TMI Blog2016 (6) TMI 21X X X X Extracts X X X X X X X X Extracts X X X X ..... lowance u/s 36(1)(iii) - Held that:- Coming to other grievance of Revenue, we find that learned CIT(A) has made a findings of fact that that assessee was having free reserves far more than advances to two firms. The learned CIT(A) has also categorically held that the assessee had given advances to two firms under normal business operations and, therefore, he had rightly held that disallowance u/s 36(1)(iii) was not warranted. The learned DR was not able to controvert any of the findings of learned CIT(A), and, therefore, we do not find any infirmity in the order of learned CIT(A)- Decided against revenue - I.T.A No. 719(Asr)/2014 - - - Dated:- 24-5-2016 - Sh. A. D. Jain, Judicial Member And Sh. T. S. Kapoor, Accountant Member For the Appellant : Sh. Umesh Takyar (DR) For the Respondent : Sh. S. K. Vatta (CA) ORDER Per T. S. Kapoor (AM) This is an appeal filed by Revenue against the order of learned CIT(A), Jalandhar, dated 26.09.2014 for Asst. Year: 2011-12. 2. The Revenue has taken the following grounds of appeal. (i) That, on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in law in deleting the addition of ₹ 30,24,0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest rate of 12%. 4. Aggrieved with the order the assessee filed appeal before learned CIT(A) and filed detailed submissions. The learned CIT(A) after going through the submissions delete both additions by holding as under: Addition u/s 14A 5.2 I have considered the observations of the Assessing Officer as made by him in the assessment order as well as the written submissions filed by the assessee company vide letter dated 26.09.2014 on the issue under reference. I have also considered the judicial pronouncements relied upon by the assessee as well as by the Assessing Officer on the issue under reference. On careful considered of the rival contentions, it has been noticed that Assessing Officer has made the impugned addition by invoking the provisions of section 14A of the Act as the assessee company has made investment/capital contribution in the sister concerns which will fetch exempt income. On the other hand, the contentions and submissions of the assessee company basically emphasize that the assessee company had substantial own capital base by way of share capital in the A.Ys. 2009-10, 2010-11 and 2011-12 of ₹ 12.77 crores, Rs.,16.58 crores and ₹ 24. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been deleted by me in the case of assessee itself. 1.1 In support of the above submissions/contentions, the Ld. AR of the assessee company had relied upon the judgments of the Honorable Apex Court in the case of CIT Vs Shivsagar Estate reported at (2002) 177 CTR 107 / 257 ITR 59 (SC), Honorable Delhi High Court in the case of CIT Vs ARJ Security promoters reported at (2003) 264 ITR 276 (Delhi), Honorable Punjab Haryana High Court in the case of CIT Vs. Marudhar Chemicals Pharmaceuticals (P) Limited reported at 319 ITR 75, Honorable Punjab Haryana High Court in the case of Hero Cycles Limited reported at 323 ITR 518 and plethora of other such judgments on the issue under reference (details in written submissions as reproduced above). The gist of the arguments of the Ld. AR of the assessee with facts have also been given in para 5.2 above. 5.4 I have carefully considered the argument of the Ld. AR of the assessee company, facts brought on record and various judicial pronouncements relied upon by him in support of his arguments. 5.5.1 1 Firstly the financial statements for the financial years 2008-09, 2009-10 and 2010-11 which have been brought on record by the L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3) 183 CTR (Del) 323/( 2003) 264 ITR 276 ( Del) has followed this principle . When the Department wanted to negate the claim of the assessee, which was accepted in the past, the Honorable High Court had held as under:- having accepted in three assessment years that the assessee's business activity of printing lottery tickets falls within the ambit of section 80-1, the revenue cannot be allowed to turnaround and contend that the deduction under the said section is not allowable in respect of the assessment years in question. The special Leave Petition filed by the Revenue against this judgement stands dismissed in (2004) 266ITR (St.) 4 . The Honorable Supreme Court has also affirmed this view in several cases. In CIT vs. Shivsagar Estate (2002) 177 CTR (SC) 107: (2002) 257 ITR 59 (SC), it has been held that the lease rent from certain property was separately assessable in the hands of individual co-owners and was not assessable in the hands of association of persons .The court decided that having regard to the fact that no appeal had been carried against the orders of identical assessment for the previous year, the civil appeals and special leave petitions were