Tax Management India. Com
Law and Practice  :  Digital eBook
Research is most exciting & rewarding


  TMI - Tax Management India. Com
Follow us:
  Facebook   Twitter   Linkedin   Telegram

TMI Blog

Home

2016 (4) TMI 857

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... of the assessee allowed - Decided in favor of assessee. - ITA No.891/PN/2013 - - - Dated:- 29-2-2016 - SHRI R.K. PANDA, AM AND SHRI VIKAS AWASTHY, JM For The Assessee : Shri Sunil Pathak For The Revenue : Shri Hitendra Ninawe ORDER PER R.K. PANDA, AM : This appeal filed by the assessee is directed against the order dated 18-02-2013 of the CIT(A)-II, Nashik relating to Assessment Year 2007-08. 2. Grounds of appeal No. 1 to 3 by the assessee are as under : On facts and in law, 1] The learned CIT(A) erred in confirming the disallowance of ₹ 38,87,288/- on account of interest and of ₹ 48,194/- out of telephone and electricity expenses on the ground that these expenses relate to the flats at Khar, Mumbai and these flats are not owned by the appellant company but by its directors Shri Ishwarlal Jain and Shri Manish Jain (page 12 CIT(A) order). 2] The learned CIT(A) further erred in enhancing the disallowance of interest by a sum of ₹ 31,71,622/- on the ground that the appellant had prima facie diverted funds of ₹ 2,64,30,607/- for non business purposes (page 12 CIT(A) order). 3] The decision of the learned CIT(A) in ma .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... 8377; 38,87,288/- and telephone and electricity expenses of ₹ 48,194/- has been claimed. Further, the assessee has shown its cost price at ₹ 5,98,28,719/- in the business assets over which depreciation has not been claimed. On being questioned by the AO, it was submitted that for the sake of convenience the flat at Khar, Mumbai was purchased in the names of 2 of the directors namely Shri Ishwarlal Lalwani and Shri Manish Lalwani and also the loans for purchasing the said property were taken in the names of the said 2 directors only. However, the said property belongs to the company and the property and the loans have been shown in the books of the company. 5. However, the AO was not satisfied with the explanation given by the assessee. According to him since the property stands in the names of individuals, therefore, it cannot belong to the company. The ownership of immovable property belongs to the person in whose name the property is registered. Thus, the company has no locus standi over the Khar flats for which the assessee company has not claimed any depreciation over it. There is no business use of the property. Therefore, the AO disallowed the interest and othe .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... of the flat in April 2006. A stamp duty of ₹ 27,48,750/- was also paid by appellant company on behalf of the purchasers. Scrutiny of the documents/statement of accounts further revealed that the appellant company had paid ₹ 66 lac to SBI during A.Y. 2007-08 towards repayment of principal (Rs. 27,12,712/-) and interest (Rs. 38,87,288/-) in respect of the housing loan on behalf of the directors. Besides, the appellant company is also shown to have incurred expenses of ₹ 31,30,607/- on account of franking charges and interior decoration in respect of the aforesaid flats on behalf of the directors. When confronted, the appellant company stated that the flats were owned by the company and the ownership flats and SEI housing loan were shown in its books of accounts. The explanation of the appellant company is contrary to the documents available on record. The housing loan of ₹ 5 crore from SEI, Ialgaon is in the name of Shri Ishwarlal S. Lalwani and his son Shri Manish Lalwani. The purchasers had taken a term loan (housing finance) of ₹ 5 crore from SEI, jalgaon vide arrangement letter dt. 24/04/2006 for flat no. 701 (7th 8th floor) 17th Road, Khar (West), .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... s addition of ₹ 39,35,482/- (Rs.38,87,288/- + ₹ 48,194/- is confirmed, enhancement of ₹ 31,71,672/- is made to the income of the appellant. 8. Aggrieved with such order of the CIT(A) the assessee is in appeal before us. 9. The Ld. Counsel for the assessee strongly objected to the order of the CIT(A). He submitted that the assessee company is a jeweller at Jalgaon and it purchases gold ornaments and jewellery from Mumbai. Therefore, when the directors or other personnel of the company visit Mumbai, they have to stay at a place which is safe. Accordingly, the flats were purchased at Mumbai and were used by the company for business as well as residence of one of the directors. He submitted that the assessee company had purchased the flats at a consideration of ₹ 5,98,28,719/-. Referring to the audited accounts for the A.Y. 2007-08, a copy of which is filed at pages 4 to 23 of the paper book, the Ld. Counsel for the assessee drew the attention of the Bench to the schedule of fixed assets, a copy of which is placed at page 16. Referring to item No.19, i.e. flat at Khar, he submitted that the same has been shown in the asset side of the balance sheet. Refer .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... ; 2,64,30,607/- diverted for non business purposes. The reasoning for such enhancement has already been reproduced in the findings given by the CIT(A). It is the submission of the Ld. Counsel for the assessee that since the flats have already entered into the block of asset and depreciation claimed in the original return has been allowed and the same has not been withdrawn, therefore, it is to be held that the flat at Khar is a business asset and utilized for the purpose of business. It is also his submission that in view of various decisions the flats need not to be registered in the name of the assessee company. 