TMI Blog2016 (6) TMI 202X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of interest free advances given to related parties - Held that:- The assessee was having its own fund which was sufficient for this additional investment in the sister concern. Therefore, we do not find any error or illegality in the order of CIT (Appeals) in deleting the disallowance made by the Assessing Officer on account of interest expenditure under Section 14A. Disallowance of interest in respect of capitalization of work-in-progress - Held that:- It clear from the finding of the CIT (Appeals) that the interest rate of 11% as calculated by considering all the relevant amounts of loan and interest. Therefore, in the absence of any contrary fact brought before us, we do not find any reason to interfere with the finding of the CIT (Appeals) on this issue. - I.T. A. No.1062/Bang/2014, I.T. A. No.1073/Bang/2014 - - - Dated:- 29-4-2016 - SHRI VIJAY PAL RAO, JUDICIAL MEMBER AND SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER For The Assessee : Shri V. Chandrashekar, Advocate. For The Respondent : Shri Sanjay Kumar,CIT-III (D.R) ORDER Per Shri Vijay Pal Rao, J.M. : These cross appeals are directed against the orders of Commissioner of Income Tax (Appeals)-I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the appeal the appellant prays that the appeal be allowed in the interest of equity and justice. 3. Gr.No.1 is general in nature and does not require any adjudication. 4. Ground No.3 is regarding disallowance made under Section 14A of the Income Tax Act, 1961 (in short 'the Act'). 5. We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. At the outset, we note that an identical issue has been considered and decided by the co-ordinate bench of this Tribunal in assessee's own case for the Assessment Years 2008-09 2009-10 vide order dt.5.2.2016 in ITA Nos.933 934/Bang/2013 in para 8 to 11 as under :- 8. We have considered the rival submissions as well as the relevant material on record. We find that the Assessing Officer has made a disallowance by noting the fact that the assessee has made investment of ₹ 7.1 Crore on tax free securities and dividend income is exempt from tax. Thus the Assessing Officer applied Rule 8D(2)(iii) for the purpose of disallowance under Section 14A. The Assessing Officer has not discussed anything about the indirect expendit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le and non-taxable income. As it is manifest from the assessment order that there is no such ascertainment of expenditure which can be apportioned and attributable to the tax exempt income. The co-ordinate bench of this Tribunal in the case of Subramanya Constructions Development Co. Ltd. (supra) while dealing with an identical issue has held in para 9 as under :- 9. Vis- -vis the disallowance made under Rule 8D(2)(iii), a look at the assessment order clearly show that assessee, though it did not take specific plea it had stated that there was nothing which called for a disallowance under section 14A investment portfolio. Reply of the assessee on the proposed disallowance under section 14A of the Act given before the AO read as under : The question of disallowance u/s 14A r.w. Rules 8D will not arise since the company has not made investments out of the loans taken from various banks. All these investments have been made out of its internal generation and the rent deposits from various tenants on which no interest is payable. Major portion of investments were made during the financial year 2005-06 in which year the general reserve was ₹ 5.15 Crores and the deposit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenditure by applying Rule 8D(2)(iii). Further we note that there is no change in the investment portfolio of the assessee as it is evident from the record that except an investment of ₹ 20,000 in NSC, there is no other change in the existing investment of the prior years. Therefore, there is no movement in the investment portfolio except ₹ 20,000 which too in NSC. Accordingly when there is no movement in the investment portfolio, then, we are in agreement with the claim of the assessee that there is no expenditure incurred by the assessee on account of indirect expenditure for earning the dividend income. Even otherwise while applying the provisions of section 14A and computing the quantum of disallowance under Rule 8D(2)(iii), it cannot exceed the amount which is attributable for the earning the exempt income. Since the formula given in the Rule 8D does not recognize the actual expenditure incurred by the assessee but it calculates the disallowance being 0.5% of the average investment therefore, this computation of disallowance cannot disregard and over ride the actual expenditure attributable for earning the exempt income. Accordingly, we set aside the orders of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submissions and relevant material on record. As