to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... base of company as both the end products produced/manufactured by the company and the said subsidiary company are for manufacture of electric motors/transformers and products manufactured by electromagnetic units. Therefore, the end use product of electrical stampings and SE copper wire are without which the said electrical motors, transformer or electromagnetic finished products cannot be manufactured and functional at all. Similarly, the contribution as a partner can be assumed out of own funds as the assessee company has huge capital base. 5.6 On the disallowance of interest and other expanses in respect of such investments in shares of allied or other concerns, the decision of the jurisdictional Honorable Punjab Haryana High court in the case of Hero Cycle Limited (2012) 323 ITR 518 on the subject matter of apparent large interest free own share capital base, free Reserve Surplus is quite relevant and squarely applies in the case of the assessee company. The Honorable Jurisdictional High Court in the said case has held as under:- The contention of the revenue that directly or indirectly some expenditure is always incurred which must be disallowed under section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e out of interest free funds and therefore no part of interest on borrowings can be disallowed on the basis that the investments were made out of interest bearing funds. 5.7.1 The Honorable Bombay High Court in the case of CIT vs Glenmark Pharmaceutical Ltd as reported in (2013) 85 DTR 169 decided on 08.01.2013 has held as under:- Business expenditure - Disallowance under s. 14A - No expenditure incurred for earning exempt income - Whether or not assessee's expenses were incurred for earning exempt income is pure question of fact - Tribunal has arrived at a finding of fact that no expenditure was incurred by the assessee for earning the exempt income as the investments were made from its own funds and not borrowed funds -- Revenue has not been able to show how the finding offact arrived at by the Tribunal is either arbitrary or perverse - In view of the finding of fact the question whether the deletion of disallowance under s. 14A was justified does not involve any question of law. 5.7.2. In CIT vs Amarjothi Granites India (P) Ltd (2013) 263 CTR (Raj) 621, the Honorable Court has held as under:- Business expenditure - interest on borrowed capital - inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owed capital -- Capital borrowed for investment in shares f group company -- There being proximate nexus between the business of the assessee company and that of the company in which investments were made in the form of shares, interest on capital borrowed for said investment is allowable business expenditure -- section 36(l)(iii) does not require that the amounts so invested should be wholly and exclusively for making or earning such income nor does it place any embargo for investments to be made in group concerns and subsidiary concern. Also Held: The Tribunal has found that there is proximate nexus between the business of the assessee and that of the company in which investments were made in the form of shares. It may be true that the returns are not commensurate with the expected returns in the form of interest, but if and when, the shares are liquidated, there is expectancy of substantial gains which fact has been glossed over by the AO while confining his findings that the returns are far below the quantum of interest paid on the borrowed funds' and, therefore, the basis of analyzing that the payment of interest on borrowed funds has to be tested on the gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be mentioned: e) An amount of ₹ 25.00.000/- advanced to Sri HL Katval on 04.02.2010 The assessee continues to have this advance as an outstanding during the entire year and hence to that extent this fund continues to be locked with Sri Katyal which otherwise could have been used to meet the working Capital requirement. The assessee had admitted during the course of assessment proceedings for A.Y.2010-11 that this amount is in the nature of interest free loan and is not on account of any business transaction. In view of the above provisions of Sec 36(l)(iii) is attracted and interest expense attributable to this loan is disallowable U/s 36(1) (iii) of the Income tax Act.' f) Forwarding of ₹ 35.00,000/- to M/s Oriel Ventures on 06.02.2010 It was submitted by the assessee that this advance was forwarded for the purpose ofproviding consultancy for increasing the equity share capital of the assessee by arranging for private equity participation. However it was seen subsequently that the party was not performing as per their expectation and so the contract was cancelled. This amount has till date not been received back and litigation is going on for its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ransactions. The