12. We find merit in the submission of the Ld. Counsel for the assessee. There is no dispute to the fact that the flats purchased at Khar has been shown in the asset side of the balance sheet and the loan obtained from bank in the name of the directors has been shown as liability in the liability side of the balance sheet. The Board of Directors vide resolution dated 10-02-2006 have approved for the purchase of the flats in the name of the 2 directors. Depreciation in the computation statement is as per Form No.3CD enclosed along with return of income. In the schedule .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... er the common law, owner means a person who has got valid title legally conveyed to him after complying with the requirements of law such as the Transfer of Property Act, Registration Act, etc. But, in the context of section 22 of the Income tax Act, 1961 having regard to the ground realities and further having regard to the object of the Income tax Act, namely, to tax the income , owner is a person who is entitled to receive income from the property in his own right. The Hon ble Delhi High court in the case of Addl.CIT Vs. Manjeet Engineering Industries (Supra) has held that when a partner brings his property to the partnership firm and the firm treats his property as belonging to the firm only, it has the effect of transferring the property to the firm. Document in writing and registration is not necessary. Following the above principles and considering the fact that the company has already shown the asset in the balance sheet of the assessee company and the loan obtained by the directors for purchase of the flats has been shown as liability in the liability side of the balance sheet and the depreciation claimed by the assessee on such flat has not been rejected in the as .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... his connection we would like to state that we have made investment in the shares of few private limited companies and a public limited company, under the same management. However, we may add that no dividend was declared by any of the companies whose shares are held by us we did not have any income which was exempt and did not form part of total income. As such question of disallowance u/s.14A we submit, would not arise. However, as desired working of disallowance u/s.14A is enclosed assuming without admitting that the said sec.14A is applicable. 18. However, the AO was not satisfied with the explanation given by the assessee. He observed that borrowed funds have been utilized for non business purposes, i.e. for purchase of shares, hence interest is disallowable u/s.36(1)(iii). Moreover same furniture, electricity, telephone and business premises are used for the business purposes as well as for the investment in shares. Entries in the books of account are also made by same accountant. Hence, some portion of other expenses are also related to investment in shares. He noted that the interest burden to the assessee paid to bank was only ₹ 24,03,497/- as on 31- 03-2005 and n .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... to HDFC (gold loan), ₹ 38,87,288/- on housing loan (Khar flats) in its P L account. The appellant company is showing a debit balance of ₹ 17,97,55,244/- against Rajmal Lakhichand where its director Shri Ishwarlal S. Lalwani is having 40% share in profit/loss. The appellant company has charged interest @ 6% from M/s. Rajmal Lakhichand. Similarly the appellant company is charging interest @ 6% on balances outstanding against its directors. It is further seen that the appellant company has diverted huge funds to M/s. Rajmal Lakhichand which in turn has purchased shares of the appellant company in the name of Shri Ishwarlal S. Lalwani. The appellant's contention that it had used its own funds for investment/loans in/to its groups companies is without any documentary evidence. It is also seen that the appellant company had taken a term loan of ₹ 2.30 crore from Saraswat Coop. Bank Ltd. in which it had to pay 30% as margin money. Similarly, the appellant had taken loans from various other banks in which it was required to pay margin money. Hence appellant's own funds are presumed to have been used for obtaining loans and were therefore not available to make inv .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... joying the benefits thereof. It cannot possibly be held that the funds to the extent diverted to sister concerns or other persons free of interest were required by the assessee for the purpose of its business and loans to that extent were required to be raised. We do not subscribe to the theory of direct nexus of the funds between borrowings of the funds and diversion thereof for non-business purposes. Rather, there should be nexus of use of borrowed funds for the purpose of business to claim deduction under Section 36(1)(iii) of the Act. That being the position, there is no escape from the finding that interest being paid by the assessee to the extent the amounts are diverted to sister concern on interest free basis are to be disallowed. 