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TMI Blog2008 (7) TMI 460X X X X Extracts X X X X X X X X Extracts X X X X ..... 57 CTR (Ker) 422 : (2000) 108 Taxman 322 (Ker). 2 (i) The learned CIT(A) deleted the disallowance of Rs. 4,73,197, as unjustified, on the ground of the mandate of Circular dt. 29th April, 1967 and on appreciation of the case law, relied upon the assessee company as also the contents of the assessment order. The relevant finding of the learned CIT(A), on the issue in question, is reproduced hereunder; "I have considered the submission of the learned counsel vis-a-vis the facts of the case. It is seen from the assessment order that all the payments made towards PF contribution which were held by the AO as delayed payments were made within the grace period of five days allowed by PF authorities. As per the Circular dt. 29th April, 1967, if the employer makes the payment within such period of grace, the appellant is not liable to pay any damage in accordance with the employees PF scheme and the relevant Act and the assessee will also not be treated to be in default under the relevant Act. The various judicial decisions referred to above also support the contention of the learned counsel that payments made within the grace period of five lays should not be treated as made beyond the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y them, in the relevant previous year. After the insertion of s. 43B, even if the assessee had regularly adopted the mercantile system of accounting, the amount of tax payable by the assessee could be deducted only in the year, in which the sum was actually paid and not in the year, in which the assessee incurred the liability to pay that tax. However, an assessee, who had collected sales-tax in the last quarter of the accounting year and deposited it in the treasury, within the statutory period, falling in the next accounting year, was not entitled to claim any deduction for it. This was not intended by s. 43B. To obviate this kind of unexpected outcome of s. 43B, the first proviso was added in s. 43B by the Finance Act of 1987. The proviso makes it clear that the section will not apply in relation to any sum, which is actually paid by the assessee, in the next accounting year, if it is paid on or before the due date, for furnishing the return of income, in respect of the previous year, in which the liability to pay such sum was incurred and the evidence of such payment is furnished by the assessee, along with the return. However, "any sum payable" in cl. (a) of s. 43B was open to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p focus the legal effect, that may ensue on all matters, pending assessment, containing the issue of payments in respect of welfare dues, made before the due date of filing the return. The first proviso and the second proviso to s. 43B of the Act contain due dates for various payments, enumerated in sub-cls. (a) to (f) of s. 43B of the Act. Consequently, these provisos contained identical legislative intent, on the issue of due date of payments, covered under s. 43B of the Act. In view of this, the decision of the Hon'ble Supreme Court of India, in the case of Allied Motors (P) Ltd. vs. CIT is squarely applicable to the deleted second proviso and amendment to first proviso to s. 43B of the Act. In the case of Allied Motors (P) Ltd., the apex Court of the land has categorically held, following the rule of reasonable construction of the statutory provisions, that the first proviso to s. 43B of the Act is retrospective in operation. On the same analogy, the decision of the Supreme Court is applicable to the amendment made by the Finance Act, 2003 w.e.f. 1st April, 2004. 4(ii) The above view is fortified by the decision of the jurisdictional Tribunal, in the case of Addl. CIT vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B would not be applicable to the assessee." 4(v) In this context, it is essential to trace and appreciate the legislative history of the provisions of s. 43B of the Act and subsequent amendments to first proviso and deletion of second proviso thereunder. Thus, the entire section should be read and construed harmoniously, with a view to ascertaining the true legislative intent as to give proper meaning to all the limbs of the provisions of s. 43B of the Act. Further, it is pertinent to contextualise the ratio of the decision of the Hon'ble Supreme Court, in the case of Allied Motors (P) Ltd. vs. CIT rendered in the context of first proviso, with reference to the deletion of the second proviso to s. 43B of the Act. In view of this, the ratio of the decision in the said case is applicable to the due date covered under the deleted second proviso to s. 43B of the Act as held by the jurisdictional Bench of the Tribunal in the decision discussed earlier. In view of the above legal and factual discussions, we do not find any reason to interfere with the finding of the learned CIT(A) on the issue in question, and hence, the findings of the learned CIT(A) are upheld. "Ground No. 2: O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO's first contention is that commission has been paid to parties, effecting sales to Government undertakings, i.e., for supplies made to ONGC and Gujarat Petronet Ltd. and it is against the public policy to use intermediary for supplies made to Government. He accordingly applied Explanation to s. 37. It is seen that the AO