Disallowance u/s 14A/Rule 8D upheld where major part of partners capital, bank and unsecured loans were stuck up in receivables

In a recent judgment, ITAT, Amritsar has upheld the disallowance u/s 14A read with Rule 8D where major part of partners capital, bank and unsecured loans were struck up in receivables holding that money has no colour and in a running business it rotates and balance in each account changes from day to day

Case Details:
Income Tax Appellate Tribunal Amritsar Bench, Amritsar
I.T.A No.656(Asr)/2014 Assessment Year: 2010-11
M/s J. Kishore Oversees vs. JCIT
Date of Order: 18/03/2016

Brief Facts of the Case:
The only ground involved in this appeal was related to addition made u/s 14A of the Income Tax Act,1961. During the course of assessment proceedings the Assessing Officer (AO) observed that assessee had invested a significant amount in mutual funds. The Assessing Officer further observed that the assessee had made investment of Rs. 3.75 crores in HDFC Mutual Fund and have earned tax free dividend income, whereas, during the year assessee was having unsecured loans of Rs. 1,47,30,054/- and secured loans of Rs. 3,09,64,264/-. The assessee had borrowed funds from bank and also from other relatives and had paid interest to Bank and relatives. Therefore, the AO made a disallowance of Rs.3,05,694/- us/ 14A read with Rule 8D.

On appeal, CIT(A) observed that disallowance of interest had to be calculated in accordance with number of days basis and on that basis disallowance was restricted to Rs.2,08,601/- instead of Rs.3,05,694/-.

The assessee contested the matter before ITAT and contended that:
(a)  The assessee firm had sufficient balance of funds in the capital accounts of the partners amountig to Rs. 444.577 crores whereas investment in mutual funds was made only to the extent of Rs.3.75 crores.
(b) The assessee had not invested in mutual funds out of borrowings as at the time investment there was only Rs.55 lacs in borrowing account.
(c) During the course of Financial Year the assessee had earned a net profit of Rs.1.70 cores and these funds were invested in mutual funds, and
(d) The addition u/s 14A if any had to be restricted to the amount of dividend income

However, the Tribunal examined the availability of the funds laying in the capital accounts and thorough the balance sheet it observed that funds amounting to Rs. 14.81 crores were struck in sundry receivables and therefore, the learned AR was confronted regarding availability of funds of partners

Excerpts from the ITAT Judgment:

We have heard the rival parties and have gone through the material placed on record. We find that the first argument of learned AR do not carry any force as the figures in the balance sheet suggest that the assessee had no surplus funds to make investment in mutual funds. The second argument of the learned AR that at the time of making investment there were little borrowings also do not hold ground as money has no colour and in a running business it rotates and balance in each account changes from day to day and furthermore the fact remains that it is a case of use of mixed funds for making investments therefore, disallowance u/s 14A was warranted. However the last argument of learned AR that the disallowance be restricted to the amount of dividend is acceptable as the Coordinate Bench in the case of M/s Daga Global Chemicals Pvt. Ltd. in ITA No. 5592/Mum/2012 vide order dated 1.1.2015 has held that the disallowance u/s 14 r. w Rule 8D cannot be exceed the exempt income.