IN INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH B , MUMBAI BEFORE SHRI G.S.PANNU, ACCOUNTANT MEMBER AND SHRI AMARJIT SINGH, JUDICIAL MEMBER ITA No.824/Mum/2013 (Assessment Year 2009-10) DCIT,Circle 22(1), Room No.411, 4th Floor, Aaykar Bhavan, M.K.Road, Mumbai 400 020 ...... Appellant Vs. M/s.Neel Controls, 403 4th Floor, Sapphire Arcade, 42M G Road, Rajawadi, Ghatkopar (E), Mumbai 400 077. PAN: AAAFN0627J .... Respondent ITA No.695/Mum/2013 (Assessment Year 2009-10) M/s.Neel Controls, 403 4th Floor, Sapphire Arcade, 42M G Road, Rajawadi, Ghatkopar (E), Mumbai 400 077. PAN: AAAFN0627J .... Appellant Vs. JCIT, Range 22(1), Room No.410, Tower No.6, Vashi Rly. St. Complex, Navi Mumbai 400 703 Revenue by : Shri Pradeep Kr. Singh Assessee by : Shri B.V.Lakhani Date of hearing : 17/10/2016 Date of pronouncement : 19/10/2016 2 ITA No.824& 695/Mum/2013 (Assessment Year 2009-10) ORDER PER G.S.PANNU,A.M: captioned cross-appeals filed by Revenue and assessee pertaining to A.Y. 2009-10 are directed against order of CIT(A)-33, Mumbai which in turn arises out of order passed by Assessing Officer under section 143(3) of Income Tax Act, 1961 (in short Act ) dated 23/11/2011. 2. First, we take up appeal of Revenue in ITA No. 824/Mum/2013. At outset, it is noticed that tax effect involved in this appeal is less than Rs.10.00 lacs. CBDT vide Circular No.21/2015 dated 10/12/2015 has revised monetary limits for filing of appeals by Department before Tribunal retrospectively. Since tax effect in dispute in captioned appeal is stated to be below monetary limit of Rs.10.00 lacs specified in CBDT Circular dated 10/12/2015 (supra), same is dismissed as not maintainable. 3. Now we may take up assessee s appeal in ITA No.695/Mum/2013, wherein following Grounds of appeal have been raised by assessee:- 1. On facts & circumstances of case Learned Commr. of Income Tax (Appeals) has erred in confirming disallowance sum of Rs.2,40,246/ under section 14A read with Rule 8D. disallowance made by Learned assessing officer and confirmed by learned Commr. Of Income Tax (Appeals) amounting to Rs.2,40,246/ is not justified and be deleted. 2. On facts & circumstances of case Learned Commissioner of income tax (Appeals) has erred in granting deduction of interest only to extent of Rs.852,619/ . appellant prays that they are entitled to deduction of interest under section 36(1)(iii) amounting to Rs.22,77,904/ and disallowance made by Learned assessing officer and 3 ITA No.824& 695/Mum/2013 (Assessment Year 2009-10) confirmed by learned Commr. Of Income Tax (Appeals) amounting to Rs.8,52,619/ may be deleted. 3. Learned Commissioner of Income Tax (Appeals) has not dealt with issue regarding levy of interest under section 234B. appellant denies liability for payment of interest u/s 234B and prays that interest levy at Rs.2,37,374/ may be deleted. 4. assessee company had earned dividend income of Rs.6,05,843/-, which was exempt from tax. In return of income filed, assessee had suo- moto made disallowance under section 14A of Act of Rs.22,974/-. Assessing Officer noted that disallowance made by assessee pertained to element of expenses covered by sub-clause (iii) of clause(2) of Rule 8D of Income Tax Rules, 1962 ( in short Rules ) and assessee had not disallowed any portion of interest expenditure which was relatable to investments. Accordingly, Assessing Officer disallowed sum of Rs.2,40,246/- on account of interest expenditure calculated in manner prescribed in Rule 8D(2)(ii) of Rules. This addition has been further affirmed by CIT(A), against which assessee is in further appeal before Tribunal. 