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2016 (6) TMI 202 - ITAT BANGALORE

2016 (6) TMI 202 - ITAT BANGALORE - TMI - Disallowance made under Section 14A - Held that:- When the Assessing Officer has not expressed or recorded any satisfaction by identifying the expenditure which has been incurred by the assessee for earning the dividend income the disallowance under Section 14A on account of indirect expenditure is not sustainable and the same is disallowed.

Disallowance of interest in respect of work-in-progress - Held that:- In view of the contention of the .....

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djudicate the issue in accordance with the above observations.

Disallowance of interest on account 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.

Disallowa .....

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ER 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, Bangalore Dt.30.05.2014 for the Assessment Years 2011-12. 2. First we take up the assessee's appeal wherein the following grounds are raised :- 1. The order of the CIT (Appeals) - I, Bangalore to the extent which .....

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25 instead of deleting the entire disallowance made by the ld. Assessing Officer under the provisions of section 14A read with rule 8D of the Income Tax Rules, 1962 under the facts and circumstances of the case. 3.1. The learned CIT (Appeals) failed to appreciate the fact that the ld. Assessing Officer did not arrive at a proper satisfaction for invoking the provisions of section 14A read with Rule 8D of the Income Tax Rules under the facts and circumstances of the case. 3.2. The learned CIT (Ap .....

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ontends that the disallowance made by the ld. Authorities below is highly excessive and the same requires to be reduced substantially under the facts and circumstances of the case. 4. The learned CIT (Appeals) is not justified in law in not deleting the entire additions made by the ld. A.O. under capitalization of interest in respect of work-in-progress to the extent of ₹ 68,59,054, under the facts and circumstances of the case. 5. The appellant craves leave to add, alter, substitute and d .....

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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 notin .....

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on on the loans taken for various purposes. Thus it is clear from the assessment order that the Assessing Officer has not expressed any satisfaction that the assessee has incurred certain expenditure for earning the dividend income in question. There is no quarrel that section 14A postulates the disallowance of expenditure incurred for earning the exempt income which is not forming part of the total income of the assessee. Thus there may be two type of expenditure attributable for earning the ex .....

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ome is required to be apportioned among the taxable and non-taxable income. Thus, the primary requirement for invoking the provisions of section 14A in respect of indirect expenditure which can be apportioned for earning the tax free income is that the said expenditure has been incurred for indivisible activity resulting taxable as well as well as tax free income. The Assessing Officer has to examine and ascertain that certain expenditure has been incurred by the assessee on account of a composi .....

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lying the formula under Rule 8D. Thus the Rule 8D cannot be applied automatically but it is only a method of apportionment of an expenditure which has been incurred for an indivisible activity resulting in taxable 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 .....

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/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 deposits received from the tenants was ₹ 49.13 Crores. Hence no portion of the loans from .....

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from shares worth ₹ 2,30,400/- held in M/s Indian Overseas Bank, which holding was the same all though, brought forward from earlier year. Under section 14A of the Act, once assessee has taken a stand that it had not incurred any expenditure under section 14A, then in our opinion, the AO is not justified in invoking Rule 8D(2)(iii) for a disallowance of indirect expenditure unless he recorded his dis-satisfaction of claim. It is essential such non-satisfaction has to be given with cogent .....

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ing the disallowances made under Rule 8D(2)(ii) and ought not have sustained the disallowance made under Rule 8D(2)(iii). Order of the learned CIT(A) is set aside to the extent. Disallowance under rule 8D(iii) is also deleted. Therefore, in view of the facts and circumstances of the case where the Assessing Officer has not expressed any satisfaction in the assessment order or even has not ascertained and identified the expenditure which is attributable to the tax free income the disallowance mad .....

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377; 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 an .....

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ders of the authorities below on this issue and delete the disallowance made by the Assessing Officer on account of indirect expenditure under section 14A by applying Rule 8D(2)(iii). 9. For the Assessment Year 2009-10, the facts are identical except that there is a fresh investment of ₹ 2 Crores in the shares of Green Food Park Ltd. The learned Authorised Representative has submitted that this investment is made by the assessee in the sister concern of the assessee and it is a strategic i .....

