). He submits that the matter be remitted back to the Assessing Officer for verification and scrutiny particularly on the amounts indicated in this judgment.

6. We do not see any basis to grant his request. Before the Division Bench judgment in Godrej and Boyce Mfg. Co. Ltd.(supra) at least some material was produced so as to warrant a sending back of the matter to the Assessing Officer. Therefore, the Additional Solicitor General pointed out that reference is made only to the reserves and there is no mention of interest-free funds. It was urged that the reserves shown on the liabilities side of the balance-sheet and are represented by a variety of assets on the assets side. These assets can be fixed or non-liquid assets and, hence, incapable of any investment. Therefore, the inquiry as to whether the interest-free funds were available on the assets side and in the absence of sufficient proof of such availability, the presumption could not be raised. That was the inquiry which was warranted and that is why the matter came to be remitted and restore to the file of the Assessing Officer. That was to find out whether the assessee-Godrej and Boyce had incurred any expenditure in relation to the earning of income which does not form part of a total income and question of the expenditure of disallowance.

7. We do not find that any such inquiry is necessary and in the absence of any request in that behalf made to the Tribunal, nor the necessary materials having been produced either before the Tribunal or before us. We, therefore, decline this request of Mr. Suresh Kumar.

8. As a result of the above discussion, neither of the questions are substantial questions of law requiring any determination by this court. The issues are fully covered in favour of the assessee and against the Revenue. The appeal is, therefore, dismissed. No costs.

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