TMI Blog2013 (3) TMI 744X X X X Extracts X X X X X X X X Extracts X X X X ..... ,72,81,626/- in complete disregard to the fact that such a disallowance resulted in assessing a new source of income in the appellant s hand which was also not the subject matter of appeal before the ld. CIT(A). 2.1) That the Ld. CIT(A) erred in law in computing the disallowance of interest expenses ₹ 1,72,81,626/- under Rule 8D(2)(ii) read with section 14A of the Act without appreciating the fact that the disallowance under Rule 8D had already been computed by the A.O. after reviewing the detailed submissions and records of the assessee and such an enhancement was beyond jurisdiction. 2.2) That the Ld. CIT(A) erred in law in computing ₹ 1,71,81,626/- as the enhanced disallowance under Rule 8D read with section 14A of the Act by adopting a self worked out formula in an adhoc and arbitrary manner. 2.3) That the Ld. CIT(A) erred in law in drawing an adverse presumption that part of the interest bearing borrowed funds were used for purpose of making investments in instruments yielding tax free income, not appreciating that the appellant had sufficient interest free funds for making investments in instruments yielding tax exempt income. 2.4) That the Ld. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said companies, amounting to ₹ 19.45 crores. The AO relied on the decision of the Hon ble Punjab Haryana High Court in the case of Abhishek Industries Limited : 286 ITR 1. 3. On further appeal, the Ld. CIT(A), confirmed the disallowance made by the Assessing Officer. 4. The Ld. counsel for the assessee, Sh. Rupesh Jain, Advocate made oral and written arguments and reference was made to the written submissions placed before the Bench, which for the sake of clarity are reproduced as under: The appellant was engaged in the business of, inter alia, manufacturing and marketing of BOPP films and held controlling interest in various subsidiaries companies, including Neeman Medical International (Asia) Limited, Max Healthstaff International Limited and Max Ateev Limited. The appellant since incorporation, had diversified itself into various businesses, through subsidiary companies. The assessee wanted to expand horizons into various businesses, like clinical research, placement solutions of healthcare resources, software development etc. In order to fulfill the aforesaid objects, the appellant incorporated following wholly owned subsidiary company(ies) to take up th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2. Max Healthstaff International Limited 410.12 3. Neema Medical International (Asia) Limited 293.49 Total 704.52 5. In the aforesaid factual background, it was specifically argued that there was no nexus between borrowed funds and impugned interest free advances give to subsidiary companies, which were given out of interest free funds and therefore, the interest expenditure having been incurred for other business purposes of the assessee was allowable deduction in its entirety. It was argued that during the relevant year, the assessee had given interest free advances to the subsidiary companies, aggregating to ₹ 7.04 crores. The aforesaid loans to subsidiaries were sourced out of surplus interest free funds i.e. proceeds from fresh issue of share capital amounting to ₹ 1000 crores approximately. The said inflow of interest free funds/loans and subsequent advancement to sister concerns, during the year, is clearly evident from the cash flow statement/statement of inflow of interest free fun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Cash Credit 2,719.65 1,144.23 247.06 The loan was utilized for meeting the capital requirements of the appellant s BOPP divisions 3. Vehicle loan 85.98 61.82 7.37 The loan was utilized for purchasing 4. Other interest 107.90 Interest expenses on acceptance, bank charges, L/C charges discounting charges. Grand total 12,219.92 10,146.05 1,459.52 6. Reliance in this regard was placed on the following decisions, wherein it has been held that where it is established that loan/advance has been given to subsidiary company out of own funds and not borrowed funds, no disallowance of interest expenditure can be made: - CIT vs. Bharti Tele Ventures Ltd. 331 ITR 502 (Del.) - CIT vs. Prem Heavy Engg. Works (P) Ltd. 285 ITR 554 (All.) - CIT vs. Tin Box Co. 260 ITR 637 (Del) - CIT vs. Hotel Savera 239 ITR 795 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The aforesaid subsidiary companies were in dire need of funds for utilization of same for