contention given by the assessee is acceptable to the extent of accepting that no direct expenses are attributable to these advances. However the concept of indirect or attributable expenses is very much valid for this transaction. i) This issue has already been discussed in detail in para 4.4 of this order and hence is not being reproduced to avoid duplication. In view of the above, the contention of the assessee that no interest expense is attributable to these advances is rejected and the following interest, computed as under, taking the average rate of borrowing @ 12% per annum, is disallowed U/s 36(1) (iii) of the Income Tax Act. Interest attributable to advance given to Sri H L Katyal ₹ 3,00,000/- Interest attributable to advance given to M/s Oriel ₹ 4,20,000/- Total interest attributable to non business advances ₹ 7,20,000/- Thus an amount of ₹ 7,20,000/- is disallowed out of the interest payment debited in the rofit loss account and added back to the total income. Penalty U/s 271(1)(C) is initiated for furnishing inaccurate particulars of income after taking into account the fact that these expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... your appeal order for asstt. year 2010-11 have deleted the said additions and upheld the submissions of the assessee. (b). H.L. Katyal ₹ 25 Lacs - Interest disallowance of ₹ 3,00,000/- The facts are that the said person is Liasoning and procuring orders for the products of the company since the very inception of the company in 1991-92 and very reliable business associate over the complete transaction of the company from 1999 to company having turnover of ₹ 324.88 crore. The said advance was therefore, was paid to a business associate for consideration of continued business relationship and therefore, the observations of the Ld. JCIT, that the same is for not business consideration is wrong. Except the fact that the said gentleman is a business associate and working with company, there is no other relationship with him nor he is a relative of any of the directors/shareholders of the company. The business link is established and continued. The company has its own large capital base and free reserves besides substantial internal accrual generations of ₹ 17.63 crore for the year in question. No loan has been raised for payment of this amount. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urposes and for the requirements to carry on the business of the assessee company and are also directly relatable to its business transactions in course of normal business operations and activities. The assessee company also held substantial own funds and Reserves besides it had current net cash accrual internal generations, profits before depreciation, to the extent of ₹ 17.73 Crores on which no interest is payable by the company and are in the nature of non interest bearing funds available with the assessee. The assessee company has also not borrowed any funds for making such advances to persons/parties. The working capital funds as per Banks limits also remained deployed in working capital fund requirements in stocks and stores, sundry debtors and other current assets as per financial figures brought on record. The arguments of the Assessing Officer that assessee has mixed kitty of funds wherein both the borrowed funds and funds out of its own internal accruals and the possibility of having advanced interest bearing funds to the said persons/parties are not ruled out appears to be more presumptions and surmises in view of apparent availability of interest free funds of own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d CIT(A). 7. We have heard the rival parties and have gone through the material placed on record. We find that in respect of disallowance u/s 14A, the assessee submitted complete details of the capital and reserves of assessee and also submitted the profits earned during the year. The learned CIT(A) has made a finding of fact that assessee had made an investment of ₹ 2.75 crores in the F.Y. 2008-09 as against free funds of ₹ 12.38 crores. The learned CIT(A) has also made a finding of fact that assessee had earned net profit of ₹ 17.33 crores during the year which is far in excess of the investment made in the capital of subsidiary company. The learned CIT(A) further held that in earlier years on similar facts and circumstances the addition u/s 14A was not made and keeping in view the rule of consistency the addition was not sustainable in the present years. While recording detailed findings the learned CIT(A) has also relied upon a number of case laws. The learned DR was not able to controvert any of the findings of learned CIT(A), and, therefore, we do not find any infirmity in the order of learned CIT(A) and therefore, ground No.1 of appeal is dismissed. 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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