has been influenced by the order of assessment, for the asst. yr. 2000-01, which has finally been quashed by the Tribunal, vide its order dt. 20th April, 2005, in ITA No. 2309/Del/2004. The AO has also placed reliance on the decision of the Settlement Commission's order dt. 30th July, 2004 in the case of M/s Ahluwalia Contract (India) Ltd. New Delhi, and decision of Delhi High Court, in the case of CIT vs. Orissa Cement Ltd. (2002) 177 CTR (Del) 361 : (2002) 258 ITR 365 (Del). I have gone through the submission of the learned counsel, copy of the agreements and appointment letters, issued to these agents. Confirmations have been filed by the commission recipients. Payments were made through account payee cheques. They are regular income-tax assessees and their income-tax particulars are available on record. It is also observed that the appellant had bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the parties concerned, a substantial amount of the receipts against the works awarded. It has been claimed that while all the receipts, including the receipts, which were agreed to be paid back by the applicant. have been accounted for on the receipt side, the applicant had to generate cash, for paying back to these clients, which he did by drawing bearer or account payee cheques from its regularly maintained bank accounts. It has been claimed that such withdrawals from the banks came back to the applicant and were actually utilized for disbursement of payments to the big clients. It was pleaded by the Authorised Representative that since the contracts, received by the applicant, were on the basis of understanding of paying back certain amounts, the applicant was entitled to claim such amounts, as there was an overriding title of these payments on receipts. The Authorised Representative's plea in the case was that since a part of the, contract receipts had been mentioned as pay back in the diary seized, the total receipts of the applicant should be reduced by the amount of such payment. When the appellant was asked to file affidavits from the clients or employees of the cli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;s business. The explanations given by the appellant, in this regard, are reproduced below; for proper appreciation of the facts....... The learned counsel, when asked for, produced before me various communications exchanged between these parties and the appellant. After going through the same, I found that the entire correspondence of Surat Municipal Corporation (a contract executed by the assessee with the assistance of M/s GMC) was also marked to GMC, as an agent. Further, the correspondences with the other parties, as detailed above, were also routed through GMC. This shows that the party has actively participated in the execution of contracts and has not acted as a person to influence the customer's employees in awarding contract to the appellant. Similarly, in the case of M/s IPL, I found that the party itself is a manufacturing-cum-trading firm of pipes. Initially, it has bought pipes from the appellant for supplies to ONGC, later on executed jointly a contract of ONGC, with the appellant. It is only at later stages that IPL acted as advisor and consultant in tender bidding of ONGC. In fact, the entire ONGC business to the appellant was procured only with the active ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commission was paid were identifiable, the payment was made through account payee cheques, for the services rendered by the parties. The Revenue has failed to establish any collusiveness and colourable device, in making the payment of such commission. The quantum of such commission is not in dispute so is the case with the services rendered by the parties. Further, the parties confirmed the receipt of such commission and the same are assessed to tax as observed by the CIT(A). In the instant case, the Revenue is making an assertion of applicability of the provisions of the said Explanation, therefore, the onus to prove the same is cast on it, and the onus remained undischarged by way of cogent and corroborative material. However, the Revenue has failed to bring on record requisite cogent, corroborative and reliable evidences, to justify invocation of the said Explanation, as held by the learned CIT(A) also. 5(ii) The Revenue has not disputed the eligibility of the claim under s. 37(1) of the Act. The claim has been rejected, by invoking the Explanation below s. 37(1) of the Act and placed reliance mainly on the assessment order to support the addition. We have carefully considered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose in thickets and branches. My plea is to keep the path to justice clear of obstruction which could impede it." (b) In the case of Union of India vs. Major Bahadur Singh (2006) 1 SSC 368, at pp. 373 and 374, the Hon'ble Supreme Court, while dealing with a similar situation and referring to the principles, in the matter of applying precedents held as under: "The Courts should not place reliance on decisions without discussing, as to how the factual situation fits in with the fact-situation of the decision on which reliance is placed. Observations of the Courts are neither to be read as Ecuclid's theorems nor as provisions of the statute and that too taken out of their context. These observations must be read in the context in which they appear to have been stated. Judgments of the Courts are not to be construed as statutes. To interpret words, phrases and provisions of a statute, it may become necessary for Judges to embark into lengthy discussions. But, the discussion is meant to explain and not to define. Judges interpret statutes; they do not interpret judgments. They interpret words of statute; their words are not to be interpreted as statutes." (c) Similar judic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance Minister, can be taken into consideration, as held by the Hon'ble Supreme Court, in the case of Sole Trustee. Loka Shikshana Trust vs. CIT 1975 CTR (SC) 281 : (1975) 101 ITR 234 (SC). 