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TMI Blog2016 (4) TMI 857X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 CIT(A) order). 3] The decision of the learned CIT(A) in making the disallowances referred to in Ground No. 1 & 2 is grossly incorrect for the following reasons - a. The flats at Khar were purchased in the name of the directors for the sake of convenience and the cost of the flats was borne by the appellant company and thus, the flats constituted the property of the company and not of the directors. b. The loans taken for meeting the cost of the flats were also repaid by the appellant company and the same was duly reflected in its books. c. If the properties are purchased by the appellant company in the name of the directors and the funds are provided by the company, the properties have to be considered to be owned by the company and not by the directors. d. The flats were used for the business purposes and therefore, the question of disallowing the interest or other expenditure pertaining to the flats simply does not arise and the same had to be allowed as a business expenditure in the hands of the company. e. The appellant company had not diverted the interest bearing funds for non business purposes and such funds were utilized for business purposes and therefore, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e interest and other expenses claimed by the assessee by holding that it has no relation with the business of the assessee and such expenditure has been claimed only to reduce the income. The AO accordingly disallowed the interest expenditure of Rs. 38,87,288/- and telephone and electricity expenses of Rs. 48,194/-. 6. Before the CIT(A) the assessee reiterated more or less the same submissions as made before the AO. It was argued that the flats are used both for the purpose of assessee's business as well as the residence of one of the director of the company Shri Manish I. Jain. It was submitted that during the course of assessment proceedings all the relevant details regarding the use of flats for the business of the assessee company was filed before the AO. Merely because the flats are registered in the name of its directors the expenditure cannot be disallowed when the asset stands in the balance sheet of the assessee company in the asset side and the bank loan stands in the liability side of the balance sheet. It was submitted that when the claim of depreciation on the flats has been accepted for the year under appeal in the assessment completed u/s.143(3) there is no justific ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtgage of the said flat (Valuing Rs. 5.67 crore belonging to Shri Ishwarlal Jain and Shri Manish Jain) Smt. Pushpadevi Ishwarlal Jain and Smt. Nikita Manish Jain had provided third party guarantee. Further, the sale agreement dt. 18/04/2006 between Shri Vashu Bhagnani and Shri Ishwarlal S.Lalwani and Shri. Manish Lalwani clearly shows that the aforesaid flats were jointly purchased by the directors in their individual capacities for Rs. 5.53 crore. An additional amount of Rs. 14 lac was paid to the owner for furnishing of the flats. In view of the above facts, an enhancement notice dt. 16/02/20l3 was given to the appellant for proposing enhancement in its income on account of disallowance of interest u/s 36(1)(iii) on borrowed funds diverted by the appellant for non-business purposes i.e. for repayment of loan, advance of Rs. 1,67,00,000/-, expenses incurred on flats etc.. The appellant in its reply dt. 17/02/2013 has reiterated its earlier stand that the flats were owned by the company. The submission of the appellant is contrary to the facts. The registration of the flats is in the name of directors. If company would have owned the flats, it being separate legal entity, could hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,982/- from the gross block of Rs. 20,46,30,484/-. Referring to computation statement placed at page 2 and 3 of the paper book he submitted that depreciation claimed is Rs. 2,18,73,103/- as per form 3CD. Referring to page 35 of the paper book, he drew the attention of the Bench to the schedule of depreciation according to which depreciation of Rs. 62,39,688/- has been claimed on buildings. Referring to the copy of the Board Resolution dated 10-02-2006 he submitted that the Board of Directors have approved for purchase of the flats by the company in the name of the 2 directors. He submitted that the AO has allowed depreciation on the flats. This otherwise indicates that the AO has accepted the ownership of the property in the hands of the company and for the purpose of business. Referring to various decisions filed before CIT(A) he submitted that the courts have held that even when property/vehicles are not registered in the name of the company/firm but are registered in the names of the directors/partners, the assessee is entitled to depreciation and interest. Since in the instant case the AO has already allowed the depreciation, therefore, he has accepted the flat as business asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2,39,688/- on building/flats