TMI Blog2012 (9) TMI 754X X X X Extracts X X X X X X X X Extracts X X X X ..... u/s. 139(1) – Held that:- As the dates provided by assessee are not available in either of the orders of the authorities below. Therefore for verification issue remand back to AO. Disallowance of prior period expenses – Assessee argued that said expenditure related to the electricity charge – Held that:- Only expenditure which is related to the accounting year under consideration has to be allowed against the declared receipts except the expenditure which was not crystallized in earlier accounting years. Further assessee has failed to prove that the expenditure in question was crystallized only in the accounting year. Appeal decides in favour of revenue Depreciation on Hotel building – Assessee claim depreciation on hotel building claimed by assessee at 15% - AO allow 10% - Held that:- As decided in earlier years by CIT(A)that depreciation for hotel building will be allowable only @ 10%. Appeal decided in favour of revenue Ad-hoc disallowance of interest expenses against dividend income u/s 14A – Held that:- The AO must adopt reasonable basis for effecting the apportionment with reasonable opportunity of being heard provide to assessee. Disallowance should be restricted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of these submissions, however, impressed the Assessing Officer. He noted that the subsidiary company, i.e. HHI Resorts Pvt Ltd, was demerged from the assessee company on 16th March 2007, and that the said company did not have any commercial activity at present. The Assessing Officer further noted that the assessee company owns a piece of land at Goa but, on account of certain legal restrictions, no construction is permissible on this piece of land. He thus questioned commercial expediency of granting interest free loan to the subsidiary company, when no construction is permissible on the land owned by that subsidiary company. As regards the availability of sufficient interest free funds, the Assessing Officer rejected the said claim on the short ground that while there was an increase in interest free loans to subsidiaries in the current year, there was no such corresponding increase of share capital and reserves and that the increase in the source of funds in the current year was in secured loans from banks which stood at Rs 24,28,25,324 at the end of the year as against Rs 13,31,88,370 at the beginning of the year. As regards assessee's reliance on Hon'ble Supreme Court's judgmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion claimed under section 36(1)(iii) in respect of interest on its borrowings could not be declined. In coming to this conclusion, learned Judicial Member referred to and relied upon Hon'ble Supreme Court's judgment in the case of Munjal Sales Corporation Vs CIT (298 ITR 298). He further held that as the assessee was engaged in the hotel business and the subsidiaries were also set up to acquire, set up or manage the hotels, which will advance the cause or achieve objects of the assessee company, the advances given to the subsidiary companies are required to be treated as having been given in the course of business of the company. Learned Judicial Member took note of the proposition, as laid down by Hon'ble Supreme Court in the case of S A Builders (supra), that what is relevant is that the amount was advanced as a measure of commercial expediency and not from the point of view of earning profits. It was further explained that once it is established that there was nexus between the expenditure and purpose of the business, it is not for the revenue authorities to decide as to what quantum of expenditure will constitute reasonable expenditure having regard to the facts of the case. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany, has not used the said loan for business expediency, and learned counsel appearing for the assessee has not brought any contrary material to the specific findings of the learned AO". He was thus of the "considered opinion that the ratio laid down by S A Builders is also not applicable to the facts of the case". He thus upheld the disallowance in principle, though he modified the quantum of disallowance but then that aspect of the quantification of disallowance is not really relevant for our purposes and we need not go into the same. Suffice to note that the disallowance was confirmed in principle by the learned Accountant Member, as against deletion of disallowance proposed by the learned Judicial Member in the lead order. It is in this backdrop that the matter has been referred to me, for expressing my view as a Third Member, so as to come out, what the learned Accountant Member terms as, cul-de-sac. 6. I have heard the rival contentions, perused the material on record and duly considered the factual matrix of the case as also the applicable legal position. 