TMI Blog2016 (3) TMI 1069X X X X Extracts X X X X X X X X Extracts X X X X ..... up for consideration before the Tribunal and decided in favour of the assessee. Addition u/s 36(1)(iii) - proportionate interest expenditure pertaining to interest free loans and advances given by the assessee to subsidiaries companies out of interest bearing funds raised by the assessee - CIT(A) deleted addition - Held that:- The assessee's business expediency is proved beyond doubt that the entire interest free advances were given to the subsidiary company out of commercial expediency. In the case of Reliance Utilities and Power Ltd (2009 (1) TMI 4 - BOMBAY HIGH COURT ), The Hon'ble Court has held that the assessee has its own funds and simultaneously has borrowed interest bearing funds the presumption is that the advance of money is out of own funds and not out of interest bearing funds. We, therefore, respectfully following the ratio laid down in the above decisions supra confirm the order of ld. CIT(A) on this issue. - Decided in favour of the assessee. Loss u/s 43(5)(d) on account of M to M losses - CIT(A) deleted the loss - Held that:- In view of the facts of the assessee and various judicial decisions of the coordinate benches following the decision of apex court in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the separate orders passed by learned CIT(A) in their respective hands. Both these appeal are related to the assessment year 2007-08 and 2008-09. Since some of the issues urged in these appeals are identical in nature, they were heard together and are being disposed of by this common order for the sake of convenience. 2. First we shall take up the appeal bearing ITA No.4089/Mum/2012. 1. On the facts and circumstances of the case and in law, the Ld. CIT(A) failed to interpret the provisions of Section 14A of the Income Tax Act,1961 and Rule 80 in its right perspective and true meaning. 2 . On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in restricting the addition/adjustment of the disallowance u/s. 14A of the Act while computing the book profits u/s. 115JB of the Act to ₹ 13514428/- as against ₹ 11,24,17,511/- added by AO . 3. On the facts and circumstances of the case and in law, the Ld.CIT(A) erred in deleting the disallowance of ₹ 2,42,24,011/- u/s. 36(1)(iii) on account of proportionate interest expenditure pertaining to interest free loans advances given by the assessee company to its subsidiaries out of inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... could not be disallowed on the basis of prorata apportionment of interest between the investment of the assessee and total assets. The total investment in the equity shares and debentures were ₹ 330.59 crores as given in Sc-7 of the balance sheet out of which ₹ 11,16,00,000/- related to debentures, the interest on which were duly disclosed as interest income during the year. The appellant further submitted before the ld. CIT(A) that the investment of ₹ 319.43 crores were made over the years in the equity shares of the subsidiary companies and no other investments in the shares of other listed company were made and these investments were made on account of business expediency in the subsidiary companies in which the assessee's stake holding was ranging between 51% to 100%. The Reserves and Surplus of the assessee increased from 54.66 lakhs in the financial 2000-01 to ₹ 41414.24 lakhs in the financial year 2007-08. Similarly, the investment in subsidiaries companies which were at ₹ 17.89 crores in financial year 2001-02 had gone up to ₹ 319.44 crores in financial years 2007-08. The ld. CIT(A) deleted the addition made by the AO on account of in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst ₹ 54.66 crores as on 31.3.2001. Similarly, the investment in the subsidiaries companies were ₹ 319.44 crores as on 31.3.2008 as against ₹ 96.51 crores as on 31.3.2001 which proved that the investment in the subsidiaries companies were made out of assessee's own funds and accruals over the years and not out of loan funds. The ld. Counsel heavily placed reliance on the various decisions some of which are as follows:- a) CIT Vs Hero Cycles Ltd(2010) 323 ITR 518 (P H) b) Shoppers Stop Ltd Vs ACIT - dt 30.08.2011 c) CIT Vs HDFC Bank Ltd (2014) 366 ITR 505 d) CIT V/s Reliance Utilities and Power Ltd (2009) 313 ITR 340 (Bom) In view of the above decisions if the interest free funds advanced by the assessee were sufficient to meet the investment and simultaneously, the assessee has interest bearing loans the presumption under the law was that the investment were made out of interest free funds and not out of loans. 2.5 We have considered the rival submissions and perused the record and find that the assessee's own funds as stated above were far more than the investment made in the subsidiary companies and debentures. The facts ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... addition by observing that the secured and unsecured loans of the assessee were of ₹ 620.19 crores and unsecured loans of ₹ 102,05,42,595/- respectively. The loan given during the year were ₹ 307.15 crores and interest expenditure debited to the profit and loss account was ₹ 94.35 crores. The total loan given to the subsidiaries companies at the year end stood at ₹ 78.94 crores out of which ₹ 16.56 crores were advanced to M/s Enercon Wind Farms (Karnataka) Limited at the rate of 10% on the reducing balance method and the interest received from the said subsidiary company was duly shown as income of the assessee. Similarly, the assessee advanced ₹ 38.15 crores to another 100% owned subsidiary M/s Enercon (India) Infrastructure Private Limited which was also advanced at the rate of 10% and the interest received from the subsidiary company was also shown as income of the assessee. On the remaining amount of ₹ 24.22 crores, the advances were advanced to various 11 subsidiary companies wherein the assessee holding were to tune of 51% to 100% share. It was also submitted that these subsidiaries were engaged in the business of installation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary company were being used by the assessee for transmission of its electricity to the power greed of the Electricity Board for further distribution and to the ultimate customers. We also note that the moment the installation of windmill was completed, the subsidiary company used to pay back the advances received by the assessee by borrowing funds from the banks and other financial institutions. It is also settled proposition of law, if the assessee uses its interest bearing funds and lent to the sister concern without charging any interest and without charging any interest on the said advances, the advance is liable to be disallowed u/s 36(1)(iii) of the Act. Further, in the instant case, the assessee's business expediency is proved beyond doubt that the entire interest free advances were given to the subsidiary company out of commercial expediency. The case of the assessee also squarely covered by The decision of the