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rolling state in the group concern and not for earning the income out of investment. Therefore the learned Authorised Representative has submitted that this investment in the subsidiary does not attract the provisions of section 14A when the purpose and motive of the investment is not to earn the dividend income and it has also not yielded any dividend income during the year under consideration. 10. On the other hand, the learned Departmental Representative has submitted that the decisions relie .....

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l the learned A. R. has submitted that even otherwise when there is no dividend income from the said investment no disallowance can be made without identifying the expenditure attributable for earning the dividend income and further the Assessing Officer has not recorded any satisfaction for rejecting the claim of the assessee that no expenditure has been incurred. 11. We have considered the rival submissions and relevant material on record. As regards the non-expression or recording of satisfac .....

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n 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 holdi .....

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A cannot be applied. The co-ordinate bench of this Tribunal in the case of JM Financial Ltd. (supra) has held in paras 7 to 13 as under : 7. Having considered the rival submissions as well as relevant material on record, we note that so far as applicability of Rule 8D is concerned, there is no quarrel on this point that for the A.Y. under consideration Rule 8D is applicable. Further for the A.Y. 2008-09, the Tribunal held in para 15 as under:- We have considered the rival arguments made by both .....

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ls. The provisions of rule 8D inserted by the IT (Fifth Amendment) Rules 2008 with effect from 24.3.2008 are applicable for A.Y. 2008-09 and onwards. Therefore, the revenue authorities are bound to follow the mandatory provisions for calculation of disallowance u/s 14A. Therefore, we do not find any infirmity in the order of the CIT(A) upholding the action of the AO for disallowing the deduction u/s 14A read with rule 8D. The contention of the assessee that the AO without satisfaction being reac .....

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ee 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 .....

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idiary 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, prima facie the assessee has made out a case to show that no expenditure has been incurred for maintaining these long term investment in subsidiary companies. The AO has not brought out any contrary fact or material to show that the assessee has incurred any expenditure for maintaining these investments or portfoli .....

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l income. (b) Section 14A(1) is enacted to ensure that only expenses incurred in respect of earning taxable income are allowed; (c) The principle of apportionment of expenses is widened by section 14A to include even the apportionment of expenditure between taxable and nontaxable income of an indivisible business; (d) The basic principle of taxation is to tax net income. This principle applies even for the purpose of section 14A and expenses towards non-taxable income must be excluded; (e) Once .....

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case of Walfort Share and Stock Brokers P. Ltd. (supra), Hon ble Jurisdictional High Court has held in para 32 and 33 as under:- 32. Sub-section (2) and (3) to section 14A were inserted by an amendment brought about by the Finance Act of 2006 with effect from April 1, 2007. Sub Sections (2) and (3) Provide as follows. "14A.(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in acc .....

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e 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 su .....

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ncurred in relation to such income which does not form part of the total income, in accordance with the prescribed method, arises if the Assessing Officer is not satisfied with the correctness of the claim of the assessee in respect of the expenditure which the assessee claims to have incurred in relation to income which does not part of the total income. Moreover, the satisfaction of the Assessing Officer has to be arrived at, having regard to the accounts of the assessee. Hence, sub-section (2 .....

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tion of the Assessing Officer must-be arrived at on an objective basis. It is only when the Assessing Officer is not satisfied with the claim of the assessee, that the Legislature directs him to follow the method that may be prescribed. In a situation where the accounts of the assessee furnish an objective basis for the Assessing Officer to arrive at a satisfaction in regard to the correctness of the claim of the assessee of the expenditure which has been incurred in relation to income which doe .....

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the Act. Under the proviso, it has been stipulated that nothing in the section will empower the Assessing Officer, for an assessment year beginning on or before April 1,2001, 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 prescri .....

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ase 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 has raised the new plea in the year under consideration that no expenditure had been incurred by the assessee for earning the exempt inco .....

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nvestment are in the group concern we do not find any reason to believe that the assessee would have incurred any administrative expenses in holding these investments. The AO has not brought on record any material to show that the assessee has incurred any expenditure in relation to the income which does not form part of the total income. Section 14A has within it implicit the notion of apportionment in the cases where the expenditure is incurred for composite/indivisible activities in which tax .....

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mpt income or keeping the investment in question. If there is expenditure directly or indirectly incurred in relation to exempt income the same cannot be claimed against the income which is taxable. For attracting the provisions of section 14A- there should be proximate cause for disallowance which has relationship with the tax exempt income as held by the Hon ble Supreme Court in case of CIT Vs. Walfort Share and Stock Brokers P. Ltd. ( 326 ITR 1). Therefore, there should be a proximate relatio .....