5. Before us, Ld. Representative for assessee vehemently pointed out that there was no justification to disallow interest expenditure in instant year. It is pointed out that no investments have been made during year under consideration. By referring to balance sheet, it is pointed out that as on 01/04/2008, aggregate investment was Rs.1,11,87,777/- comprising of mutual funds - Rs.1,11,85,776/- and shares in two Co-operative Housing Societies of Rs.2,001/-. It was pointed out that in instant year investment in mutual funds have been sold and no fresh investments have been made and closing balance of investments shown in balance 4 ITA No.824& 695/Mum/2013 (Assessment Year 2009-10) sheet as on 31/03/2009 is Rs.2,001/-, which is investment in two Co- operative Housing Societies Ltd. On this basis, it was pointed out that as no funds have been utilized for making investments during year, interest debited to P&L Account cannot be considered for purpose of disallowance under section14A of Act. It has been further pointed out that in immediately preceding assessment year of 2008-09, disallowance of interest expenditure relatable to investments was deleted by CIT(A) on ground that same was made out of own funds of assessee. It was pointed out that order of CIT(A) dated 01/11/2012 for assessment year 2008-09 has since become final and, therefore, under these circumstances disallowance of interest expenditure was not merited in instant year. 6. On other hand, Ld. Departmental Representative has defended orders of lower authorities by relying on same. 7. We have carefully considered rival submissions. factual matrix brought out by assessee clearly reveal that in instant year assessee has not made any fresh investment in mutual funds and further in past year also no interest has been found to be attributable to such investments. Rather, in year under consideration, assessee has sold investments in mutual funds. only investment remaining in this year out of past investments is sum of Rs.2,001/- in shares of two Co-operative Housing Societies Ltd. Under these circumstances, it will be appropriate to hold that interest debited in P&L Account is not directly attributable to business of assessee so as to fall for consideration for disallowance as per formula contained in Rule 8D(2)(ii) of Rules. Accordingly, disallowance of Rs. 2,40,246/- made by Assessing Officer out of interest 5 ITA No.824& 695/Mum/2013 (Assessment Year 2009-10) expenditure under section 14A of Act is directed to be deleted. Thus, on this aspect assessee succeeds. 8. second Ground raised by assessee is with respect to disallowance of Rs.22,07,904/- made by Assessing Officer out of interest expenditure by invoking provisions of proviso to section 36(1)(iii) of Act. In this context, brief facts are that assessee was undertaking construction of building. total cost of building under construction at end of year stood Rs.2,49,40,337/-. During year under consideration, assessee had made additions to extent of Rs.1,63,52,088/- and balance of Rs.85,88,248/- was opening balance brought forward from earlier years. Assessing Officer noted that assessee had debited expenditure on account of interest in P&L Account amounting to Rs.46,68,746/- towards interest paid to partners on their credit balance in capital account. According to Assessing Officer portion of interest paid to partners relating to outlay of Rs.2,49,40,337/- towards building under construction was not eligible for deduction. For said reason Assessing Officer made disallowance of Rs.22,77,904/- on ground that such interest expenditure was in respect of capital borrowed for acquisition of asset which was not put to use. In this regard, Assessing Officer has also referred to proviso to section 36(1)(iii) of Act. CIT(A) has also affirmed disallowance, against which assessee is in further appeal before Tribunal. 8.1 Though Ld. Representative for assessee did not dispute that asset in question i.e. building is still under construction and is not put to use for business, yet according to him no disallowance is required to be made out 6 ITA No.824& 695/Mum/2013 (Assessment Year 2009-10) of interest expenditure in terms of proviso to section 36(1)(iii) of Act because on facts there is no interest expenditure, which is relatable to funds invested towards building under construction. 