purposes of business. The aforesaid companies were running in losses and had negative cash flow during the relevant year. The aforesaid position can be gathered from the financial statements of the aforesaid companies (PB 24-34, 25-39 40-44). The relevant extract of the balance sheet of the aforesaid companies for the relevant previous year ending 31.3.2008 is reproduced hereunder, which establishes the financial crunch faced by them and that the interest free funds availed from the appellant company were utilized by the borrowed companies for business purposes. Extract Balance sheet as at March of 31, 2008 Particulars Neeman Amount (Rs. in lacs) MHS Amount (Rs. in lacs) Ateev Amount (Rs. in lacs) Sources of Funds 421.68 394.50 3144.60 Share capital Unsecured Loans (From Max India Limited, The holding Company) 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their business operations. Accordingly, the aforesaid interest free advances were given by the assessee on the ground of business/commercial expediency and therefore, even assuming that borrowed funds were utilized for aforesaid companies, interest expenditure thereon being incurred for the purposes of business is allowable business deduction u/s 36(1)(ii) of the Act. In terms of section 36(1)(ii) of the Act, interest expenditure is allowable deduction in entirety, if the following conditions are satisfied.: i) moneys must have been borrowed; ii) the act of borrowing must be for purposes of businesses; iii) the assessee must have paid interest on such borrowing. Reference is made to the decision of Madhav Prasad Jatia vs. CIT 118 ITR 200 (SC). In the case of the assessee, undisputedly the first and the third condition precedent for claiming deduction u/s 36(1))(ii) of the Act are satisfied in so far as the assessee has borrowed capital and paid interest thereon. The second condition required to be satisfied for claiming deduction is that the capital must have been borrowed for the purpose of business. The interest expenditure in the case of the assessee, was inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hishek Industries Ltd. 286 ITR 1 relied upon by the AO while rejecting the proposition of interest expenditure by way of interest free advance/loan to subsidiary companies on account of commercial expediency. 17. It was submitted that the aforesaid decision has been distinguished by the Hon ble High Court of Punjab Haryana in the later decision, which was followed by the Hon ble Punjab Haryana High Court in the case of CIT v. Munjal Sales Corporation 298 ITR 294, whereby the order of the Tribunal in deleting the interest expenditure incurred in connection with borrowed funds utilized for giving interest free advances to sister concerns was reversed. The aforesaid decision is the case of Munjal Sales Corporation (supra) was set aside by the Hon ble Supreme Court of India in the case of Munjal Sales Corpn. vs. CIT 298 ITR 298 and consequently impliedly over-ruling the decision in the case of Abhishek Industries Ltd. (surpa). It was submitted that the aforesaid decision has been distinguished by the Hon ble Punjab Haryana High Court in the latter decision, in the case of CIT v. Rockman Cycle Industries Ltd; 176 Taxman 21, wherein it has been held that if interest bearing borr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advance of the holding company, the Ld. counsel for the assessee laid emphasis on the decision of the Hon le Supreme Court in the case of S.A.Builders Ltd. (supra) wherein it has been categorically held that if a company holds a deep business interest in its sister concern/subsidiary company and borrowed funds are given to support such company and have been used by the later for its business purposes, it could be said that the amount has been advanced by the parent company on the ground of commercial expediency and the interest expenditure incurred in the hands of holding company shalll be allowable deduction u/s 36(1)(iii) of the Act. 23. The facts of the present case are that the assessee company had given interest free loans and advances aggregating to ₹ 2297.83 lacs upto the end of the relevant year including ₹ 704 lacs during the relevant year to three subsidiary companies of the assessee. The AO did not make any disallowance in respect of expenditure incurred on borrowed funds u/s 36(1)(iii) of the Act in relation to interest free loans and advances given to the aforesaid three subsidiary companies in the earlier years. The issue arising in the present appeal