TMI Blog2012 (10) TMI 756X X X X Extracts X X X X X X X X Extracts X X X X ..... not established - Held that:- If in the process of examination of claim for such a deduction, it transpires that the assessee had diverted certain funds to associates without any interest, there would be a very heavy onus on the assessee to be discharged before the AO to the effect that in spite of pending loans on which the assessee was incurring the liability to pay interest, still there was justification for diversion of funds to associate or sister concerns for non-business purposes - as complete facts are not available nor the assessee furnished date(s) of interest free advances or dates of borrowings and nor furnished any material, establishing commercial expediency in advancing aforesaid funds before the lower authorities and even before us, nor the ld. CIT(A) recorded any findings on these aspects, it is fair and appropriate to set aside the order of the CIT(A) and restore the issue back to his file for deciding the matter afresh - in favour of assessee by way of remand. Disallowance u/s 14A - certain investments in shares out of funds borrowed or from its own sources - Held that:- As decided in Maxopp Investment Ltd. & Others Versus Commissioner of Income Tax [2011 (1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... haily Gupta, ARs Revenue by Shri Satpal Singh,. DR O R D E R A.N. Pahuja:- This appeal filed on 25.01.2012 by the assessee against an order dated 14.11.2011 of the learned CIT(A)-XV, New Delhi, raises the following grounds :- 1. That on the facts and in the circumstances of the case, the impugned order is based upon irrelevant considerations, incorrect application of law, bad in law and void ab initio. 2. That the CIT(A) erred on facts and in law in confirming addition of Rs.33,99,003 as deemed dividend under section 2(22)(e) of the Income Tax Act, 1961 ('the Act') in the hands of the appellant. 2.1 That the CIT(A) failed to appreciate that the amount advanced to the appellant by M/s. PSB Industries (India) (P) Limited was not covered within the scope and ambit of the provisions of section 2(22)(e) of the Act. 2.2 That the CIT(A) failed to appreciate that 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 deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .2008 by the assessee, was selected for scrutiny with the service of a notice u/s 143(2) of the Income-tax Act, 1961, (hereinafter referred to as the Act), issued on 29.07.2009. During the course of assessment proceedings, the Assessing Officer (A.O. in short) noticed that the assessee had taken unsecured loans of Rs.12,66,28,030/-,including Rs.3,96,15,000/- from M/s PSB Industries India Pvt. Ltd., and Rs.80,000 M/s Skipper Sales Pvt. Ltd., Hemkunt Chambers, 89, Nehru Place, New Delhi . Since the assessee had 6000 shares out of total 12,800 shares of M/s PSB Industries (India) Pvt. Ltd. and 200 shares out 1000 shares of M/s Skipper Sales Pvt. Ltd. and thus, was beneficial owner of shares carrying 46.87% and 20% respectively of voting power in these two companies, the AO show caused the assessee as to why loan taken from aforesaid two companies be not treated as deemed dividend in terms of provisions 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 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eciding the issue afresh in accordance with law in the light of various judicial pronouncements, including those referred to above and of course, after allowing sufficient opportunity to both the parties. Needless to say that while redeciding the appeal, the learned CIT(A) shall pass a speaking order, keeping in mind, inter alia, the mandate of provisions of sec. 250(6) of the Act, bringing out clearly as to whether or not loans were received in the ordinary course of business. With these observations, ground nos. 2 to 2.2 in the appeal are disposed of. 6. Ground nos. 3 to 3.1 in the appeal relate to disallowance of interest of Rs.6,67,910/- u/s 36(1)(iii) of the Act. The AO noticed during the course of assessment proceedings that the assessee had made interest free loans and advances of Rs.13,58,36,280/-to the concerns in which directors were interested. Since the assessee debited 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntial interest free funds to the extent of Rs.13,76,94,226/- while interest free advances had reduced to Rs.11,61,87,987/- in the year under consideration as against Rs.13.66 crores in the preceding year. Relying upon the decisions in Indian Explosives Limited vs. CIT, 147 ITR 392(Cal.); Woolcombers Of India Limited vs. CIT,134 ITR 219(Cal.); Alkali And Chemical Corporation Of India Limited vs. CIT,161 ITR 820 (Cal) ;. East India Pharmaceutical Works Limited. Vs,CIT,224 ITR 627 (SC); the ld. AR contended that since the interest free advances were made out of interest free funds available with them, no disallowance out of interest could be made. On the other hand, the ld. DR supported the findings in the impugned order. 