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2016 (5) TMI 933 - ITAT CHANDIGARH

2016 (5) TMI 933 - ITAT CHANDIGARH - TMI - Disallowance of proportionate interest under section 36(1)(iii) - Held that:- In any case the assessee had enough interest free funds to make impugned advances and therefore it was to be presumed that the advances had been made out of interest free funds and no disallowance under section 36(1)(iii) was therefore warranted in this case. In view of the above we set aside the order of the Ld. CIT(A) and delete the disallowance of interest made under sectio .....

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ment of the Ld. DR that the CBDT Circular No. 5/2014 dt. 11/02/2014 stating that even in the absence of any exempt income disallowance under section 14A has to be made, is binding on the Revenue authority, we find has no merit. The Hon'ble Supreme Court in the case of Commissioner of Central Excise, Bolpur Vs. M/s Ratan Melting & Wire Industries [2005 (2) TMI 138 - SUPREME COURT OF INDIA ], has categorically held that decision of the High Court / Supreme Court would overrule Circulars issued by .....

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eduled banks for opening letters of credit was in the nature of interest as per the provisions of section 2(28A) of the Act but since the amount had been paid to scheduled banks no tax was required to be deducted at source on the same in view of the provisions of section 194A (3)(iii) which categorically exclude interest paid to banks from the perview of tax deduction at source. In view of the above since the assessee was not required to deduct tax at source in the impugned payments the provisio .....

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A)-1, Chandigarh dt. 27/02/2015. 2. Briefly stated during the impugned Assessment year the assessee filed return of income declaring total income of ₹ 3,41,50,800/-. Thereafter assessment under section 143(3) was framed on the assessee at income of ₹ 4,86,08,810/- after making the following addition / disallowance. 1. Disallowance u/s 14A ₹ 40,28,526/- 2. Disallowance of L/C charges u/s 40(a)(ia) on account of non deduction of TDS ₹ 64,37,342/- 3. Disallowance of interest .....

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e made under section 14A was also directed to be deleted. 4. Aggrieved by the same both the Assessee and the Revenue filed the present appeal before us. 5. We shall first take up the appeal filed by the assessee in ITA No. 545/Chd/2015. 6. At the outset it may be stated that the appeal was time barred by 10 days. The Ld. AR filed an application dt. 19/04/2016, requesting condonation of delay on behalf of the assessee stating that since the mother of the Manager Finance of the Company had a sudde .....

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portionate interest of ₹ 33,92,141/- on alleged interest free advance to its 100% fully owned subsidiary M/s Vardhman Life Sciences Private Limited which is arbitrary and unjustified." 8. The only issue in the present appeal is regarding the upholding of disallowance of proportionate interest of ₹ 33,92,141/- under section 36(1)(iii) of the Act. 9. Brief facts relating to the issue are that the assesse company had given interest free advance of ₹ 7,35,45,100/- to its assoc .....

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the same at ₹ 33,92,141/-. 10. Before the Ld. CIT(A) the assessee pleaded that the disallowance made was not justified since there was no nexus of borrowed funds and the amount advanced. The assessee further pleaded that the advance had been made for business purpose since M/s Vardhman Life Sciences Private Ltd., to whom the advance was given, was to manufacture raw material which was used by the assessee company in its manufacturing, activity and which it was currently importing from Chi .....

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bhishek Industries and upheld the disallowance made by the AO. Ld. CIT(A) held at para 3.1 to 3.3.2 of its order as follows: 3.1 Brief facts of the issue are that the appellant company had given inerest free advance of ₹ 7,35,45,100/- to its associate concern - M/s Vardhan Life Sciences (P) Ltd.. The Assessing Officer questioned the appellant regarding disallowance u/s 36(1)(iii) of the Income Tax Act, 1961(hereinafter referred to as 'Act') and the appellant had submitted as under: .....