39. If the plea of the assessee is accepted that the interest free advances made to the sister concerns for non-business purposes was out of its own funds in the form of capital introduced in business, that again will show a camouflage by the assessee as at the time of raising of loan, the assessee will show the figures of capital introduced by it as a margin for loans being raised and after the loans are raised, when substantial amount is dive .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... in the case of Godrej Boyce Mfg. Co. Ltd. V Is. Dy. CIT [reported in (2010) 43 DTR (Bom) 177/ (2010) 328 ITR 81 (Bom)] on 12/08/2010. The hon'ble High Court of Bombay in its decision had held that disallowance under section 14A as per rule 8D, though constitutionally valid, cannot be made for the assessment years prior to the AY. 2008-09. In the prior year's disallowance was required to be made on reasonable basis, but from the AY 2008-09 disallowance u/s 14A as per the rule 8D was required to be made. Further, the basic object of sec. 14A is to disallow the direct and indirect expenditure incurred in relation to income which does not form part of the total income. In the instant case, there is a direct nexus in interest bearing funds and investments. As per rule 8D of the Income Tax Rules 1961, interest cost directly related to earning exempt income is fully disallowed as per part 'a' of calculation of rule 8D. As regards appellant's reliance on Delite Enterprises, I have gone through the judgment but find that the facts of that case are different from that of the present appeal. In 'Delite', the AYs involved were 2001-02 and 2002-03 when Rule 8D of .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... ch does not form part of total income, it has to suffer disallowance irrespective of the fact whether any income is earned by the assessee or not. Section 14A does not envisage any such exception. When prior to introduction of Sec. 14A, an expenditure both under section 36 and 57 was allowable to an assessee without such requirement of earning or receipt of income, such condition cannot be imported when it comes for disallowance of the same expenditure u/s 14A In coming to this conclusion, the bench relied on the decision of the Hon'ble Supreme Court in the case of CIT vs. Rajendra Prasad Moody 115 ITR 519 SC. It has been held that the term 'in relation to' is wide enough to include in its sweep the expenditure both for making or earning income and incurred wholly and exclusively for the purposes of business carried on by the assessee. What one has to see is whether any expenditure were incurred by an assessee in relation to an income that does not form part of total income of the assessee under the Act, and if the answer is in affirmative then that expenditure cannot be allowed irrespective of the fact that it was allowable under different provisions of the Act. Fu .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... e nature specified in ss. 15 to 59, cannot be allowed against other income which is includible in the total income for the purpose of chargeability to tax. The provisions of section 14A are mandatory. Since A.Y. under appeal happens to be 2007-08 in which Rule 8D is not applicable, I am of the considered view that AO was justified in disallowing ₹ 1,90,82,249/- u/s.14A by taking proportionate disallowance of interest on borrowed funds. The appellant had 50.03% of borrowed funds out of total funds of ₹ 46,40,63,053/-. The appellant had claimed interest of ₹ 3,81,16,663/- (except on specific borrowings). Hence 50.3% of ₹ 3,81,16,663/- comes out to be ₹ 1,90,70,249/- which has rightly been disallowed by the AO. Appellant's calculation of disallowance of ₹ 12,77,399/- sec.14A r.w.r. 8D is not applicable as far as the AY. under appeal is concerned. The disallowance of ₹ 1,90,70,249/- u/s 14A is therefore confirmed. 21. Aggrieved with such order of the CIT(A) the assessee is in appeal before us. 22. The Ld. Counsel for the assessee strongly challenged the order of the CIT(A). Referring to page 15 of the paper book the Ld. Counsel .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... t the Tribunal following the decision of Hon ble Allahabad High Court in the case of Motors Pvt.Ltd. and the decision of Hon ble Punjab and Haryana High Court in the case of Lakhani Marketing has held that when the assessee has not received any dividend income out of shares held as investment and when no disallowance u/s.14A has been made in the preceding as well as in succeeding assessment year, then no disallowance u/s.14A can be made. Referring to the decision of Hon ble Delhi High Court in the case of Cheminvest Ltd. Vs. CIT reported in 318 ITR 33 he submitted that the Hon ble High Court in the said decision has held that in absence of receipt of any exempt income in the relevant assessment year no disallowance should be made u/s.14A. Referring to the decision of Hon ble Supreme Court in the case of S.A. Builders reports in 288 ITR 1 he submitted that the Hon ble Supreme Court in the said decision has held that no disallowance u/s.36(1)(iii) or u/s.37 can be made when interest bearing funds has been given to sister concern without charging interest when there is commercial expediency. He accordingly submitted that the order of the CIT(A) should be set aside and the grounds rais .