7. The first limb of the point of difference between my distinguished colleagues is whether or not " CIT(A) is justi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. (Emphasis by underlining supplied by me) 9. I have also noted that in the current year itself, the assessee has earned a profit of Rs 3,50,51,698, and when amounts of Rs 5,10,399 towards prior period expenses as also of Rs 1,86,44,232 towards non cash expenses in the nature of depreciation is added thereto, the total cash profits aggregate to Rs 5,31,85,591. This amount is far more than the total advances of Rs 3,55,25,833. On this factual matrix, and applying the presumption as laid down by Hon'ble Bombay High Court, one has to proceed on the basis that the entire interest free advances were given out of the interest bearing funds available to the assessee. Undoubtedly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of SA Builders Vs CIT (288 ITR 1). That was a case in which borrowed funds were not used by the assessee in its business but diverted the same to the sister concern by giving interest free advances. On these facts, Their Lordships observed that It is true that the borrowed amount in question was not utilized by the assessee in its own business, but had been advanced as interest free loan to its sister concern. However, in our opinion, that fact is not really relevant. What is relevant is whether the assessee advanced such amount to its sister concern as a measure of commercial expediency . Elaborating upon the connotations of 'commercial expediency', Their Lordships observed that The expression "commercial expediency" is an expression of wide import and includes such expenditure as a prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure, if it was incurred on grounds of commercial expediency". The Assessing Officer decided this issue against the assessee mainly on the ground that the subsidiary in question was holding a plot of land at Goa but then since no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) on this aspect, the point of difference, to this extent, cannot be adjudicated upon. In any event, having held that the assessee did have sufficient interest bearing funds to advance interest free advances to sister concerns, this aspect of the matter is somewhat academic. 11. The matter will now go back to the division bench to decide the appeal in accordance with the majority view. Pramod Kumar (Accountant Member As a Third Member) PER C.D.RAO, AM : 15. I have carefully gone through the draft order authored by my learned colleague and have also had the opportunity of discussing the matter with him in detail. Much as I persuade myself to agree with the findings and conclusion arrived at by my learned colleague at para No.10 and 11 of the proposed order which relates to ground no.4 raised by assessee in ITA No.525/Kol/2011. I am unable to concur with him and my learned colleague is also not inclined to yield to my suggestions. Accordingly, to come out of the culde sac and with the leave and consent of my Brother colleague, I proceed to write this separate and dissenting order. 16. The ground raised by assessee at ground no.4 is as under :- "4. For that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our honour that since such sum was given for the purpose of business of the assessee, the assessee did not charge any interest on the same considering the commercial expediency of the sum so advanced. The assessee has advanced loan amounting to Rs.3,55,25,833/- to M./s. HHI Resorts Pvt. Ltd. a subsidiary of the assessee. The subsidiary company was demerged from the assessee company on 16.03.2007. The subsidiary company has no business activity except a land at Goa on which no construction is allowable due to certain laws of Government. This land was originally with the assessee-company and was transferred to the subsidiary company under the demerger scheme. Construction on the above mentioned land was not allowable even when the land with the assessee-company. In his explanation A/R could not explain the business expediency in granting the interest free loan to the subsidiary company. It is apparent from Balance Sheet that interest free loan to the subsidiary company was increased from Rs.10,21.000/- in the previous year to Rs.3,55,25,833/- in the current year However, there is no increase in the share capital and general reserve of the assessee company during that period. Rath ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e by the AO is confirmed. Accordingly ground no.5 is dismissed." 18. In the proposed order the ld. JM has considered the availability of own funds of assessee in the shape of share capital , reserves and surplus and profit of the relevant year which are more than the amount advanced to its subsidiary as interest free and by applying the ratio laid down by Hon'ble Apex Court in the case of Manjal Sales Corporation vs CIT (2008) 298 ITR 298(SC) he is of the view that no disallowance of deduction claimed u/s 36(1)(iii) of the IT Act can be made in para no.10. 18.1. In para no.11 the ld. JM by applying the ratio laid down by Hon'ble Supreme Court in the case of S.A.Builders Ltd. vs CIT (207) 288 ITR 1 (SC) I was of the view that in the present case the amount advanced by assessee company to its sister concern is for advancement of its objects and falls under commercial expediency as enumerated by Hon'ble Supreme Court in the case of SA Builders. 18.2. However, in my view both the propositions laid down by the Hon'ble Apex Court in the cases on which the ld. JM placed reliance are not applicable to the facts of assessee's case. First in respect of the sufficiency of own funds the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cash and Cash Equivalent as at (Closing Balance): 18,831,497 18.4. From the above analysis it is clearly evident that the cash flow generated by assessee on account of operating activities as well as investing activities has been set off against the cash flow from financing activities and resultantly there is a decrease of opening cash balance to the extent of Rs.34,70,000/-. Under these circumstances in my considered opinion neither the profits of assessee during the year nor the surplus and reserves will not serve the purpose to contend that assessee is having own funds to give to its sister concern. 