9. We have heard both the parties and gone through the facts of the case as also the decisions relied upon by the ld. AR. As is apparent from the aforesaid facts, the 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 busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the provision is wider in scope than the expression "for the purpose of earning income, profits or gains". In the case under consideration, there is nothing in the order of lower authorities to suggest that the assessee discharged the onus laid down upon them that borrowed funds had indeed been utilized for the purpose of its business so as to entitle it to claim deduction u/s 36(1)(iii) of the Act despite the fact that the AO had raised specific query in this respect. In case the assessee had some surplus amount which, according to him, could not be repaid prematurely to its creditors, still the same were either required to be circulated and utilised for the purpose of business or to be invested in a manner in which it generates income and not that these were diverted towards associate or sister concerns free of interest. This would result in not presenting the true and correct picture 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of assessment proceedings, the AO noticed certain investments in shares out of funds borrowed or from its own sources. Since the income generated from the investments did not form part of total income, the AO asked the assessee to furnish the amount of disallowance in terms of the provisions of section 14A of the Act read with Rule 8D of the I.T. Rules,1962. In response, the assessee merely replied that they did not earn any exempt income nor furnished details of expenditure incurred in maintaining supervising the investments. However, the AO did not accept the submissions of the assessee and accordingly, while referring to decision of the Hon ble High Court of Bombay in the case of Godrej Boyce Manufacturing Co. Ltd. Vs. DCIT in (I.T.A. No.626 and WP 2010 and decision of Special Bench in the case of Chem Invest Limited Vs. Income-tax Officer, 317 ITR(AT) 86(Del.); disallowed an amount of 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 co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to suggest as to whether any cash flow statement or sources of the investments in the various shares held by the assessee in the year under consideration or in the preceding years was placed before the AO or the ld. CIT(A). In any case, no material was placed before the AO in order to enable him to record his satisfaction envisaged in Maxopp Investment Ltd.(supra). Hon ble Apex Court in Kantamani Venkata Narayana and Sons v. First Addl. ITO [1967] 63 ITR 638 and again in Malegaon Electricity Co. P. Ltd. v. CIT [1970] 78 ITR 466 (SC) observed that it is the duty of the assessee to bring to the notice of the Income tax Officer particular items in the books of account or portions of documents which are relevant. The law casts a duty on the assessee to disclose fully and truly all material facts necessary for his assessment for that year. Not even a whisper has been made before us as to whether or not 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 all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ails of expenditure objectively in managing and supervising the aforesaid huge investments in shares. 13.1 Hon ble Calcutta High Court in Dhanuka Sons vs. CIT, (Cal.) held that:- After hearing the learned counsel appearing for the parties and after going through the materials on record and the decisions cited by Mr. Khaitan, we find that the Supreme Court in the cases of CIT v. Maharastra Sugar Mills Ltd. [1971] 82 ITR 452 and Rajasthan State Warehousing Corpn. v. CIT [2000] 242 ITR 450 having held that where there is one indivisible business giving rise to taxable income as well as exempt income, the entire expenditure incurred in relation to that business would have to be allowed even if a part of the income earned from the business is exempt from tax, section 14A of the Act was enacted to overcome those judicial pronouncements. The object of section14A of the Act is to disallow the direct and 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 pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to service charges amounting to Rs.16,56,000/-,assessed as income from house property instead of business income. The AO noticed on perusal of return of income that the assessee had shown service receipts of Rs.16,56,000/- and rental income of Rs.29,32,350/- on account of letting out of its property to M/s Bank of Punjab Ltd.. The rental receipts were offered for tax under the head Income from House Property while the other part relating to service charges was separated and claimed as business income. The AO was of the opinion that service charges were part of rental income alone and while assessing the service charges under the head Income from House Property , disallowed the claim of various expenses and depreciation, amounting to Rs.10,71,36/-. 15. On appeal, the ld. CIT(A) upheld the findings of the AO as under:- 12. I have gone through the submission of the appellant and have perused the Assessing 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, telep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e respective meters for repairs and maintenance. ii) To allow within the said premises fixing of Junction box/cables for telephone lines and to allow access to the same for the telephone company s employees/representatives at all times. 17.1. For the aforesaid continuous supply of electricity water as also junction box/cables for telephone, bank agreed to pay to the contractor lessor @ Rs.1,15,000/- pm during 1.1.2003 to 31.12.2005 and @Rs.Rs.1,38,000/-pm between 1.1.2006 to 31.12.2006. This agreement is also for a period of 9 years and is coextensive and coterminous with the tenancy agreement of even date. 17.2 The AO assessed the aforesaid service charges under the head Income from House Property while the assessee claimed the same as business income. There is nothing to suggest that ensuring continuous supply of electricity, water or junction box/cables for telephone to the tenants, is business of the 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 ..... 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