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M/s Highway Industries Ltd. Versus The A.C.I.T., Ludhiana

2016 (6) TMI 737 - ITAT CHANDIGARH

Disallowance u/s 14A - Held that:- If there are interest free funds available a presumption would arise that investment would be out of interest free funds available. This view has also been endorsed by the Bombay High Court in a latest judgment in the case of HDFC Bank Ltd. Vs. DCIT (2016 (3) TMI 755 - BOMBAY HIGH COURT ), which was rendered in the context of disallowance under section 14A of the Act. Interestingly, in this case the High Court has reprimanded the Tribunal in not following an ea .....

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ted to delete the addition made under section 14A of the Act. - Decided in favour of assessee - Capitalization of interest towards machinery under installation account - Held that:- There were certain machinery & building under construction during the year. The assessee had capitalized certain interest on acquisition of the same claiming that to an extent the amount was borrowed for acquisition of these. We are of the considered view that in case the assessee has given a plausible explanatio .....

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o acquire such assets also has a bearing on the issue. In view of this, we direct the Assessing Officer to delete the disallowance.- Decided in favour of assessee - Disallowance of interest on advances given to two parties - Held that:- No evidence to show the business expediency for these advances could be filed. However, we must also add that from the reading of the Balance Sheet of the assessee, it is quite clear that the assessee possesses huge own funds, therefore, relying on the propos .....

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l For the Respondent : Shri Sushil Kumal, CIT DR ORDER Per Rano Jain, A. M. The appeal filed by the assessee is directed against the order of learned Commissioner of Income Tax (Appeals)-2, Ludhiana dated 16.3.2015, relating to assessment year 2009-10, passed under section 250(6) of the Income Tax Act, 1961 (in short 'the Act'). 2. The ground No.1 raised by the assessee reads as under : "1. That the learned CIT(A)-II has erred in confirming the disallowance u/s 14A/Rule 8D (Rs.7,22, .....

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erest expenditure. A suo-moto disallowance under section 14A of the Act, amounting to ₹ 50,000/- was made by assessee as was confirmed by the CIT (Appeals) in assessee's own case for assessment year 2005-06. The Assessing Officer invoking the provisions of Rule 8D of the Income Tax Rules, computed the disallowance at ₹ 8,42,519/- and after giving relief of the suo-moto disallowance of ₹ 50,000/- made an addition of ₹ 7,92,519/-. 4. Before the CIT (Appeals), submission .....

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s explained. The main argument of the assessee was that in the presence of enough owned fund, no disallowance of interest can be made, since the presumption is that in such a scenario the investments are presumed to be made out of owned funds. After making a detailed analysis on the submissions of the assessee after giving relief of computational error, the CIT (Appeals) confirmed the disallowance made by the Assessing Officer. 5. Aggrieved by this, the assessee has come in appeal before us. The .....

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9.10.2015. 6. The learned D.R. vehemently argued against the stance taken by the learned counsel for the assessee and filed a detailed written submissions basically opposing the reliance placed by the assessee on the order of the I.T.A.T., Chandigarh Bench in the case of Hero Cycles Ltd. (supra). Further, he pointed out a number of infirmities in this order of the I.T.A.T., Chandigarh Bench. He prayed to place reliance on the judgment of Hon'ble Punjab & Haryana High Court in the case of .....

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he case being identical, respectfully following the same, we are inclined to hold that in the presence of huge owned funds, it has to be presumed that the investments have been made not out of borrowed funds and no disallowance on account of interest can be made. As regards the expenditure part of the disallowance, we observe that the assessee had suo-moto disallowed an amount of ₹ 50,000/- on this count. In the absence of any satisfaction in this regard as to how the suo-moto disallowance .....

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eal with the detailed written submissions filed by the learned D.R., which seem to be made very arduously. It has been stated at the outset that the undisputed facts of the case are that it is a case of 'mixed funds' and borrowed funds as well as own funds have been used for making investments, income from which are exempt. The reliance placed by the learned counsel for the assessee on the decision of the I.T.A.T., Chandigarh Bench in the case of Hero Cycles Ltd. (supra) was vehemently o .....

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case of Avon Cycles Ltd. (supra). The judgments in the case of Bright Enterprises Pvt. Ltd. (supra) and CIT Vs, Kapsons Associates, 381 ITR 204 (P&H) are stated to be out of place, as the same were rendered in the context of section 36(1)(iii) and not in the context of section 14A of the Act. 9. Though we are not inclined to comment on the infirmity pointed out by the learned D.R. on the order of the Coordinate Bench of the Tribunal in the case of Avon Cycles Ltd. (supra), however, we are go .....