regards the non-expression or recording of satisfaction by the Assessing Officer, we find that the Assessing Officer has made no efforts to ascertain and identify the expenditure which is attributable to the activity which has resulted taxable and nontaxable income and therefore can be apportioned under Section 14A r.w. Rule 8D. Therefore, so far as the requirement of recording the satisfaction the assessment order is lacking this requirement and consequently for want of the pre-requisite condition for making the disallowance under section 14A on account of indirect expenditure the action of the Assessing Officer is not sustainable. In view of our findings for the Assessment Year 2008-09 which are applicable for the Assessment Year 2009-10. As regards the new investment in the sister concern, as it is clear from the business of the sister concern being Green Food Park Ltd. the assessee is also in the business of beverages and distilleries and therefore the investment in the sister concern cannot be ruled out being a strategic and holding a controlling stake in the said company. Even otherwise this investment in the sister concern has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee is dismissed. 8. As it is clear from the finding of Tribunal that the assessee failed to furnish the details of disallowance under section 14A and, therefore, the disallowance made by the AO was found by the Tribunal without any infirmity. For the year under consideration the assessee has specifically raised a point before the AO that 97.82% of the investment is in the subsidiary companies and joint venture companies and, therefore, no expenditure was incurred for maintaining the portfolio on these investments or for holding the same. The assessee has also pointed out that these investments are long term investment and no decision is required in making the investment or disinvestment on regular basis because these investments are strategic in nature in the subsidiary companies on long term basis and, therefore, no direct or indirect expenditure is incurred. We find that the department has not disputed this fact that out of the total investment about 98% of the investment are in subsidiary companies of the assessee and, therefore, the purpose of investment is not for earning the dividend income but having control and business purpose and consideration. Therefore, pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act : Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154 for any assessment year beginning on or before the 1st day of April, 2001. (The proviso was inserted earlier by the Finance Act of 2002 with retrospective effect from May 11, 2001) 33. Under sub-section (2), the Assessing Officer is required to determine the amount of expenditure incurred by an assessee in relation to such income which does not form part of the total income under the Act in accordance with such method as may be prescribed. The method, ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... either to reassess under section 147 or pass an order enhancing the assessment or reducing the refund already made or otherwise increasing the liability of the assessee under section 154. 10. It has been made clear by the Hon ble High Court that sub-section (2) does not if so facto empower the AO to apply the method prescribed by Rules straightaway without considering whether the claim made by the assessee is correct. 11. The assessee has relied upon various decisions of this Tribunal wherein an identical issue has been considered. In the case of Garware Wall Ropes Limited Vs. Addl. CIT (supra), the Tribunal while deciding an identical issue has held in para 2.4 as under:- We have considered the rival submission and carefully perused the relevant records. So far as the issue regarding disallowance u/s 14A in the case where no dividend has been received, the same is covered against the assessee by the order of Tribunal in assessee s own case for the assessment year 2008-09, wherein the Tribunal has followed the decision of special bench of Tribunal while deciding the issue. Therefore, we do agree with the finding of the Tribunal on this point. Further since the assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ether the assessee has incurred any expenditure in relation to income which does not form part of the total income and if so to quantify the expenditure of disallowance. The AO has not brought on record any fact or material to show that any expenditure has been incurred on the activity which has resulted into both taxable and non taxable income. Therefore, in our view when the assessee has prima facie brought out a case that no expenditure has been incurred for earning the income which does not form part of the total income then in the absence of any finding that expenditure has been incurred for earning the exempt income the provisions of section 14A cannot be applied. Accordingly we delete the addition/disallowance made by AO u/s 14A r.w. Rule 8D. 12. A similar view was taken by the Delhi Bench of this Tribunal in the case of M/s Oriental Structural Engineers (P) Ltd (supra) which has been confirmed by the Hon ble Delhi High Court vide decision dated 15.01.2013 in para 6.3 as under:- '6.3 We have carefully considered the submissions and perused the records. We find that Ld. Commissioner of Income Tax (Appeals) has given a finding that only interest of ₹ 2,96,731/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of interest in respect of work-inprogress. 