18.5. Keeping in view of my above findings I am of the view that the facts of the present case are quite contrary to the facts of Munjal Sales Corporation. Therefore in my opinion the ratio laid down by Hon'ble Apex Court in the case of Munjal Sales Corporation vs CIT 298 ITR 298 is not applicable to the present facts of the case. 19. As regarding the second observations of the ld. JM regarding the commercial expediency it is observed from the specific observations of the ld. AO which were confirmed by the ld. CIT(A) that Assessing Officer has categorically disti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee company during the previous year relevant to assessment year to the sister concern i.e. Rs.3,45,04,833/- (Rs.3,55,25,833/- -- Rs.10,21,000/-) is sufficient. Therefore I direct the AO to re-compute the disallowance accordingly. 20. In the result ground no.4 raised by assessee is allowed in part. 21. As regarding the others grounds I concur with the observations and decision of the ld. JM. Sd/- (C.D.Rao) Accountant Member ORDER Per Mahavir Singh, JM Appeal No.488/K/2011 filed by assessee is arising out of revision order of CIT (Central-1), Kolkata in M. No.CIT(C-1)/263/SP JAISWAL ESTATES P. LTD./Tech/10- 11/Kol/11212-14 dated 01.03.2011. Assessment was framed by DCIT, C.C.-IV, Kolkata u/s. 143(3) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") for Assessment Year 2006-07 vide dated 22.12.2008. Likewise, Appeal No.525/K/201 filed by assessee is arising out of order of CIT(A), Central-1, Kolkata in appeal no.131/CC- IV/CIT(A),C-1/09-10 dated 31.01.2011. Assessment was framed by ACIT, CC-IV, Kolkata u/s. 143(3) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") for Assessment Year 2007-08 vide dated 29.12.2009. 2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of CIT Vs. M/s. Vijay Shree Limited vide ITAT No. 245 of 2011 in GA No.2607 of 2011 dated 7th September, 2011, wherein it has been held as under: "After hearing Mr. Sinha, learned advocate, appearing on behalf of the appellant and after going through the decision of the Supreme Court in the case of Commissioner of Income Tax vs. Alom Extrusion Ltd., we find that the Supreme Court in the aforesaid case has held that the amendment to the second proviso to the Sec. 43(B) of the Income Tax Act, as introduced by Finance Act, 2003, was curative in nature and is required to be applied retrospectively with effect from 1st April, 1988. Such being the position, the deletion of the amount paid by the Employees' contribution beyond due date was deductible by invoking the aforesaid amended provisions of Section 43(B) of the Act. We, therefore, find that no substantial question of law is involved in this appeal and consequently, we dismiss this appeal." In this view of the matter, we remit the matter back to Assessing Officer to verify dates whether payment is made within due dates of filing of return of income u/s. 139(1) of the Act or not. If payments are made within due date of filing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see at 15% and allowed by Assessing Officer at 10%. For this, assessee has raised following ground no.3: "For that in view of the facts and circumstances of the case the Ld. CIT(A) was wholly wrong and unjustified in confirming the disallowance of depreciation of Rs.15,78,678/- on the Buildings in Kolkata and Varanashi units used as hotel by allowing the depreciation @ 10% only instead of @ 15% claimed by the assessee without considering the facts of the case and it may kindly be held accordingly." 7. We have heard rival contentions and gone through facts and circumstances of the case. We find that this issue is covered against the assessee even in earlier years and CIT(A) has decided on that basis only. The relevant findings of CIT(A) in para 7 are as under: "Ground no. 6 taken by the appellant is against allowing depreciation on building used for hotel @ 10% instead of 15% claimed by the During the course of appeal it was submitted that the issue has been decided against the assessee in earlier years. Considering above and the fact that the it is a settled issue that depreciation for hotel building will be allowable only @ 10%. Accordingly ground no. 6 taken by the appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed from the Balance Sheet that interest free loan to the subsidiary company increased from Rs.10.21 lac in the previous year to Rs.3,55,25,833/- in the relevant year but there is no increase in the share capital and general reserves and surplus during the relevant period. According to AO, secured loan from banks increased from Rs.13,31,88,370/- as on 31.03.2006 to Rs.24,28,25,324/- as on 31.03.2007. Accordingly, AO has not accepted the contentions of the assessee and made disallowance of interest on interest free advances by estimating and by taking average rate of interest at Rs.37,86,614/-. Aggrieved assessee preferred appeal before CIT(A), who exactly on identical facts confirmed the action of AO. Aggrieved, now assessee is in appeal