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iary the amount had to be mentioned it is reiterated that it had to be mentioned in para (vi)(iii)(a) & (b) of the audit report. The advance for given i.e. ₹ 735.45 lac is to be a subsidiary and the advance can never be prejudicial to the interest of the company.(sic)" 3.1.1 The Assessing Officer was not satisfied with the explanation of the appellant and disallowed interest @ 12% on this advance. The disallowance worked out to ₹ 33,92,141/-. 3.2 During the course of appella .....

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of Hon'ble Punjab & Haryana High Court in the case of M/s Abhishek Industries Ltd. (286 ITR 1) is not applicable, since advance was made to 100% subsidiary, who was to manufacture the products, which were raw materials for the appellant. 3.3 I have considered the submission of the Ld. Counsel. The interest free advance was given by the appellant to its associate concern - M/s Vardhman Life Sciences (P) Ltd. which was 100% fully owned subsidiary of the appellant. The purpose of acquiring .....

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Ltd. (surpa) will be applicable. 3.3.1 The contentions of the Ld. Counsel that the appellant had sufficient reserves in the beginning of the year is also not relevant in view of the judgment of Hon'ble Punjab & Haryana High Court in the case of M/s Abhishek Industries Ltd. (supra), in which it was held: " The entire money in a business entity comes in a common kitty. The moneys received as share capital, as term loan, as working capital loan, as sale proceeds etc., do not have any .....

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before the Ld. CIT(A) and stated that the advance had been made for business purposes and therefore there was no question of disallowing any interest under section 36(1)(iii) of the Act. Ld. AR drew our attention to the findings of the Ld. CIT(A) at para 3.3 of his order in this regard and stated that the fact that the advance had been made to its 100% subsidiary which was to manufacture the main raw material being used by the assessee company has not been controverted by the lower authorities. .....

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pon the decision of the Hon'ble Supreme Court in the case of Hero Cycles (P) Ltd. Vs. CIT(Ludhiana) in Civil Appeal No. 514 of 2008 dt. 05/11/2015 and the Jurisdictional High Court in the case of Bright Enterprises(P) Ltd Vs. CIT, Jalandhar in ITA No. 224 of 2013 dt. 24/07/2015 in this regard. 12. Ld. DR on the other hand relied upon the order of the Ld. CIT(A) and stated that the subsidiary company had not started functioning / manufacturing in the impugned year and therefore the advance co .....

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the parties and perused the documents placed before us as also the orders of the authorities below. We find merit in the contention of the Ld. AR that the impugned advance had been made for the business purpose of the assessee. The fact that the M/s Vardhman Life Sciences Private Ltd. is an 100% subsidiary of the assessee company is not in dispute. The fact that M/s Vardhman Life Sciences Private Ltd. was to manufacture raw material which was required by the assessee company in its manufacturin .....

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Life Sciences Private Ltd. had not actually started functioning or manufacturing during the impugned AY and therefore the advance could not said to be for procuring raw material. We find no merit in this contention of the Revenue. To establish commercial expediency of an advance it is not necessary to establish direct nexus between the advance given and the benefit derived by the assessee. In the present case the advance having been given to a fully owned subsidiary of the assessee which was to .....

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cost and also ensure regular supply of the same. The Hon'ble Apex Court has elaborately dealt with the meaning of the expression "commercial expediency" in the context of section 36(1)(iii) in the case of S.A. Builder 288 ITR 1 wherein it has held at para 19, 20, 21, 23, 24, 26, 30, 35, & 36 as follows: "19. We have considered the submissions of the respective parties. The question involved in this case is only about the allowability of the interest on borrowed funds and .....

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8 of the Act. 21. In Madhav Prasad Jatia vs. CIT (1979) 10 CTR (SC) 375 : AIR 1979 SC 1291, this Court held that the expression "for the purpose of business" occurring under the provision is wider in scope than the expression "for the purpose of earning income, profits or gains", and this has been the consistent view of this Court. 23. In our opinion, the decisions relating to s. 37 of the Act will also be applicable to s. 36(1)(iii) because in s. 37 also the expression used .....

