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TMI Blog2012 (10) TMI 756X X X X Extracts X X X X X X X X Extracts X X X X ..... t the amount advanced to the appellant by M/s. Skipper Sales Private Limited was not covered within the scope and ambit of the provisions of section 2(22)( e) of the Act. 3. That the CIT(A) erred on facts and in law in confirming the disallowance of interest paid amounting to Rs.6,67,910 claimed as deduction under section 36(1)(iii) of the Act on the ground that borrowed funds has been advanced interest free for non-business purposes. 3.1 That the CIT(A) erred on facts and in law in not appreciating that interest free loans were made out of available interest free funds. 4. That the CIT(A) erred on facts and in law In confirming disallowance of Rs.2,50,495 under section 14A of the Act. 4.1 That the CIT(A) failed to appreciate that since no exempt income was earned by the appellant, no disallowance under section l4A of the Act was called for. 4.2 That the CIT(A) erred on facts and in law in sustaining the disallowance without appreciating that no expenditure was actually incurred by the appellant. 4.3 That the CIT(A) erred on facts and in law in not appreciating that shares were purchased for acquiring controlling interest and not for earning income. 4.4 That the CIT(A) erred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions of sec. 2(22)(e) of the Act. In response, the assessee replied vide letter dated 20.12.2010 that these loans were taken for business purposes. However, the AO did not accept the submissions of the assessee on the ground that M/s PSB Industries (India) Pvt. Ltd. was having reserves and surplus to the extent of Rs.3,39,99,003/- as on 31.03.2008 while the assessee did not furnish details of accumulated profit of M/s Skipper Sales Pvt. Ltd., the AO added the amount of Rs.3,40,79,003/- in terms of provisions of section 2(22)(e) of the Act. 3. On appeal, the learned CIT(A) while rejecting the contentions of the assessee that funds were received on trust were interest free, restricted the addition to Rs.33,99,003/- to the extent of reserves and surplus of PSB Industries Ltd., and in the case of Skipper Sale (P) Ltd. there being no accumulated profits, deleted the addition. Inter alia, the ld. CIT(A) relied upon decision in Walchand & Company Ltd. Vs. CIT (1971)100 ITR 598(Bom.) 4. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A).The ld. AR on behalf of the assessee while carrying us through the impugned order contended that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an amount of Rs.8,15,176/- on account of interest on borrowed funds, the AO asked the assessee to establish purpose and commercial expediency of advancing these interest free loans and how the funds were utilized by these concerns for the business or benefit of the assessee. In response, the assessee replied that borrowed funds were utilized out of composite funds available with the company, including further loans given for business. However, the AO did not accept the submissions of the assessee on the ground that the assessee did not establish commercial expediency of advancing interest free loans to the concerns under the same management nor furnished loanwise details along with corresponding business purposes. Accordingly ,while referring to provisions of section 36(1)(iii) of the Act and relying upon decisions in CIT Vs. Amritaben R. Shah, 238 ITR 777(Bom.); Sarabhai Sons (P) Ltd. Vs. CIT,201 ITR 4659Guj); CIT Vs. Sujani Textiles Pvt. Ltd.,151 ITR 653(Mad.); Indian Metals & Ferro Alloys Ltd. Vs. CIT,193 ITR 344(Orissa); CIT Vs. Abhishek Industries Ltd.,286 ITR 1(P&H); CIT Vs. V.I. Baby and Co. (2002), 254 ITR 248 (Kerala); CIT Vs. Motor General Finance Ltd. (2002) 254 ITR 44 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AO disallowed interest of Rs.7,80,859/- out of interest of Rs.8,15,176/- on borrowed funds on the ground that the assessee did not establish commercial expediency of advancing interest free loans to the concerns under the same management nor furnished loan wise details along with corresponding business purposes. On appeal, the ld. CIT(A) reduced the disallowance to Rs.6,67,910 in relation to interest free advances. Neither the date of advances nor the nexus between loans or advances and funds borrowed is evident from the impugned order nor the ld. CIT(A) recorded any findings as to the business expediency of interest free advances or on the nexus between borrowed funds and interest free advances. The ld. CIT(A) did not analyse the issue in proper perspective nor it is evident from the impugned order as to on which date interest free advance was given to the concerns under the same management and what was the purpose and for what purpose interest bearing funds were borrowed by the assessee. As is apparent from the impugned order, before the AO or the ld. CIT(A), the assessee did not place any evidence as to how the funds borrowed by it had been utilized and what was the commercial e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icture of the accounts of the assessee as at the cost being incurred by the assessee, the associate or sister concerns/persons would be enjoying the benefits thereof. It cannot be held that the funds to the extent diverted to associate persons/concerns without charging any interest, were required by the assessee for the purpose of its business and loans to that extent were required to be raised. Unless the interest free loan goes to advance business interest of the assessee, there cannot be any commercial expediency. 9.1 In the instant case, the assessee failed to establish that the interest free advances were given out of interest free borrowings or own funds nor even established any commercial expediency in advancing funds while no cash flow statement was placed before lower authorities and even before us . In Punjab Stainless Steel Industries vs. CIT [2011] (Delhi), Hon'ble jurisdictionl High Court held as under: "In the instant case, there was absolutely no finding recorded by the Tribunal that the interest free advances were made by the assessee to sister concern for its business purposes. There was no such finding by the Tribunal even with respect to the advances extended i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs.2,50,495/- as computed in para 5.6 of the impugned order in terms of rule 8D of the IT Rules,1962. 