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2016 (6) TMI 21 - ITAT AMRITSAR

2016 (6) TMI 21 - ITAT AMRITSAR - TMI - Addition u/s 14A - Held 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 profi .....

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ndings of learned CIT(A), and, therefore, we do not find any infirmity in the order of learned CIT(A) - Decided against revenue

Disallowance 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 .....

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ppeal 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 ₹ 30,24,084/- which was made by the AO out of interest and other expenses under section 14A of the Income Tax Act, 1961. (ii) That, on the facts and in the circumstances of the case, the Ld. CIT(A .....

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of the Assessing Officer restored." 3. The brief facts of the case as noted in the assessment order are that assessee company is engaged in the business of manufacturing of electrical stamping and allied products. The case of the assessee was selected for scrutiny. During the course of assessment proceedings, the Assessing Officer observed that assessee had made investment in share capital of sister company and had also advanced interest free loans to sister concerns. The Assessing Officer .....

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not made out of borrowed funds. It was also submitted that assessee had earned net profit of ₹ 17.73 crores during the year and, therefore, no interest expenses was attributable to the investment made by assessee. The assessee further submitted that in earlier years no disallowances u/s 14A was made. However the Assessing Officer was not convinced with the reply of the assessee and therefore, he made a disallowance of ₹ 13,24,084/- as per Rule 8D of Income Tax. The Assessing Officer .....

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fficer 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 ass .....

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60.95 crores respectively (including depreciation reserve since depreciation is not a cash out flow) in the said years, on which no interest is being paid by the company. It was also contended that the assessee company also have net profit before depreciation to the extent of ₹ 12.38 crores, ₹ 14.63 crores and ₹ 17.73 crores in the A.Ys. Year 2009-10, 2010-11 and 2011-12 which are internal accruals and therefore the company had substantial resources of its own to make the inve .....

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sessee company investment in the working capital far exceeded the working capital loans taken from the Banks and the said working capital loans were kept deployed for the purposes it was sanctioned and released which were also being regularly monitored by the bankers. It was, therefore, contended that no amount of working capital funds could be assumed or presumed or said to have been deployed/or utilized for making the investments in the sister/subsidiary concerns or utilized for contribution a .....

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t the disallowances made by the Assessing Officer under the provisions of section 14A of the Act is contrary to the principles and rules of consistency and of natural law and justice. It has again been contended that similar disallowance made by the Assessing Officer in A.Y. 2010-11 has 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 .....

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ils 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 Ld. AR of the ass .....

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ent in such shares is merely ₹ 2.75 crores in the financial year 2008-09 as against free funds of ₹ 12.38 crores and only ₹ 44.45 lacs as against profit of s. 14/63 crnres in the financial year 2009-10. Apart from this, the contribution as a partner in a sister concern during current year is only 56,81,349/- as against profits of ₹ 17.73 crores in the financial year 2010-11. More so, the working capital limit as raised from Banks and others also remained deployed in worki .....

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of the Assessing Officer that every year is an independent year and thus disallowance/additions can be made/sustained is also not well founded on the facts of the case and in view of the rules and principles of consistency as upheld by the various decisions of the Honorable Supreme Court and other Honorable Courts. The rule of consistency is a facet of rule of res judicata but broader in concept than res judicata rule. The well-settled principle of consistency has been uniformly followed by Cour .....

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aim 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 dis .....

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or the previous year, the civil appeals and special leave petitions were to be dismissed. 5.5.3 Thirdly, Even on the principle of commercial expediency, the decision in the case of SA Builders case 288 ITR 1 (SC) wherein the Honorable Supreme Court has held that the issue of lending of funds to the sister concern should have been examined from the point of view as to whether this has been done as a measure of commercial expediency is quite relevant. In the said judgment it was noted that the exp .....

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ediency and if it was, it should have been allowed. They further held that the expression "commercial expediency" was an expression of wide import and included such expenditure as a prudent businessman incurred for the purpose of business. The expenditure may not have been incurred under any legal obligation, but it was allowable if it was incurred on ground of commercial expediency. The irisdictional High Court have also, in their decision in the case of CIT vs Marudhar Chemicals & .....

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e Honorable High Court followed the decision of the Honorable Apex Court in the case of S.A. Builders (supra) while referring to the earlier decision of the Honorable jurisdictional High Court in the case of Abhishek Inds Ltd. 286 ITR 1 (P&H). In my opinion, the assessee has rightly contented that the investments in equity shares of Kapsons Insulations Pvt. Ltd., which is a subsidiary company and company holds more than 71.35% of equity in the said company, which is for purposes of expansion .....

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t 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. Th .....

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xempted income no expenditure has been incurred, disallowance under section 14A can not stand". The Hon 'able High Court have further held: We have taken this view earlier also in ITA No. 504 of2008 (Commissioner of Income Tax Chandigarh II vs .M/s Winsome Textile Industries Limited, Chandigarh) decided on 25.08.2009, wherein it was observed as under: "6. Contention raised on behalf of the revenue is that even if the assessee had made investment in shares out of its own funds, the .....

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t was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. Observations made therein have to be read in that context. In the present case, admittedly, the assessee did not make any claim for exemption. In such a situation, section I4A could have no application." 5.7 Similarly, the other Honorable High Courts have while deciding about the applicability of section 14A of the Act and disallowance of intere .....

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olders funds, presumption stands established that the investments in sister concerns were made by the assessee 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. 1 .....

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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 - interest free advances to another company - finding of the Tribunal that the assessee made interest free advances to another company out of its own funds and thus the disallowance on account of no .....