5(vi) The insertion of Explanation to s. 37 of the Act, has been explained by the CBDT, vide Circular No. 772, dt. 23rd Dec., 1998 [(1999) 151 CTR (St) 9 : (1999) 235 ITR (St) 351. which is in the nature of contemporanea expositio and a statute may be interpreted by reference to this exposition, as made by the CBDT. the highest body in the tax administration. The Explanation to sub-s. (1) was inserted by the Finance (No. 2) Act, 1998, with full retrospective effect from 1st April, 1962. The amendment is explained in the Board circular as under: "20 Disallowance of illegal expenses 20.1 Sec. 37 of the IT Act is amended to provide that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purposes of business or profession and no deduction or allowance shall be made in respect of such expenditure. This amendment will result in disallowance of the claims made by certain assessees, in respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of mere assertion or surmises or suspicion is liable to be quashed by higher Court. The decision must be supported by concrete facts and cogent evidences. This is a fundamental rule of justice. The Supreme Court has often frowned upon such tendency of the AO to frame the assessment order, on mere surmises and set aside these cases. This view has been held by the Supreme Court in the cases of Dhirajlal Girdhanlal vs. CIT (1954) 26 ITR 736 (SC), Omar Salay Mohamed Sait vs. CIT (1959) 37 ITR 151 (SC), Dhakeshwari Cotton Mills Ltd. vs. CIT (1954) 26 ITR 775 (SC) and Lalchand Bhagat Ambica Ram vs. CIT (1959) 37 ITR 288 (SC). Thus, in a given fact-situation of the instant case, the Revenue has failed to justify invocation of the said Explanation and consequent addition, as the parties to whom commission was paid, mode of payment through account payee cheques, quantum of commission, for the purpose of business and for the services rendered by the parties, remained undisputed facts, emanating from the assessment order, CIT(A)'s order and submissions. Having regard to the above legal and factual discussions, there is no reason and justification to warrant any interference with the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up companies and that the same should be followed. The AO has further observed that it cannot be believed that the entire business operation was conducted with borrowed funds and the amounts advanced allegedly interest free to group companies was out of own funds. The AO also observed that the amount advanced to one of the group companies, M/s Hexa Securities is doubtful of recovery and no interest is being charged from the aforesaid company after 30th June, 2000. The AO has not given any concrete finding based on any material regarding the interest-bearing borrowed funds having been utilized for advancing loans to sister-concern and he has based his conclusion on conjectures and surmises. At the year end appellant was having interest-bearing borrowed funds of Rs. 358.83 crores. The statement gives the entire details of borrowings and the purpose of borrowings. The AO cannot assume that borrowings have not been used for that purposes. It is to be noted that lenders periodically review the accounts and verify the usage of borrowings. The appellant under no circumstances can use the borrowed funds for purposes other than the purpose agreed with the lender. A perusal of the borr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rposes of the sister concerns for non-business purposes. In the appellant's case the funds have been provided to the subsidiary in which there is huge investment for the purpose of its business and have been utilized in its business and, therefore, following the decision of the Supreme Court in the case of S.A. Builders, the interest paid by the appellant, assuming it is out of funds borrowed by it, is to be allowed deduction. It may also be peretinent to mention that the loan given to the appellant's group company, M/s Hexa Securities & Finance Ltd. was not interest free. However, in view of the precarious financial conditions of that company no interest was charged after 30th June, 2000. It should be noted that out of loan of Rs. 84.76 crores given to Hexa Securities, a sum of Rs. 75.65 crores had been lent until 31st March, 2001. In the preceding years it has been accepted that the loans to subsidiaries and group companies have been made out of own funds, therefore, a different finding cannot be made in the year under consideration in relation to amount given on loan in earlier years. Reliance is placed on this proposition on the under mentioned decisions: (i) CIT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... even if it is assumed that during the relevant previous year funds were advanced to the subsidiary partly out of borrowed funds, the