amounting to Rs. 5,98,28,719/- (page 35 of the paper book). The submission of the assessee before the CIT(A) that the assessee's claim for depreciation has been accepted for the A.Y. 2007-08 is also not disputed by the CIT(A). We find before CIT(A) the assessee has inter alia made following submissions : "It was only for the sake of convenience that the said flats were registered in the name of the Directors. The facts of the case clearly show that the company is the real owner of both the flats notwithstanding their registration in the names of directors. It is the defacto and beneficial ownership which is material and relevant. In the context of depreciation the courts have accepted the assessee's claim for the same even when property/vehicles are not registered in the name of company/firm but in the names of directors/partners. Addl.CIT Vs. Manjeet Engg. Ind. 154 ITR 509 Delhi CIT Vs. Fazilka Dabwali 270 ITR 398; P&H Ratio of the said decisions would also apply to the facts of our case also. It is also important to note that the appellant's claim for depreciation has been accepted also for the A.Y. 2007-08. We are enclosing herewith a copy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stified. In view of the above discussion, we are of the considered opinion that the CIT(A) was not justified in disallowing the interest expenditure and telephone and electricity expenditure relating to the flats at Mumbai. We accordingly set aside the order of the CIT(A) and the grounds raised by the assessee are allowed. 15. The Ld. Counsel for the assessee did not press grounds of appeal No.4 for which the Ld. Departmental Representative has no objection. Accordingly, this ground by the assessee is dismissed as 'not pressed'. 16. Grounds of appeal No.5 to 5.3 by the assessee are as under: "5] The learned CIT(A) erred in confirming the disallowance of interest of s.l,90,82,249/- u/s 14A/ Section 36(1)(iii) of the Act. 5.1] The learned CIT(A) erred in applying the provisions of Section 14A when admittedly, the appellant had not received any exempt income from the investment in the shares in the group companies during this year. 5.2] The learned CIT(A) failed to appreciate that the interest bearing funds were utilized by the appellant in its business and not for investment in the shares and thus, the question of disallowing any interest u/s 14A / Section 36(1)(iii) did not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee's investment in shares from which no dividend has been received was Rs. 15,19,15,800/-. This has increased the interest burden to Rs. 3,81,16,663/- in A.Y. 2007-08 as against Rs. 24,03,497/- in A.Y. 2005-06. The turnover has gone up to Rs. 138.67 crores in A.Y. 2007-08 as against Rs. 24.86 crores in A.Y. 2005-06. From the various parameters he noted that the increase in turnover is 5.6 times only whereas the interest burden has increased to 15.85 times from A.Y. 2005-06. According to the AO had the assessee not invested in shares there was no need to pay such huge interest particularly pertaining to investment in shares. Hence, interest expenses not pertaining to business needs to be disallowed. Since the assessee could not correlate the date wise utilization of funds in shares, therefore, the AO disallowed proportionate interest on account of interest free funds and interest bearing funds according to which the disallowance u/s.14A r.w. Rule 8D comes to Rs. 1,90,70,249/-. The AO accordingly applying the provisions of Rule 8D disallowed interest of Rs. 1,90,70,249/-. He also disallowed a sum of Rs. 12,000/- for use of staff and other facility. Thus, he disallowed total amount ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der : 37. Section 36(1)(iii) of the Act provides for deductions of interest on the loans raised for business purposes. Once the assessee claims any such deduction in the books of accounts, the onus will be on the assessee to satisfy the Assessing Officer that whatever loans were raised by the assessee, the same were used for business purposes. If in the process of examination of genuineness of such a deduction, it transpires that the assessee had advanced certain funds to sister concerns or any other person without any interest, there would be very heavy onus on the assessee to be discharged before the Assessing Officer to the effect that in spite of pending term loans and working capital loans on which the assessee is incurring liability to pay interest, there was justification to advance loans to sister concerns for non business purposes without any interest and accordingly, the assessee should be allowed deduction of interest being paid on the loans raised by it to that extent. 