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s expended, not of necessity and with a view to direct and immediate benefit, but voluntarily and on grounds of commercial expediency and in order to indirectly facilitate the carrying on the business. The above test in Atherton's case (supra) has been approved by this Court in several decisions e.g. Eastern Investments Ltd. vs. CIT (1951) 20 ITR 1 (SC), CIT vs. Chandulal Keshavlal & Co. (1960) 38 ITR 601 (SC), etc. 26. The expression "commercial expediency" is an expression of .....

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ations Ltd. (1964) 53 ITR 140 (SC), CIT vs. Birla Cotton Spinning & Weaving Mills Ltd. (1971) 82 ITR 166 (SC), etc. 35. We agree with the view taken by the Delhi High Court in CIT vs. Dalmia Cement (Bharat) Ltd. (2002) 174 CTR (Del) 188 : (2002) 254 ITR 377 (Del) that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the .....

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he transfer of the borrowed funds to a sister-concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. 36. We wish to make it clear that it is not our opinion 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 adva .....

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idiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans. This view has been reiterated by the Apex Court in Hero Cycles (Supra) and by the jurisdictional High Court in Bright Enterprises (supra). The Hon'ble Apex Court in S.A. Builders has held that if money is advanced on the grounds of commercial expediency and in order to indirectly facilitate carrying on the business, the test of having made the advance .....

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dvance was only for setting up the subsidiary company, it cannot be denied that the purpose was only to benefit the assessee company even if indirectly. Even on the touch stone of the parameter that the expenditure should be such as a prudent man would incur for the purpose of business, the assessee satisfies the same, since it cannot be denied that the advance made for setting up the business of the subsidiary which would eventually benefit the assessee, would have been made by any prudent busi .....

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tegorically stated that where the holding company has deep interest in its subsidiary, which uses the money advanced for some business purposes, the assessee would be entitled to claim deduction under section 36(1)(iii) of the Act. Undeniably in the present case the assessee is the holding company of Vardhman Life Sciences (P) Ltd. holding 100% interest in it and further it is an admitted fact that the advance has been used by the assessee for setting up its business, clearly therefore, the adva .....

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or business purpose. Ld. AR has alternatively pleaded before us that company had enough interest free funds in the form of reserves amounting to ₹ 27.94 Crores to make the impugned advance of ₹ 7,35,45,100/- and thus it should be presumed that the advance had been made out of the interest free funds. No disallowance thus, was warranted under section 36(1)(iii) of the Act of ₹ 7,35,45,100/- . The Ld. AR relied upon the decision of the Hon'ble Supreme Court in the case of Her .....

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e was only to the extent of 7.35 crores. Therefore, undeniably, the assessee had enough interest free funds to make the impugned advances and in such circumstances the presumption is that the advances had been made out of the interest free funds. This view has been affirmed by the Hon'ble Supreme Court in the case of Hero Cycles Ltd.(supra) where in it has held as follows: "In so far as the loans to Directors are concerned, it could not be disputed by the Revenue that the assessee had a .....

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e Utilities and Power Ltd. (2009) 313 ITR 340 and has held at para 16 of its order as follows: 16. 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 interest-free funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd. Vs. CIT[1997] 224 ITR 627 had the occasion to consider the decision of the Calcutta High Court in W .....

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tion had not been advanced earlier it did not require to be answered. It then noted that in Woolcomber's of India Ltd.'s case [1982] 134 ITR 219 the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the overdraft 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 .....

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ished considering the finding of fact both by the Commissioner of Income Tax(Appeals) and the Income-tax Appellate Tribunal. Respectfully following the same we hold that in any case the assessee had enough interest free funds to make impugned advances and therefore it was to be presumed that the advances had been made out of interest free funds and no disallowance under section 36(1)(iii) was therefore warranted in this case. In view of the above we set aside the order of the Ld. CIT(A) and dele .....