disallowance of interest cannot exceed by Rs. 56.70 lacs (i.e. 62.5 per cent of Rs. 9.11 crores of 9.96 per cent). The assessee has invested a sum of Rs. 69.46 crores in shares and Government securities out of which Rs. 67.36 crores related to investment in subsidiaries and group companies of the appellant. Out of the aforesaid amount Rs. 67.36 crores, the income from investment in overseas companies to the extent of Rs. 11.04 crores, was not exempt from tax. The appellant received sum of Rs. 42.02 lacs as dividend from investment made in various group companies. Since no expenditure has been incurred for earning the dividend income, no expenses were allocated under s. 14A in relation to such dividend income by the appellant. The AO following the order for asst. yr. 2000-01 held that part of the borrowed funds were utilized for making investment in the group companies from which exempt income has been received and on that basis, disallowed proportionate expenditure relatable to the borrowed funds alleged to have been invested in assessee's g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... finding in the earlier assessment years that the investments made in the earlier year in the group companies have come out of borrowed funds. In fact, in the asst. yr. 2000-01, it was held by the Tribunal in the appellant's own case that the investment has been made out of own interest free funds available with the appellant. It is pertinent to note that AO conducted detailed enquiry on that aspect in the immediately preceding assessment year, i.e., for asst. yr. 2001-02 and after examination accepted the appellant's plea that own funds have been used for making investment in group companies, and made no disallowance. Once this aspect has been examined in the past than no enquiry can be conducted again on this aspect. This contention is supported by the under mentioned decisions: (i) CIT vs. Sridev Enterprises; (ii) Malwa Cotton Spg. Mills; (iii) Meenakshi Synthetics vs. CIT. In the asst. yr. 2004-05 too, no disallowance of interest under s. 14A has been made by the AO. On the grounds of consistency too, the aforesaid disallowance was not called for. The CIT(A) has appreciated the aforesaid submission and deleted the disallowance under s. 14A of the Act." 6. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ares of group companies and advance to group companies were made partly by own funds and partly by borrowed funds in the ratio of 37.5 per cent and 62.5 per cent respectively. He, accordingly, held that out of Rs. 64 crores investment in shares, Rs. 40 crores were out of borrowed funds (62.5 per cent of 64 crores) and similarly, out of Rs. 84 crores of loans and advances to M/s Hexa Securities Rs. 52.5 crores were made out of borrowed funds. After setting off interest received and paid, the AO applied 12 per cent interest attributable to borrowed funds invested in shares, which works out to Rs. 4.80 crores and cost attributable to borrowed funds utilized for giving loans and advances to M/s Hexa Securities at Rs. 6.3 crores. The AO, accordingly, made a disallowance of Rs. 11.10, out of interest claimed by the appellant. Further, the appellant company had shown a dividend income of Rs. 42,02,489 which has been claimed as exempt under s. 10(33). The AO rejected the claim of the appellant under s. 10(33) stating that 'since net income from dividend after setting off interest attributable to borrowed funds invested in shares, comes to a negative figure, assessee's claim of ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this was after depreciation of different years and if own fund were computed before depreciation the same will be Rs. 383.56 crores as on 31st March, 2002. The learned counsel's contention is that allowance of depreciation from year-to-year is to recoup the cost of the assets, as this is a non-cash expenditure, therefore the accumulated depreciation is also part of own funds which the appellant could use for any purpose. As regards the interest-bearing borrowed funds to the extent of Rs. 358.83 crores standing in the balance sheet as on 31st March, 2002 (relevant year), it is submitted that these funds were borrowed for specific business purposes and the lenders periodically review the accounts and verify the usage of borrowings to ensure that the borrowed money was utilized for the purpose the loan was sought and the appellant under no circumstance can use the borrowed funds for the purpose other than the purpose agreed with the lender. The AO has not rebutted this explanation. Neither has he established any nexus between the borrowed funds and funds advanced to subsidiary company. If the explanation given by the appellant is untrue, the onus is on the AO to establish with su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4A of the Act. The learned CIT has mentioned that there has been a significant change in the composition of investment in shares of appellant during the year inasmuch as shares of Jindal Steel & Power were acquired for Rs. 5.44 crores and shares of Jindal Strips Ltd. were reduced from 8,71,793 shares to 5,23,076 shares. This finding of the learned CIT when compared with the schedule of investment given in the balance sheet itself shows that these shares have increased and decreased due to business reorganization and not due to any purchase and sale of shares. We further find that instead of giving specific