38. The entire money in a business entity comes in a common kitty. Monies received as share capital, as term loan, as working capital loan or as sale proceeds do not have any different colour. Whateve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... een raised by the assessee at the time of disbursement of funds. This 'would depend on facts of each case. 40. Once it is borne out from the record that the assessee had borrowed certain funds on which liability to pay tax is being incurred and on the other hand, certain amounts had been advanced to sister concerns or others without carrying any interest and without any business purpose, the interest to the extent the advance had been made without carrying any interest is to be disallowed under Section 36(1)(iii) of the Act." 7.5 Notwithstanding the provisions of sec. 36(1)(iii) of the Act, as regards disallowance u/s 14A, I have perused the details filed by the appellant and the other material on record. In the course of appellate proceedings, the AR of the appellant had pointed out that the working of disallowance referred to in the assessment order was done at the instance of the AO, while according to the appellant in the absence of any exempt income question of disallowance u/s 14A did not arise at all. Without prejudice to the earlier submissions, AR has drawn my attention to the recent decisions of the hon'ble Bombay High Court in the case of CIT V. M/s Delite En ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... funds u/s 36(1)(iii) of the Act. Since there was no profit for the appellant for the relevant assessment year, the hon'ble High Court held that the question of disallowance of interest expenses related to tax free profit from the Firm [u/s.10(2A)] u/s 14A of the IT Act would not arise. In the present case the appellant used borrowed funds amounting to Rs. 1.36 crore for making investment in shares of group companies. Since facts of Delite Enterprises (Supra) are not applicable, decision of hon'ble ITAT in the case of Avshesh Mercantile (P) Ltd. (Supra), based on Delite Enterprises, will also not support the appellant. The hon'ble ITAT Ahmedabad Bench IB' in the case of Shankar Chemical Works vs. DCIT [(2011) 47 SOT 121 (Ahmedabad)] has held that any expenditure incurred for earning exempt income has to be disallowed even if there is no actual earning of any exempt income. It has further held that if interest bearing borrowed funds are utilized for purpose of investment in shares and there is no receipt of dividend income or if there is only meager amount of dividend income, even then, whole amount of interest expenditure incurred for this purpose will be subject to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . CIT [(2012) 50 SOT 31 (Delhi)] has held that actual earning of the income is not sine qua non for deciding the deduction of expenditure laid out or expended wholly or exclusively for the purpose of earning the income. Thus, where investment has been made in shares, which did not yield any dividend in the year under consideration, the expenditure incurred for earning the income is deductible notwithstanding the fact that no such income has been earned. The ratio of these cases will apply mutatis mutandis under section 14A also while ascertaining the expenditure incurred for earning tax-free income from investment. The Hon'ble High Court of Delhi in the case of Maxopp Investment Ltd. and others vs. CIT [(2011) 64 DTR (Del) 122] while analyzing the provisions of section 14A of the Act has held as under: We are of the view that the expression "in relation to" appearing in s. 14A of the said Act cannot be ascribed a' narrow or constricted meaning. If we were to accept the submission made on behalf of the assessee then sub-s. (1) would have to be read as follows: "For the purpose of computing the total income under this chapter, no deduction shall be allowed in respect of e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aries which is Rs. 1,36,40,800/- as on 31-03-2007. He submitted that since the own capital and free reserves are more than the investment in shares of associated concerns and in subsidiaries, therefore, no disallowance u/s.14A is possible. Further, Rule 8D is not applicable for the impugned assessment year since assessment year involved is 2007-08 and Rule 8D is applicable from A.Y. 2008-09 onwards. He further submitted that since no dividend has been received by the assessee company, therefore, there is no question of any exempt income earned by the assessee. Referring to para 7.4 of the order of the CIT(A) he submitted that the Ld.CIT(A) has given a finding that assessee is paying interest @15% on the loan of Rs. 22 crores. He submitted that under the facts and circumstances of the case neither any disallowance u/s.14A is possible nor any disallowance u/s.36(1)(iii) is possible. 23. Referring to the decision of Hon'ble Bombay High Court in the case of CIT Vs. Reliance Utilities and Power Ltd. reported in 313 ITR 340 he submitted that the Hon'ble High Court in the said decision has held that if there was funds available both interest free and overdraft and or loans taken, then a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany. Had the assessee not diverted funds for investment in shares the interest burden would have come down heavily. He accordingly submitted that the order of the CIT(A) be upheld and the grounds raised by the assessee should be dismissed. 