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ble to the earnings of exempt income. The plea of the assessee was that no disallowance of interest at all is called for in view of the fact that after setting off the interest paid out of interest received, there is no interest paid left. We must bear in mind that the assessee's prayer was to make no disallowance of interest, despite itself suo-moto disallowing interest at ₹ 10,49,851/-. IN view of this fact situation, the Tribunal directed the Assessing Officer to confirm the disallo .....

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d in the year in question, which has been invested for earning exempt income. This was held by he Bombay High Court negating the argument of the Revenue that shareholders funds to the tune of over ₹ 172 crores were utilized for the purposes of fixed assets in term of the Balance Sheet. 11. In para 8, the judgment of Punjab & Haryana High Court in the case of Hero Cycles Ltd. (supra), was analysed and is stated that in that case also the Tribunal had held that interest was set off again .....

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ase of Avon Cycles Ltd.). From the reading of the said finding of fact given by the I.T.A.T., as reproduced in para 5 of the judgment, we see that in view of the fact that as per the working of the assessee itself, the interest expenditure for earning exempt income is to the tune of ₹ 10,49,851/-, the Assessing Officer was directed to disallow the same. 13. From the above analysis, it is quite clear that the Hon'ble Punjab & Haryana High Court in the judgment of Avon Cycles Ltd. (s .....

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een given as regards the issue in question, at para 6 which reads as under : "16. As we noted earlier, the funds/reserves of the appellant were sufficient to cover the interest free advances made by it of ₹ 10.29 crores to its sister company. We are entirely in agreement with the judgment of the Bombay High Court in Commissioner of Income Tax vs. Reliance Utilities & Power Ltd., (2009) 313 ITR 340, para-10, that if there are interest free funds available a presumption would arise .....

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. This view has also been endorsed by the Bombay High Court in a latest judgment in the case of HDFC Bank Ltd. Vs. DCIT (2016) 383 ITR 529(Bom), which was rendered in the context of disallowance under section 14A of the Act. Interestingly, in this case the High Court has reprimanded the Tribunal in not following an earlier judgment of the Court in the case of CIT Vs. HDFC Bank Ltd. (2014) 366 ITR 505 (Bom), which in turn relying on the judgment of Reliance Utilities & Power Ltd. (supra), has .....

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nd 3, therefore, the same are dismissed as not pressed. 17. The ground No.4 is general in nature and, hence needs no adjudication. 18. The ground No.5 raised by the assessee reads as under : "5. That the learned CIT(A) has erred in capitalizing interest of ₹ 1,14,096/- towards machinery under installation account and ₹ 7,55,888/- towards building under construction ignoring the facts that he he appellant had already capitalized the interest in the respective heads and no further .....

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t out of the machinery of ₹ 3,08,22,637/- on machinery worth ₹ 2,54,24,957/- has been capitalized at ₹ 3,34,477/-. Regarding building, it was stated that an amount of ₹ 4,64,968/- has been capitalized. Further, there were two flats purchased by the assessee at Haridwar for ₹ 59,42,698/-. These were completed during the year and the final payments were made for the same, therefore, no interest was capitalized. Since flats were not used, the same were shown as capital .....

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ssee submitted that the bifurcation of building under construction at ₹ 1,06,16,141/- is as under : (i) Opening balance Rs.31,53,645/- Additions during the year Rs.10,54,830/- Rs.42,08,475/- Interest capitalized @ 11% Rs. 4,64,968/- Rs.46,73,443/- (ii) Flat at Haridwar Opening balance Rs.55,83,823/- Payment during the year Rs. 3,58,875/- ₹ 59,42,698/- Total Rs.1,06,16,141/- 21. In this way, it was stated that the assessee had capitalized the interest @ 11% on building construction at .....

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to fixed assets' on which interest has been capitalized by the Assessing Officer. However, rejecting the contention of the assessee, the CIT (Appeals) confirmed the disallowance made by the Assessing Officer. He was of the view that the Assessing Officer had clearly brought out in the assessment order that the assessee has received secured loans amounting to ₹ 23,11,892/- on which it has paid interest. The claim of the assessee that it had not borrowed any money for addition to plant .....

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rated the submissions made before the lower authorities, while the learned D.R. relied on the order of the CIT(Appeals). 23. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material available on record. The undisputed facts are that there were certain machinery & building under construction during the year. The assessee had capitalized certain interest on acquisition of the same claiming that to an extent the amo .....

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st capitalized by the assessee itself is not correct. Further, the explanation given by the assessee that it has huge owned funds to acquire such assts also has a bearing on the issue. In view of this, we direct the Assessing Officer to delete the disallowance. 23. Ground No.6 raised by the assessee reads as under : "6. That the learned CIT(A) has erred in confirming the disallowance of interest of ₹ 6,083/- on advances given to two parties." 24. The assessee had given interest f .....

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