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xpenses incurred can not be allowed. The moot question here is as to whether the CIT(A) and the Tribunal were right in setting aside the order of AO, whereby it disallowed the sum of ₹ 91.80 lakhs, applying the provisions of s. 14A on the ground that the assessee had used interest bearing borrowed funds for earning dividend during the assessment year under question. The dividend income earned was of ₹ 9.80 crore and the estimate of expenditure was assessed @10 percent of the total in .....

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of is allowance under s. 14A in respect of interest expenditure. When the very basis for employing s. 14A on factual metric is lacking, the disallowance to the extent of 10 percent of dividend income was not permissible. When it transpires from record that the assessee's own funds were higher than the investment made by it and with nothing to indicate that the borrowed funds were utilized for the purpose of investment in shares and for earning dividends, the Tribunal committed no error in d .....

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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 .....

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the amounts so invested should be "wholly and exclusively for making or earning such income " Furthermore, the section also does not place any embargo for investments to be made in group concerns and subsidiary concerns. The appellate authority and the Tribunal found that the investment made in shares by the assessee by utilizing borrowed capital was for strategic business purposes because the companies were promoted as special purpose companies to strengthen and promote its existing .....

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ircumstances of the case and after due examination of the facts as brought out above, the contentions and arguments of the Ld. AR of the assessee company, the law laid down on the issue of disallowance of interest and expenditure by the Honorable Courts and more particularly my own decision in the case of the assessee company itself for the A.Y. 2010-11 on the identical issue, the additions/disallowance of ₹ 30,24,084/- made by the Assessing Officer by invoking the provisions of section 14 .....

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g the impugned addition, the Assessing Officer has observed in the relevant paras of the assessment order as under:- 5) Forwarding of advances for non business purposes A) Upon perusal of the details filed by the assessee with respect to advance forwarded, the following entries requires 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 .....

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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 recovery. -. B) Upon .....

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ount of the above mentioned advances are not allowable as a deduction. In view of the fact that the assessee has a mixed kitty offund, wherein both the borrowed funds and the funds out of its internal are deposited and have the same character, the possibility of having advanced bearing funds to the above mentioned person is not ruled out. In view of the above, P ide note sheet noting dated19/12/2013, the assessee was asked to explain as to why proportionate interest, out of the total interest pa .....

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to this advance. D) No specific loan has been taken to forward these advances and hence no interest paid is attributable to these advances. E) The advances made are from own reserves and surplus and not borrowed funds. 5.3) The contention of the assessee has been duly considered but the same is not acceptable and is disposed off as under: g) The interest payment on working capital loan is directly proportional to the amount of debit balance outstanding. This issue has already been discussed in d .....

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r 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 Ac .....

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that these expenses were never allowable as a revenue expenditure. 6.1 In support of grounds No. 4(i) and 4(ii) of appeal, the assessee company has filed written submissions vide letter dated 26.09.2014, the relevant paras of which read as under:- 5. That the proportionate disallowance of interest of ₹ 72,000/- on the grounds of payment of interest advances to the following persons/parties for purportedly alleged non business purposes, is absolutely wrong, unjustified unfounded and contra .....

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0 crore. A copy of the Agreement was also placed on record with our explanations vide submissions of 21s' Feb., 2013, the nature of the said transaction is very much of Revenue Nature and not for capital nature purposes. The said advance was called back and received on finding their adequacy to render adequate purposes, but as the said cheque, as received was dishonored, the amount was thus pending due recoverable. Whereas contrary to the said facts, the Learned DCIT has observed and misdire .....

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f redeemable debentures which are nothing but loan documents and not shares capital therefore, the contention that the said advance to a non related party or to a non associate concern is not for the purpose of business is factually wrong and misperceived contention by the worthy JCIT. Copies of the said agreement with and copies of the settlement of accounts are annexed. our Honour, your appeal order for asstt. year 2010-11 have deleted the said additions and upheld the submissions of the asses .....

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d 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 ye .....

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esaid disallowance/additions in respect of the said person was deleted and due relief was allowed in appeal order for the asstt. Year 2010-11 also. Therefore, in view of the decision of Hon 'able Courts as relied on para 11 (c) supra the said additions/disallowance was absolutely wrong and unjustified and it is prayed that sought for relief be granted by deleting the said additions/disallowances. That the Hon 'able Courts have held that in view of apparent own funds and substantial nal a .....

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d 288ITR 1 (Supeme Court) iv) CIT vs Murudhar chemicals and Pharmaceuticals(P) Ltd 319 ITR 75 (Punjab & Haryana High Court) From the foregoing, Your Honour, would kindly consider that the said disallowance/additions are contrary to facts and misapplication of the provisions of Law. 6.2 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 und .....

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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 .....

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ed out appears to be more presumptions and surmises in view of apparent availability of interest free funds of own capital, free reserve and current year internal accruals generations. 6.3 The advance to M/s Oriel Ventures amounting to ₹ 35 lacs, pursuing to the copy of the Agreement with the said party of the assessee company which was also filed at the assessment stage also reflects that the arrangement was for arranging working capital requirements by issuing of convertible debentures o .....

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oses and therefore, on this ground also and in view of substantial internal accrual generation of the company on the relevant year, the basis of disallowance is not tenable. 6.4 In respect of the advance paid to Shri H.L, Katyal of ₹ 25 lacs and disallowance of interest on the said advance, in view of the facts brought on record and arguments of the assessee, the said advance is clearly related to a business associate. The Assessing Officer also has not brought on record that he is either .....

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2010-11, the addition of ₹ 7,20,000/- made by the Assessing Officer on account of disallowance of interest is, therefore, not justified and is directed to be deleted. In the result, grounds No. 4(i) and 4(ii) of appeal taken by the assessee company are also allowed." 5. Aggrieved the Revenue is in appeal before us. 6. The learned DR, at the outset, heavily placed his reliance on the order of Assessing Officer whereas the learned AR heavily placed his reliance on the order of learned C .....

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