26. We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the AO in the instant case made addition of Rs. 1,90,82,249/- on account of disallowance u/s.14A of the Act on the ground that assessee has used borrowed funds for investment in shares of its group companies. The Ld.CIT(A) following the decision of Hyderabad Bench of the Tribunal in the case of Ravindra Singh Arora Vs. ACIT reported in 53 SOT 124 and various other decisions upheld the action of the AO. 27. It is the submission of the Ld. Counsel for the assessee that since the investment in shares of associate concerns and subsidiaries is less than the own capital and free reserves, therefore, there is no justification in making any disallowance. It is also the submission of the Ld. Counsel for the assessee that since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profits were deposited in the over draft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and 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 over draft 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. In this case this presumption is established considering the finding of fact both by the Commissioner of Income-tax (Appeals) and the Incometax Appellate Tribunal." 30. We find the Hon'ble Delhi High Court in the case of Cheminvest Ltd. Vs. CIT has held that when no exempt income was earned by the assessee in the relevant assessment year and the genuineness of the expenditure incurred by the assessee was not doubted no disallowance can be made u/s.14A. The relevant observation of the Hon'ble High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thereby securing right to management. Possibility of sale of shares by private placement etc. cannot be ruled out and is not an improbability. Dividend may or may not be declared. Dividend is declared by the company and strictly in legal sense, a shareholder has no control and cannot insist on payment of dividend. When declared, it is subjected to dividend distribution tax." 17. On facts, it was noticed in CIT v. Holcim India (P) Ltd. (supra) that the Revenue had accepted the genuineness of the expenditure incurred by the Assessee in that case and that expenditure had been incurred to protect investment made. 18. In the present case, the factual position that has not been disputed is that the investment by the Assessee in the shares of Max India Ltd. is in the form of a strategic investment. Since the business of the Assessee is of holding investments, the interest expenditure must be held to have been incurred for holding and maintaining such investment. The interest expenditure incurred by the Assessee is in relation to such investments which gives rise to income which does not form part of total income. 19. In light of the clear exposition of the law in Holcim India (P) Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owers in the AO for quantification of the expenditure for making the disallowance but at the same time section 14A(2) does not override section 14A(1) of the Income Tax Act. 6.4 In the case of Hero Cycles Ltd. (Supra) the Hon'ble High Court of Punjab and Haryana has observed that disallowance u/s.14A required finding of incurring of expenditure for earning exempted income, and without said finding no expenditure can be disallowed u/s.14A of the Act. The Hon'ble High Court considered section 14A(2) and Rule 8D(1) also. In the case of CCI Ltd. (Supra) the assessee earned the dividend income on the assets which was claimed exempt but the profit on the sale was offered as business income. In this case, there cannot be profit on the transfer of the mutual funds but as we have held that there is no specific finding by the AO nor by the CIT(A) that infact the assessee has used the interest bearing funds for investment, on this factual aspect, we hold that there is no justification to make the disallowance. We accordingly delete the addition made by the AO u/s.14A r.w. Rule 8D as the mandate of section 14A(1) is not fulfilled." 8.2 Similar view has been taken by the Tribunal in the cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . So far as the disallowance of Rs. 5,86,962/- by the Assessing Officer being 0.5% of the average value of investment towards administrative expenses etc. is concerned we find the CIT(A) sustained the same. 9.1 It is the submission of the Ld. Counsel for the assessee that all the shares are held in physical form and not in Demat account and no dividend income has been received on account of shares held under the head "investment". Whatever dividend was received was in the "share trading account". The above submission of the Ld. Counsel for the assessee could not be controverted by the Ld. Departmental Representative. We find various courts have held that disallowance u/s.14A cannot be made when there is no tax free income. 9.2 We find the Hon'ble Allahabad High Court in the case of Shivam Motors Pvt. Ltd.(Supra) has observed as under : "As regards the second question, Section 14A of the Act provides that for the purposes of computing the total income under the 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 the Act. Hence, what Section 14A provides is that if the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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