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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 .....

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stments on which exempted income was receivable. Further, Ld. Commissioner of Income Tax (Appeals) has observed that in respect of investment of ₹ 6,07,775,000/- made in subsidiary companies as per documents produced before him, they are attributable to commercial expediency, because as per submission made by the assessee, it had to form Special Purpose Vehicles (SPY) in order to obtain contracts from the NHAI and the SPVs so formed engaged the assessee company as contract to execute the w .....

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further sum ₹ 40,556/- calculated@2%ofthedividend earned is sufficient. Under the circumstances, we do not find any infirmity in the order of the Ld. Commissioner of Income Tax (Appeals), hence we uphold the same. 13. In view of the above discussion and facts and circumstances of the case we agree with the view taken by this Tribunal in the above stated cases and accordingly hold that the assessee has brought out a case to show that no expenditure has been incurred for maintaining the 98% .....

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the Assessment Year 2009-10 under Section 14A on account of indirect expenditure is not sustainable and the same is disallowed. By following the earlier order of this Tribunal, we decide this issue in favour of the assessee and consequently the disallowance made by the Assessing Officer is deleted. 6. Ground No.4 is regarding disallowance 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 ha .....

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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 .....

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incurred by the assessee on the term loan used for expansion of its business, then the same cannot be allowed as revenue expenditure but has to be capitalized as cost of the expansion being part of the work in progress. Accordingly, we do not find any error or illegality in the orders of authorities below on this issue. This ground of the assessee s appeal is dismissed. In principle, we concur with the view of the co-ordinate bench of this Tribunal in assessee's own case and therefore if the .....

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fund, the disallowance of interest is not justified. Thus the learned Authorised Representative has pleaded that the disallowance may be deleted. 6.2 On the other hand, the learned Departmental Representative has submitted that since the availability of the fund has not been verified by the authorities below and therefore this issue requires proper verification at the level of the Assessing Officer. 6.3 In view of the contention of the learned Authorised Representative that the assessee is havi .....

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ns. 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 .....

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ta Bench in the case of Champion Commercial Ltd. [139 ITD 108 (Kol)] without appreciating the fact that investments are made form a common pool of funds i.e. working capital and / or cash credit or overdraft accounts and the provisions of Rule 8D(2)(ii) will be only such interest expenses as are neither directly attributable to borrowings specifically used for tax exempt incomes or receipts nor are directly attributable to borrowing specifically used for taxable incomes or receipts. 4. The CIT ( .....

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5. The CIT (Appeals) erred in restricting the disallowance of interest of ₹ 2,24,76,468 to ₹ 68,59,054 at 11% on account of capitalization of work-inprogress without appre4ciating that the assessee neither before the Assessing Officer nor before the CIT (Appeals) was able to furnish any evidence with regard to the utilization of loans other than work-in-progress and the disallowance of 15% was reasonable. 6. The CIT (Appeals) erred in computing the disallowance at ₹ 68,59,054 .....

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ng Officer be restored. 8. The appellant craves leave to add, to alter, amend or delete any of the grounds that may be urged at the time of hearing of the appeal. 8. Ground No.1 is general in nature and requires no adjudication. 9. Ground Nos.2 & 3 are regarding deletion of disallowance by the CIT (Appeals) on account of interest expenditure under Section 14A of the Act. 9.1 We have heard the rival submissions as well as considered the relevant material on record. We note that an identical i .....

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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 interes .....

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trucks) 11,33,490 Total : 17,84,58,674 It is clear from the details as recorded by the CIT (Appeals) and has not been disputed by the revenue that the entire expenditure during the year has been incurred in respect of the interest on term loans, interest on working capital, interest on specific other advances and vehicle loans including the bank charges and commission on said transactions. Therefore, the term loan, working capital loan, vehicle loan and specific advances cannot be used for the .....

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s on account of specific loans for specific purposes, we do not find any error or illegality in the order of the CIT (Appeals) in deleting the said disallowance made by the Assessing Officer under Section 14A on account of indirect interest expenditure. Following the earlier order of this Tribunal, we do not find any reason to interfere with the impugned order of the CIT (Appeals). 10. Ground No.4 is regarding disallowance of interest on account of interest free advances given to related parties .....