8.2 In order to appreciate aforesaid plea of assessee, following factual aspects are relevant. Notably, opening balance in building construction was Rs.85,88,248/- and additions during year are to tune of Rs.1,63,52,088/-, which totals to Rs.2,49,40,337/-. In this context, Ld. Representative for assessee pointed out that assessee has not raised any borrowings except to extent of specific loan of Rs.1,91,246/- raised for acquisition of car, and in this regard he has referred to page -5 of Paper Book, wherein is placed balance sheet as on 31/3/2009. Therefore, first and foremost plea of assessee is that in absence of any borrowings, no interest can be attributable to investment made in construction of building. Ld. Representative for assessee has referred to page-22 of Paper Book, wherein is placed details of interest debited to P&L Account of Rs.46,68,746/-, which represents interest paid to partners on credit balance in capital accounts. Apart therefrom, details of Bank & financial charges of Rs.3,64,469/-, placed on page 15 of Paper Book, shows that it comprises of bank charges, bank guarantee commission, interest on car loan, processing fee, and interest on bank overdraft, which is small figure of Rs.4,142/-. Ld. Representative for assessee pointed out that assessee does not have any overdraft facility with bank and that interest on bank overdraft of Rs.4,142/- is on account of certain temporary overdrawing that would have occurred pending cheque realization. It was explained that out of addition of Rs.1,63,52,088/- made in Building construction account during year, 7 ITA No.824& 695/Mum/2013 (Assessment Year 2009-10) actual deployment/physical outflow of funds was only to tune of Rs.1,55,58,782/- and at page 19 of Paper Book, chart showing source of such payments has been placed. As per same, it is seen that payments have been made out of current bank accounts maintained by assessee, which do not carry any interest burden. Be that as it may, it is quite clear that it is only interest paid to partners of Rs.46,68,746/-, which has been considered by Assessing Officer as relatable to funds invested in building construction. In this context, Ld. Representative for assessee has placed chart analysing details of capital account of partners, which is placed at pages 23 of Paper Book. As per P&L Account as well as balance sheet of assessee, it is quite evident that credit balance of partners at end of year stood at Rs.4,88,11,203/- and cash flow for year stood at Rs.3,05,43,543/-. It is quite clear that cash profits generated by assessee during year are sufficient to cover investments made in construction of building during year of Rs.1,63,52,088/-(more so, if actual value of out-flow at Rs.1,55,58,782/- is considered). Apart therefrom, we find that out of total investment of Rs.2,49,40,337/- is concerned, sum of Rs.85,80,248/- has been made in preceding year. In preceding year, Ld. Representative for assessee, pointed out that no such disallowance was made and referred to assessment order passed under section 143(3) for assessment year 2008- 09 dated 16/12/2010, copy of which has been placed at pages 36 to 39 of paper book. 8.3 aforesaid factual matrix is clearly borne out of record and at time of hearing, same has not been repudiated by Ld. Departmental Representative. Considering above matrix, in our view, 8 ITA No.824& 695/Mum/2013 (Assessment Year 2009-10) there is no material to suggest that any interest can be attributable to funds invested by assessee in building under construction and, therefore, Assessing Officer has wrongly invoked proviso to section 36(1)(iii) of Act to disallow sum of Rs. 22,77,904/- out of interest expenditure. Accordingly, on this aspect assessee succeeds. 9. last Ground in appeal of assessee relates to charging of interest under section 234B of Act , which is consequential in nature and does not require any adjudication. 10. In result, whereas appeal of Revenue is dismissed, that of assessee is partly allowed, as above. Order pronounced in open court on 19/10/2016 Sd/- Sd/- (AMARJIT SINGH) (G.S. PANNU) JUDICIAL MEMBER ACCOCUNTANT MEMBER Mumbai, Dated 19/10/2016 Vm, Sr. PS Copy of Order forwarded to : 1. Appellant , 2. Respondent. 3. CIT(A)- 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, //True Copy// (Dy./Asstt. Registrar) ITAT, Mumbai DCIT,Circle 22(1), Mumbai v. M/s.Neel Control