finding of investment of borrowed funds in shares the learned CIT has digressed the issue by going into the assessment records of asst. yr. 1995-96 and quoted from appellant's reply that substantial amount of investment was made in asst. yr. 1995-96 out of borrowed funds when ICD increased during that year from Rs. 22.91 crores to Rs. 110.85 crores. Nothing turns against appellant on this finding of CIT. It only strengthens appellant's explanation before him that no major investment has been made in last five years. The learned CIT does not say that the assessee utilized ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is also supported by the decision of Calcutta Bench of the Tribunal in the case of Usha Martin Industries Ltd. vs. Dy. CIT (2003) 79 TTJ (Kol) 23 : (2003) 86 ITD 261 (Kol). We therefore do not agree with the learned CIT that the AO committed any error in not applying provisions of s. 14A in the present case'." 6(ii) The learned CIT(A) comprehensively dealt with the factual and legal issue of the ground of appeal in question from p. 12 to p. 23 of the impugned appellate order. On a perusal of the submissions made before him by the Authorised Representative and on appreciation of the assessment order in question, the learned CIT(A) decided the issue against the Revenue and in favour of the assessee. 6(iii) A new s. 14A was inserted by the Finance Act, 2001, with retrospective effect from 1st April, 1962. The newly inserted section relates to treatment of expenditure incurred in relation to income not includible in total income. The section reads as follows: "For the purpose of computing the total income under this chapter, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sallowed and the exempted income. From a plain reading of s. 14A and the Explanatory Memorandum thereto, it would be clear that only the direct expenses incurred for earning an income which is exempt from tax will not (sic) be covered by the new section. 6 (v) The appellant in support of its contention placed reliance on the decision of the jurisdictional Tribunal in the case of Asstt. CIT vs. Eicher Ltd. (2006) 101 TTJ (Del) 369. For the purpose of proper appreciation of the true ratio, the relevant operative part of the decision is reproduced hereunder: "A look at the language of s. 14A shows that the AO can disallow only expenditure 'incurred' by the assessee in relation to the exempt income. The word 'incurred' clearly implies that it must be shown as a fact that some expenditure was in fact incurred by the assessee to produce exempted income. It was open to the legislature to confer power upon the AO to assume that a part of the expenditure must have necessarily been incurred to produce exempted income which the AO can estimate and disallow and accordingly use suitable expressions in the section conferring such power upon the AO. One such instance is s. 38(2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n incurred by the assessee in relation to the exempted income and to proceed to disallow the same on estimate. The section does not relieve the AO of the burden of proving, on the basis of evidence or material on record that the assessee has in fact incurred expenditure which has relation to the exempted income. There is no dispute that the entire dividend of Rs. 83,02,635 which is exempt under s. 10(33) was received from EM Ltd. by a single dividend warrant and no effort or expenses were necessary or were incurred to earn such income. There is also no material brought to show that the assessee's contention that no part of the interest can be attributed to the earning of the dividend income since the shares were acquired from the own funds in the earlier years and not from borrowed funds is factually incorrect. In these circumstances, there is no material on the basis of which the AO would estimate and disallow a sum of Rs. 5 lakhs by invoking s. 14A. Only actual expenditure incurred by the assessee to earn exempted income can be disallowed by the AO under s. 14A-CIT vs. United General Trust Ltd. (1994) 116 CTR (SC) 194 : (1993) 200 ITR 488 (SC) distinguished; Maruti Udyog Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest free funds and borrowed funds to the total funds available and worked out the interest on this presumption that interest-bearing funds might have also been used for such investment and loans to group companies. The Revenue failed to substantiate such contention by way of corroborative factual findings. It is further added that interest free advances to subsidiary and other companies and investment in shares of group/subsidiary companies have been made out of interest free funds available with the assessee, has been accepted in the past and no disallowance was made out of interest expenses. The assessee company placed reliance, in this regard, on the decision of the Hon'ble Supreme Court in the case of S.A. Builders Ltd. vs. CIT. The decision is applicable to the facts of the case and the Revenue failed to rebut the ratio, in the course of the appellate proceedings. The AO failed to establish nexus between the interest-bearing funds and the investment on loans and advances to the group companies. Further, the AO has failed to quantify the expenditure "incurred" by the assessee within the meaning of s. 14A of the Act. It is important to know that Explanatory Memorandum cl ..... 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