Hon'ble Apex Court rendered in the case of S A Builders (supra) wherein it has been held that interest on borrowed funds cannot be disallowed on the ground that the assessee has advanced interest free loans to sister concern as measure of commercial expedienc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r afresh decision, in accordance with law and in the light of the observations made above. It is made clear that it is not that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concern. It all depends on the facts and circumstances of the respective case. For instance, if the Directors of the sister concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans . In the case of Reliance Utilities and Power Ltd (supra), The Hon'ble Court has held that the assessee has its own funds and simultaneously has borrowed interest bearing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a normal practice in the case of export and import of the goods to hedge and enter into foreign exchange forward contract in order to cover the risk of fluctuation in the foreign exchange. The assessee had to contract for the supply of raw materials and to meet its foreign commitments and to guard against the fluctuation in exchange between the date of contract and actual performance of the contract the assessee used to enter into forward contract in foreign exchange so that the loss could be minimized between the date of the contract of purchase. The ld. CIT(A) further observed that the assessee was following consistent system of accounting and loss or gain on the forward foreign contract were being recognized at the year end according to Accounting Standared-11 of ICAI which provided for recognizing the gain or loss on the foreign exchange contract. The practice of the assessee had been accepted by the department in the earlier and succeeding years. 5. The ld DR on the other hand relied heavily on the order of AO and prayed for upholding the same and setting aside the order of CIT(A) in view of instruction no 17/2008 dated 26.11.2008 which provided for disallowance of losses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ature or notional in nature but are business loss. The ld. Counsel submitted that the assessee is following accounting system recognized of the gain and loss on the foreign exchange forward contract at the yearend based on the foreign exchange rate pertain to AS-11 issued by he ICAI and in the year 2005-06 and 2006-07 the assessee earned ₹ 19.71 crores and ₹ 2.66 Crores were credited to the profit and loss account which were accepted by the department. 7. We have considered the rival submissions and perused the materials on records and after going through the decisions relied upon by the ld.AR find that assessee had recognized a loss of ₹ 27,92,46,564/- on account of provisions of Marked to Market losses on forward foreign exchange contract upon re-statement of foreign exchange forward contract at the exchange prevalent at the close or the year or reporting date. We also note that the assessee was following a consistent method of accounting to account for the gain or loss on forward contract for foreign exchange as per accounting standard 11 which deals with the treatment of forex losses or gains not actually realized. The same practice was being followed in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count of closing of the year in derivative transactions that after perusing the reasoning of the tribunal we do not find that view taken is perverse.The view is in consonance with the factual materials the guidelines so also the guidelines from SEBI and ICAI and under these circumstances we do not agree that the appeal raises any substantial question of law and is accordingly dismissed to that extent. The Tribunal in the case of Inter Jewl Private Limited (supra) vide para 10 has observed and held as under: 10. We have carefully perused the order of Ld. CIT(A) and the decisions brought to our notice. In our considered opinion and the understanding of the facts we find that the Revenue Authorities have proceeded on a wrong assumption of facts. We find that the decision of the Tribunal's Special Bench in the case of Bank of Bahrain Kuwait (supra) squarely apply on the facts of the case and also by the various judicial pronouncements like Kumbh Gems in ITA NO. 6600/Mum/2012, H. Dipak Co. in ITA No. 7629/Mum/2011, Bhavani Gems in ITA NO.2855/Mum/2010 and M/s. Sutariya Gems Pvt. Ltd. in 3361/Mum/2013. Therefore, we have no hesitation in setting aside the order of Ld. C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of the assessee was selected for scrutiny and notices u/s 143(2) and 142(1) were issued to the assessee and duly served. The assessee company was engaged in the business of windmills, accessories and parts, operations and maintenance service in respect of windmill and generation of power by Wind energy through Wind farms and sale thereof. 10.2. The Ground No.1 is against the deletion of repairs and maintenance of ₹ 18,87,320/- by the ld.CIT(A). The AO during the course of scrutiny proceedings found that a sum of ₹ 12,06,95,137/- towards repairs and maintenance were debited to the profit and loss account. Out of which ₹ 18, which relates to the earlier years and added the same to the total income of the assessee. The ld. CIT(A) deleted the addition on the ground that the said expenses pertaining to current year as these were utilized during the year by holding that those expenses relates to the earlier years but the same were crystallized when the bills were received of the same during the current year were liable to treated as current years' expenses. The ld.AR submitted before us that the bills of the professional charges ₹ 6,61,200/- paid to L. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , dated 25.10.2005 for ₹ 12,83,864/- was claimed by the assessee during the year it is pertains to the prior period expenses and should not be allowed as per the mercantile system of accounting. The ld. CIT(A) deleted the addition after calling the remand report from the AO which stated that the amount of ₹ 12,83,864/- was disallowed being prior period expenses and during the course of remand proceedings the assessee has filed full details of repairs and maintenance of furniture and produced the copies of the bills. The AO further stated in the remand report that after verification of the record and bills, it were accounted for furniture pertains to prior period expenses rightly disallowed during the year and submitted that the issue decided on merits. However, the ld. CIT(A) allowed the appeal of the assessee on this issue on the ground that the bill were received as alleged by the assessee was only settled during the year after the same were received and therefore crystallised during the year and thus rejected the observations of the AO. 11.1 The ld. DR submitted before us that the that the amount of ₹ 12,83,864/- has incurred by the assessee vide bill dated ..... 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