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nterest 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 .....

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e. The appellant also clarified that the total amount of interest-free advances to the sister concerns is only ₹ 155.51 crores and not ₹ 179 crores as worked out by the AO. There is a totalling mistake in this regard. It is also pointed out by the appellant that the AO considered the advance of ₹ 2,05,08,600/- given to Sapthagiri Enterprises, Bangalore was an interest-bearing loan and the appellant received interest at the rate of 10% and the same was offered for taxation. 4.5 .....

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iii) Total ₹ 158J47J14J556 4.6 Thus the total interest-free funds available with the appellant were ₹ 158.47 croresJ whereas the appellant advanced interest-free loans to sister concerns amounting to ₹ 155.51 crores. Thus it can be concluded that the interest-free advances were out of the interest-free funds available with the appellant. The details of interest payment have already been extracted at para 3.6 above. A perusal of the said interest payment indicates that they were .....

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disallowance. This is the ratio laid down by the Hon 'ble High Court of Allahabad in the case of Prem Engineering Pvt. Ltd. [285 ITR 554]. A similar view 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 .....

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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 Court was overruled by the Hon'ble Supreme Court in the case of Manjula sales Corpn. [298-ITR-298(SC)]. The decision in the case of Doctor & .....

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to the interest free advance given to sister concern at ₹ 155.51 Crores. An identical issue came up before this Tribunal for the Assessment Year 2007-08 in assessee's own case and the Tribunal has given a finding in paras 9.5.1 & 9.5.2 are as under :- 9.5.1. As could be seen from the details furnished by the assessee during the course of hearing that the chunk of interest free loans to the tune of ₹ 117.39 crores were out of noninterest bearing funds, comprised of capital, re .....

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urther, it is very evident from the details furnished by the learned AR and also perusal of the Schedules to Profit & Loss account as at March, 31, 2007, it is obvious that the interest bearing loans obtained from the banks were availed for specific purposes, namely, working capital, KSBCL Advance, vehicle loans [motor cars, trucks] etc., [Copies of Balance Sheet/Schedules to P & L a/c as at March 31, 2007 are placed on record]. ITA Nos.1362 & 1363 if 2011 JBD Sugars & Distilleri .....

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t 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 i .....

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(ii) The Hon ble High Court of Gujarat had an occasion to deal with a similar issue in the case of CIT V. Raghuvir Synthetics Ltd reported in (2013) 354 ITR 222 (Guj). The issue before the Hon ble Court, in brief, was that the AO noticed that the assessee had incurred heavy interest expenses of ₹ 59.83 lakhs and, on the other hand, it had given interest free loans to the parties to the extent of ₹ 19.45 crores. On examining the details furnished, the AO disallowed the interest to the .....

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ce was unjustifiable. The Tribunal upheld the stand of the CIT (A), holding that the interest-free funds available with the assessee were far greater than the loan advanced to sister concerns and the borrowed money was not utilized for the purpose of advance to its sister concerns and the interest was not disallowable merely on account of the utilization of the funds for nonbusiness purposes. On appeal, the Hon ble Court held that when there was no evidence brought on record by the Department fo .....

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hat the assessee was having sufficient funds for advancing interest free loan to the sister concern to the tune of ₹ 117.39 Crores. For the year under consideration, there is an increase in the interest free advances of about ₹ 37 Crores. Therefore to the extent of ₹ 117.39 Crores advanced in the earlier year the issue has been settled by the Tribunal that the assessee was having sufficient funds. The CIT (Appeals) has recorded that the assessee's own fund during the year i .....

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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 .....

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n, the assessee's own funds are more than sufficient for making the investment as well as advance given to the sister concerns. The learned Departmental Representative has relied upon the order of the Assessing Officer and submitted that when the assessee has made a fresh investment during the year, therefore, to the extent of said investment, the facts are distinguishable from the earlier years. 28. Having considered the rival submissions and careful consideration of the facts, we note that .....

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n the sister concern namely Green Food Park Ltd. 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. Following the earlier order of this Tribunal, we do not find any reason to interfere with the impugned order of the CIT (Appeals). 11. Ground Nos.5 & 6 are regarding the disallowance of interest in respect of capitalization of work-in-progress. 11.1 We h .....

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