6.1 We have heard the rival submissions as well as considered the relevant material on record. An identical issue has been considered by this Tribunal in assessee's own case for the Assessment Year 2010-11 in ITA Nos.933 934/Bang/2013 in para 14 as under : 14. We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. There is no dispute that the assessee has borrowed the term loan for the purpose of expanding its business and therefore the interest expenditure incurred on the borrowed fund used for expansion of the business has to be capitalized and the same cannot be allowed as revenue expenditure in view of the proviso to section 36(1)(iii) which reads as under : Section 36(1)(iii) : The amount of the interest paid in respect of capital borrowed for the purposes of the business or profession : Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset 58[for extension of existing business or profession] (whether capitalised in the books of account or not); for any period beginning fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Assessing Officer has to adjudicate the issue in accordance with the above observations. 7. The revenue has raised the following grounds in its appeal : 1. The order of the learned CIT (Appeals) in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case. 2. The CIT (Appeals) erred in deleting the disallowance of ₹ 33,95,068 by holding that none of the interest payments can be taken for the purposes of rule 8D(2)(ii) without appreciating the provisions of Section 14A read with Rule 8D in its true sense and right spirit and the fact that when the interest expense incurred cannot be directly attributed to any particular income or receipt, provisions of Rule 8D(2)(ii) are automatically applicable. 3. The CIT (Appeals) erred in holding that the payments cannot be attributable to borrowings specifically used for tax exempt income and holding that there is no material evidence on record to show the nexus between the borrowers and tax free investments by relying on the decision of Hon'ble Tribunal of Kolkata Bench in the case of Champion Commercial Ltd. [139 ITD 108 (Kol)] without appreciating t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material on record. We note that an identical issue has been considered by the co-ordinate bench of this Tribunal in assessee's own case for the Assessment Years 2008-09 to 2010-11 in ITA Nos.933 934/Bang/2013 408/Bang/2014 in para 20 as under : 20. We have heard the rival submissions as well as considered the relevant material on record. There is no dispute that there is no fresh investment during the Assessment Year 2008-09 except a sum of ₹ 20,000 in the NSCs. Therefore there is no use of any fund whatsoever for the purpose of making the investment during the year under consideration. The entire investments were made in the earlier yeas and it is not the case of Assessing Officer that there was a disallowance on account of interest expenditure under Section 14A in the earlier assessment year. Further, the Tribunal for the Assessment Years 2006-07 07-08, while deciding the issue of interest free loans advanced to the related parties have given the finding that the assessee was having sufficient interest free funds. We further find that during the year under consideration the assessee has incurred the interest expenditure of ₹ 17.84 Crores, the details o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee's own case for the Assessment Year 2008-09 and 2009-10 vide order (supra) in paras 25 to 28 are as under : 25. We have considered the rival submissions as well as the relevant material on record. The Assessing Officer noted that the assessee has given the interest free advances to its sister concerns amounting to ₹ 179 Crores, correct amount is ₹ 155.51 Crores. The Assessing Officer thus invoked the provisions of section 40A(2) and made a proportionate disallowance of interest expenditure. The CIT (Appeals) has deleted the disallowance made by the Assessing Officer. In para 4.4 to 4.7 of the impugned order as under : 4.4 I have carefully considered the appellant s submissions and the reasons given by the AO in the assessment order. The AO noted that the appellant had advanced interest-free loans to various sister concerns amounting to ₹ 179 crores. The AO also found that the appellant was paying ₹ 17.84 crores as