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tion 14A as clarified by CBDT Circular No. 5 of 2014, were not attracted as the assessee has not earned any exempt income during the year despite the fact that the assessee had invested a huge sum from which no Income was shown while there was a considered financial outgo on interest / financial charges on borrowed funds. 2. The Ld. CIT(A) has erred in deleting the addition made on account of disallowance made under section 40(a)(ia) of the Act without getting any enquiry made on this issue or p .....

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ceedings Ld. AO confronted the assessee as to why disallowance as per section 14A read with Rule 8D be not made in the present case since the income earned from the investment in the nature of dividend would be exempt from tax. The assessee submitted that it had not earned any income from the impugned investment and hence no disallowance under section 14A was warranted. Ld. AO rejected the contention of the assessee and computed the disallowance under section 14A read with Rule 8D at ₹ 40, .....

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h income was earned no disallowance under section 14A was to be made. 20. Before us the Ld. DR argued that in view of the CBDT Circular No. 5/2014 wherein it has been clarified by the Board that disallowance of expenditure under section 14A read with Rule 8D has to be made even if no exempt income has been earned in a particular year, the Ld. CIT(A) had erred in deleting the disallowance made in the case of the assessee. Ld. DR stated that the decision of the Apex Court in the case of CIT vs. Wa .....

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lars should be given effect to and not the view expressed in the decision of this court or the High Court. Ld. AR therefore stated that the view expressed by the jurisdictional High Court in the case of Lakhani Marketing (supra) would prevail over the Circular issued by the CBDT and in the absence of any exempt income earned by the assessee no disallowance under section 14A was to be made has held by the Ld. CIT(A). 22. We have heard the rival submissions and perused the material on record. 23. .....

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isallowance made following the decision of the jurisdictional High Court in the case of Lakhani Marketing (supra). The argument of the Ld. DR that the CBDT Circular No. 5/2014 dt. 11/02/2014 stating that even in the absence of any exempt income disallowance under section 14A has to be made, is binding on the Revenue authority, we find has no merit. The Hon'ble Supreme Court in the case of Commissioner of Central Excise, Bolpur Vs. M/s Ratan Melting & Wire Industries in Civil Appeal No. 4 .....

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the circular should be given effect to and not the view expressed in a decision of this Court or the High Court. So far as the clarifications / circulars issued by the Central Government and of the State Government are concerned they represent merely their understanding of the statutory provisions. They are not binding upon the court. It is for the Court to declare what the particular provision of statute says and it is not for the Executive. Looked at from another angel, a circular which is co .....

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at case was not the application of Section 14A in the absence of earning any exempt income. Therefore the decision rendered in that case cannot be interpreted otherwise. This specific issue was dealt with by the Jurisdictional High Court in the case of Lakhani Marketing(supra) and which has rightly applied by the Ld. CIT(A) in the present case. 24. Ground No. 1 raised by the Revenue is therefore dismissed. 25. In Ground No. 2 the Revenue has agitated against the deletion of addition made on acco .....

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ayment was made to scheduled banks and thus there was no requirement to deduct tax at source. The Assessing Officer brushed aside the contention of the assessee and proceeded to disallow the impugned amount under section 40(a)(ia) of the Act. 27. Before the Ld. CIT(A)the assessee reiterated the contention made before the AO, after considering which Ld. CIT(A) deleted the disallowance made by holding at para 5.3 of his order as follows: 5.3 I have considered facts of the issue. The payment of  .....

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ax was not required to be deducted at source on this payment as per provisions of section 194A(3)(iii) and so provisions of section 40(a)(ia) will not be applicable. The addition has wrongly been made on this account and so the same is deleted. Ground of appeal is dismissed." 28. Before us the Ld. DR relied upon the order of the AO and stated that the assessee having failed to deducted TDS on Letter of Credit opening charges, it was a violation of the provisions of section 40(a)(ia), and th .....

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