before us. 10. We have heard rival contentions and gone through facts and circumstances of the case. The Ld. Counsel for the assessee Shri Siddharth Salarpuria, first of all took us to the accounts of the company from where he stated that the share capital of the company as on 31.03.2007 was at Rs.5,56,43,400/- and reserve and surplus at Rs.21,61,28,161/- and this year's profit i.e. net profit as per P L Account before making provisions for taxati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vide order dated January 3, 2003, the Tribunal held, for the assessment year 1992-93, that the assessee had given interest-free loans from its own funds and not from interest bearing loans taken by the firm from third parties and consequently the assessee was entitled to claim deduction under section 36(1)(iii). In other words, the Tribunal held that the loans were given for business purposes. Similarly, for the assessment year 1993-94, the Tribunal had taken the view that the said loans given to the firm's sister concerns were for business purposes. Accordingly, the Tribunal had deleted the disallowances during the assessment years 1992-93 and 1993-94. It is equally true that for the assessment year 1994-95 the Tribunal took a contrary view in view of the change in law brought about by the Finance Act, 1992. Prior to April 1, 1993, payment of interest to the partner had to be added back to the assessable income of the firm whereas after the Finance Act, 1992, such payment became an item of deduction for computing the assessable income of the firm and it became part of the business income of the partner. In view of this change of law, the Tribunal disallowed payment of the interes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l advance the cause or achieve object of assessee company and as such the advances were given to such subsidiary companies, which were in course of business of the assessee company. Since such advances were in course of business even if the said advances were interest free, no notional interest can be attributed towards such interest free advance, reason being there is business expediency in advancing these interest free advances to its subsidiary. For this, the decision of Hon'ble Apex Court in the case of S. A. Builders Ltd. Vs. CIT (2007) 288 ITR 1 (SC) has described the purpose of business and commercial expediency by considering, whether one should allow deduction under section 36(1)(iii) of interest paid by assessee on amounts borrowed by it for advancing to a sister concern, the authorities should examine the purpose for which the assessee advanced the money and what the sister concern did with the money. That the borrowed amount is not utilized by the assessee in its own business but had been advanced as interest free loan to its sister concern is not relevant. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... our opinion, ordinarily be entitled to deduction of interest on its borrowed loans." In the present case also the amount advanced by assessee company to its subsidiaries is for advancement of its objects and falls under the commercial expediency as enumerated by Hon'ble Apex Court in the case of S. A. Builders Ltd. (Supra). Respectfully following both the decisions of Hon'ble Apex Court, cited supra, we allow the claim of assessee and reverse the orders of lower authorities. This issue of assessee's appeal is allowed. 12. The next issue in this appeal of assessee is against the order of CIT(A) confirming the disallowance of interest expenses by invoking the provisions of section 14A of the Act r.w.r 8D(2)(ii) of the I. T. Rules, 1962 claimed against exempt income. For this, assessee raised following ground no. 5: "For that in view of the facts and circumstances of the case the Ld. CIT(A) was wholly wrong and unjustified in confirming the ad-hoc disallowance of an amount of interest of Rs.15,68,741/- u/s. 14A of the Act read with Rule 8D(2)(ii) of the I. T. Rules allegedly attributing the said expense as related to the earning of the exempt 9 ITA 488 525/K/2011 M/s. S. P. Ja ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Year 2005-06 dated 24th September, 2010 has held as under: "5. Heard the rival submissions, perused the material available on record and the decisions relied on by the Ld. Authorised Representative of the assessee cited supra. We find that on the issue of disallowance u/s. 14A, this Bench of the Tribunal has been taking a consistent view that this disallowance should be restricted to 1% of dividend income. Following the same, in this appeal also we hold that the disallowance u/s 14A for earning exempt dividend income should be restricted to 1% of dividend income. The Assessing Officer is accordingly directed to do so and work out the quantum of disallowance. This ground of appeal of the assessee is allowed as directed above." In view of the above and respectfully following the aforesaid decision of jurisdiction Tribunal (cited supra), we, direct the AO to restrict disallowance at 1% of expenses. This ground of appeal of assessee is partly allowed. 14. In the result, appeals of assessee being ITA No. 488/K/2011 is dismissed and ITA No. 525/K/2011 is partly allowed. 15. Order pronounced in open court on ORDER Per Shri Mahavir Singh, Judicial Member: Since there was ..... X X X X Extracts X X X X X X X X Extracts X X X X
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