interest towards borrowals. In view of this, the AO presumed that interest- bearing funds were diverted to the sister concerns free of interest and accordingly made a disallowance of Rs .16,45,27,168/ -. The appellant seriously obj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew has been expressed interest-free funds generated or available with the company if the interestfree funds were sufficient to meet their investments. In the present case, the interst-free funds available with the appellant are ₹ 158.47 crores and whereas the interest-free advances were only ₹ 155.51Crores. Thus there cannot be any disallowance of interest on account of account of interest-free advances made to the sister concerns in the instant case. It is also not the argument of the appellant that the interest-free advances were for any commercial expediency. Therefore, the decision of the Hon'ble Supreme Court in the case of SA Builders [288 ITR 1] is not applicable to the instant case. The AO relied on the following decisions i) Abhishek Industries [20S CTR 304 (P H)] ii) Varinder Agro Chemicals Ltd. [20S CTR 304] iii) Doctor Co. [180-ITR-627] 4.7 The Hon' ble Punjab Haryana High' Court followed the decision in the case of Abhishek Industries Ltd. while giving decision in the Varinder Agro Chemicals Ltd. case cited above. It should be mentioned that the decision in the case of Abhishek Industries rendered by the Punjab Haryana High Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction of interest on borrowed capital. The AO recorded a finding that the sum of ₹ 213 crores was invested out of its own funds and ₹ 147 crores was invested out of borrowed funds. Accordingly, he disallowed interest of ₹ 4.4 crores calculated at 12% per annum. The CIT (A) found that the assessee had enough interest free funds at its disposal for investment and, accordingly, deleted the addition which was subsequently upheld by the Tribunal. On appeal, the Hon ble Court had held that if there were funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free funds generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case, this presumption was established considering the finding the fact both by the Commissioner (Appeals) and the Tribunal. The interest was deductible. (b) We have, with due regards, perused the judgment of the Hon ble Court (supra) and of the view that the ratio laid down by the Court is directly applicable to the present assessee as the issue under consideration is identical to that of the ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Tribunal that the assessee was having sufficient funds. The CIT (Appeals) has recorded that the assessee's own fund during the year is more than the advance given to the sister concern, therefore, we do not find any reason to interfere with the finding of the CIT (Appeals) that the assessee is having its own interest free funds which is sufficient to advance interest free loan to the sister concern. Accordingly, this issue is decided against the revenue and in favour of the assessee. 26. For the Assessment Year 2009-10, the grounds are identical. As regards the disallowance under Section 14A on account of interest expenditure which has been deleted by the CIT (Appeals), the facts are almost identical except the fact that for the said assessment year the assessee has made an investment of ₹ 2 Crores in the sister concern namely Green Food Park Ltd. 27. We have heard the learned Departmental Representative and learned Authorised Representative as well as considered the relevant material on record. The learned Authorised Representative of the assessee has pointed out that the investment is a strategic investment in the sister concern therefore provisions of sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the CIT (Appeals) has applied the interest rate of 11% by considering the balance of work-in-progress appearing in the books of account from 1.4.2009/31.3.2009 to 31.3.2011. The relevant finding of the CIT (Appeals) in para 5.4 as under : 5.4 Similar issue was discussed in appeal for A.Y. 2010-11 and considered that certain percentage of interest attributable to work-in-progress. In the books of account capital work-in-progress appears as under :- As on 31.03.2009 Rs.7,11,61,668 As on 31.03.2010 Rs.9,21,96,773 As on 31.03.2011 Rs.20,25,16,145 Further it is also observed that no addition towards fixed asset during the previous year out of work-in-progress of ₹ 14,51,61,100 carried forwarded balance ₹ 6,23,55,045 and since units yet to be completed and put to use for business purpose, hence interest attributable to be considered as capital nature, required to be clubbed into with work-in-progress. Thus it is clear from the finding of the CIT (Appeals) that the interest rate of 11% as calculated by considering all the relevant am ..... X X X X Extracts X X X X X X X X Extracts X X X X
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