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... ries at ₹ 1,36,40,800/- is much less than the own capital and free reserves of ₹ 2,93,86,435/- as on 31-03-2007. It is also an admitted fact that the assessee company has not received any dividend income during the year which is exempt from income tax. 29. We find the Hon ble Bombay High Court in the case of Reliance Utilities and Power Ltd. (Supra) has held as under : If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interestfree funds available. In our opinion, the Supreme Court in East India Pharmaceutical Works Ltd. v. CIT [1997] 224 ITR 627 had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. [1982] 134 ITR 219 where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Co .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... x, Faridabad v. M/s. Lakhani Marketing Incl. (decision dated 2nd April 2014 of the High Court of Punjab and Haryana in ITA No. 970/2008) which in turn referred to two earlier decisions of the same Court in CIT v. Hero Cycles Limited[2010] 323 ITR 518 and CIT v. Winsome Textile Industries Ltd. [2009] 319 ITR 204. The second was of the Gujarat High Court in Commissioner of Income Tax-I v. Corrtech Energy (P) Ltd. [2014] 223 Taxmann 130 (Guj.) and the third of the Allahabad High Court in Commissioner of Income Tax, Kanpur v. Shivam Motors (P) Ltd. (decision dated 5th May 2014 in ITA No. 88/2014). These three decisions reiterated the position that when an Assessee had not earned any taxable income in the relevant AY in question corresponding expenditure could not be worked out for disallowance. 16. In CIT v. Holcim India (P) Ltd. (supra), the Court further explained as under: 15. Income exempt under Section 10 in a particular assessment year, may not have been exempt earlier and can become taxable in future years. Further, whether income earned in a subsequent year would or would not be taxable, may depend upon the nature of transaction entered into in the subsequent assessmen .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... of the authorities below and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. The dispute is regarding disallowance u/s.14A r.w. Rule 8D towards interest and administrative expenses. So far as disallowance of interest is concerned, we find the investment in shares and mutual funds as on 31-03-2009 is shown at ₹ 19,25,654/- as against ₹ 16,58,300/- in the preceding year. Further, there is no dispute to the fact that the own capital and free reserves of the assessee company as on 31-03-2009 is ₹ 19,54,56,058/- as against ₹ 13,78,51,972/- in the preceding year. Thus, even at the beginning of the assessment year, the own capital and free reserves of the assessee company is much more than the investment in shares and mutual funds the income of which is exempt u/s.10(35). Further, there is no categorical finding by the AO that the assessee has used the interest bearing funds for investment in shares/mutual funds, the income of which is exempt from tax. 8.1 We find the Pune Bench of the Tribunal in the case of Dharmeer Sambhavi Urban Co-op. Bank Ltd., (Supra) while deleting the disallowance u/s.14A r .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... t income. Therefore, in absence of any such details the disallowance under Rule 8D(2)(iii) amounting to ₹ 8,636/- has to be sustained. We hold and direct accordingly. The ground raised by the Revenue is accordingly partly allowed. 32. The Pune Bench of the Tribunal in the case of Shri Goyal Ishwarchand Kishorilal Vs. JCIT vide ITA No.422/PN/2013 has held that when the assessee has not received any dividend income out of the shares held as investment and when no such disallowance u/s.14A has been made in the preceding as well as succeeding assessment year, then no disallowance u/s.14A can be made. The relevant observation of the Tribunal from Para 9 onwards read as under : 9. We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and the 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 Assessing Officer disallowed an amount of ₹ 25,10,262/- u/s.14A on the ground that borrowed funds are diverted for investment in shares, the dividend income of which is exempt from tax. Therefore, the Assessing Officer disallowed an amount of S .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

..... by the Ld. Counsel for the assessee also supports the above contention. It is also an undisputed fact that the Assessing Officer in the orders passed u/s.143(3) for A.Y. 2008-09 and 2010-11 (copies of which are placed at paper book pages 1 to 4) has not made any disallowance u/s.14A of the Income Tax Act. 9.4 Since in the instant case the assessee has not received any dividend income out of the shares held as investment and since no disallowance u/s.14A has been made in the preceding as well as succeeding assessment years, therefore, we agree with the contention of the Ld. Counsel for the assessee that no disallowance u/s.14A can be made under the facts and circumstances of the case. Accordingly, the order of the CIT(A) is set-aside and the Assessing Officer is directed to delete the disallowance of ₹ 5,86,962/- made u/s.14A. Ground raised by the assessee is accordingly allowed. 33. Since in the instant case the own capital and free reserves of the assessee company is much more than the investment in shares of group companies and associate concerns and since the assessee has not received any dividend income during the year, therefore, in view of the decisions cited (su .....

X X   X X   Extracts   X X   X X

→ Full Text of the Document

X X   X X   Extracts   X X   X X

 

 

 

 

Quick Updates:Latest Updates