11. On appeal, the ld. CIT(A) upheld the findings of the AO, holding as under:- "10. I have gone through the above submission of the appellant and I do not agree with the appellant's contention that since during the year they did not earn the exempt income hence no disallowance u/s 14A is called for. In fact, in the case of Chemivest Ltd. Vs. Income-tax Officer Ward 3(3) (I.T.A. No.87/D/2008) the ITAT, Delhi Special Bench has clearly held that disallowance u/s 14A is called for in a year even if no exempt income has been earned or received by the appellant. In view of the above, I uphold the action of Assessing Officer, accordingly addition of Rs.2,50,495/- is confirmed." 12. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A).The ld. AR on behalf of the assessee contended that no fresh investments were made during the year nor there was any evidence that any expenditure was incurred for earning interest free income. Since the assessee had made quoted investments of Rs.45,69,178 and unquoted investments of Rs.1,35,85,405/- while the investm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant accounts were placed before the AO or the ld. CIT(A) in order to enable them to examine the claim of the assessee. The object or purpose of the investment affects operation of section 14A of the Act inasmuch as any expenditure incurred for earning tax free income is not an allowable deduction by virtue of operation of the said section, as held in CIT vs. State Bank of Travancore, (Ker). Hon'ble Supreme Court in their decision dated 6.7.2010 in CIT v. Walfort Share & Stock Brokers (P.) Ltd., 326 ITR 1, inter alia, observed that for attracting section 14A of the Act there has to be a proximate cause for disallowance, which is its relationship with the tax exempt income. The theory of apportionment of expenditure between taxable and non-taxable has, in principle, been now widened under section 14A, Hon'ble Apex Court concluded. In Chem invest Ltd. v. Income-tax Officer, 317 ITR (AT) 86 (Del.), Special Bench held that when the expenditure is incurred in relation to income which does not form part of total income, it has to suffer the disallowance irrespective of the fact whether any income is earned by the assessee or not and the provisions of sec. 14A of the Act do not envis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indirect expenditure incurred in relation to income which does not form part of the total income. 8. In the case before us, there is no dispute that part of the income of the assessee from its business is from dividend which is exempt from tax whereas the assessee was unable to produce any material before the authorities below showing the source from which such shares were acquired. Mr. Khaitan strenuously contended before us that for the last few years before the relevant previous year, no new share has been acquired and thus, the loan that was taken and for which the interest is payable by the assessee was not for acquisition of those old shares and, therefore, the authorities below erred in law in giving benefit of proportionate deduction. 9. In our opinion, the mere fact that those shares were old ones and not acquired recently is immaterial. It is for the assessee to show the source of acquisition of those shares by production of materials that those were acquired from the funds available in the hands of the assessee at the relevant point of time without taking benefit of any loan. If those shares were purchased from the amount taken in loan, even for instance, five or ten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sing Officer's order and the service agreement. The fact of the matter is that appellant has let out the property to "Bank of Punjab" and apart from charging rent, appellant in terms of separate so called service agreement received money for providing electricity, water, telephone etc. for a fixed sum. In my humble view, AO's action is perfectly right in view of the findings of Supreme Court in the case of Shambu Investment (P) Ltd. Vs. ClT (2003) (263 ITR143)(SC), wherein it has been held that "where prime object is to let out the property alongwith the additional right of using furniture and fixture, the income is chargeable under the head 'Income from House Property." Since in the appellant's case also the prime object is earning of rental income and provides other services of use of telephone etc. falls in the category of fixture etc. hence I hold that the entire income (rental and service income) should be taxed under the head "income from house property". Therefore, I uphold the Assessing Officer's action." 16. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A).While inviting our attention to the page 46 & 50 of paper book, the ld. AR ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee nor any material has been placed before us, suggesting as to whether similar issue was examined by the AO in the preceding years. Though the ld. AR claimed before us that their claim had been accepted in the preceding years, neither the relevant orders nor the reply filed before the AO on this issue in the preceding years have been placed before us. It is apparent that facilities are inseparable part of tenancy since one cannot be enjoy the facilities without the tenancy. The prime object of the assessee under the two agreements was to let out the premises to the bank with additional right of continuous supply of electricity and water besides facilities for junction box/cables for telephone for which rent was being paid month by month. In view of the foregoing, especially when the ld. AR claimed before us that their claim had been accepted in the preceding years while there is no such finding in the impugned order nor the ld. AR placed before us any material, suggesting that ensuring continuous supply of electricity, water or facilities for junction box/cables for telephone to the tenants ,is business of the assessee, we consider it fair and appropriate to set aside the or ..... X X X X Extracts X X X X X X X X Extracts X X X X
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