CA Sandeep Kanoi
Facts of the case :- The assessee company is a builder and developer of residential and commercial projects. It was noted by the AO that the assessee company is a partner in several “partnership firms”. The AO had made a list of all those firms along with profit sharing ratio of the assessee in those firms. It was noted by the AO that for A.Y.2009-10, the assessee had earned profit from those “partnership firms” Rs.20,54,20,402/-. The said profit was claimed as exempt u/s.10(2A) of IT Act. The assesse’s investment in those firms as on 31st of March, 2009 was Rs.66,63,26,727/-. Further, it was noted by the AO that the assessee had paid interest of Rs.3,61,28,214/-. The observation of the AO was that the assessee company had invested substantial fund in the partnership firm and earned exempted income. According to AO, on one hand, the assessee had paid interest on the unsecured loans. However, on the other hand, the borrowed funds were invested in the partnership firms from where earned exempted income u/s. 10(2A) of IT Act. The AO has invoked the provisions of Section 14A read with Rule 8D of the Act.
Contention Raised by the Assessee :- From the side of the appellant, learned AR Mr. Vijay Ranjan appeared and pleaded that the assessee had its own sufficient funds of Rs. 106,16,43,052/-. However, the investment in capital of partnership firms was only Rs.66,56,26,727/-. Once the assessee had sufficient own funds, therefore, the provisions of Section 14A were wrongly invoked. He has also argued that the assessee has earned interest free partnership firm on capital of Rs. 1,18,50,970/- and earned interest from bank Rs.78,38,101/- totaling Rs.1,96,89,071/-. As against that the interest expenditure which was taken by the AO for the said disallowance was only Rs. 1,22,01,010/-. Once the interest income was more than the interest expenditure then it was wrong on the part of the AO to invoke the provisions of Rule 8D of the Act. He has placed reliance upon the decision of Hon’ble ITAT “D” Bench Ahmedabad in the case ITO Ahmedabad Vs. Karnavati Petrochem Pvt. Ltd., in ITA No.2228/Ahd/2012, for A.Y.2008-09, dated 05.07.2013.
Held :- Under the totality of the facts and circumstances of the case, we are of the considered opinion that when the interest income was more than the interest expenditure then the AO was not justified to invoke the provisions of Section 14A read with Rule 8D of IT Act. We hereby reverse the findings of the authorities below and direct to delete the disallowance.