i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... blishes that interest free funds available with the assessee were sufficient for the aforesaid investments and interest free advances which has not been disputed by the AO or the ld. CIT(A). We have already held that the assessee company for the assessment years 2001-02 to 2006-07 in our order dated 08.03.2013 that in case of mixed pool funds, presumption should be drawn in favour of the assessee regarding utilization of interest free funds or borrowed funds in a manner which is most favourable to assessee company. In view of the same, it is to be presumed that interest free funds available with the assessee company during the impugned year were utilized for giving interest free advances of ₹ 7.04 crores given to the subsidiary companies and therefore, there is no nexus of interest expenditure incurred during the year with the aforesaid loans/advances given to the subsidiary companies, warranting disallowance u/s 36(1)(iii) of the Act. 26. As regards interest free advances given by the assessee company to the subsidiary companies in earlier years, it was submitted with reference to overall fund flow position that the aforesaid loans and advances were given out of surplus i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . As regards ground No.2, where the assessee has challenged the action of the ld. CIT(A) in enhancing the disallowance under section 14A read with Rule 8D of the Income Tax Rules, 1962 of ₹ 172.82 lacs, the AO has invoked the provisions of section 14A and computed disallowance of ₹ 3.65 crores by applying the provisions of section 14A of the Act read with rule 8D. In the aforesaid computation, as per rule 8D, the AO did not consider interest expenditure incurred during the year for the purposes of disallowance u/s 14A of the Act. 28. The assessee did not prefer an appeal against the aforesaid disallowance made by the AO before the ld. CIT(A). 29. The Ld. CIT(A) by exercising his powers which are co-terminus powers with that of the AO, disallowed the interest expenditure amounting to ₹ 172.82 lacs u/s 14A of the Act by applying the provisions of rule 8D (2)(ii) of the I.T. Rules and enhanced the disallowance to that extent. 30. During the course of arguments, the ld. counsel for the assessee, Mr. Rupesh Jain, Advocate did not press grounds No.2 2.1 relating to assumption of jurisdiction by the ld. CIT(A) for making disallowance u/s 14A of the Act in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 (ITAT.Del) - Meenakshi Synthetics vs. CIT 84 ITD 563 (ITAT Luck.) - GR Agencies vs. ITO 79 TTJ 496 (ITAT Luck) - Malwa Cotton Spinning Mills 89 ITD 65 (ITAT Chd.) (TM). - Usha Martin Industries Ltd. vs. DCIT 86 ITD 261 (ITAT-Cal.) In that view of the matter, it has been accepted that there was no nexus of borrowed funds with investment held by the assessee as at 31.3.2007. Investments during the period 1.4.2007 to 31.3.2008 (relevant to AY 2008-09) In the course of appeal proceedings, the assessee had furnished summary of net inflow of interest free funds and net addition to investments made during the year (attached at page no.66 of the PB) which also establishes that net flow of interst free funds, aggregating to ₹ 1,067.17 crores, during the year. The said summary is reproduced as under: A) Interest free sources of funds S.No. Particulars Period of Receipts Amount in (Rs. in lacs) 1. Proceeds from issue of share capital June 2007 99,999.98 2. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowance of interest expenditure has been made u/s 14A of the Act in the assessment for that year, even if by applying the provisions of Rule 8D in that year. As regards cash flow statement of the assessee for the relevant previous year, we have already held in relation to the ground of appeal No.1 decided by us hereinabove that the assessee had sufficient surplus free funds as the assessee company had received substantial interest free proceeds from issue of preferential share capital and it was sufficient to cover both investments made during the year as also interest free advances given to the subsidiary companies during the relevant year. 33. In view of the above and following our own order in assessee s own case during the assessment years 2001-01 to 2006-07 (surpa), it is held that there is no nexus between borrowed funds and investments made during the relevant previous year. In other words, the borrowed funds were used on the facts of the case, for business purposes. In such a situation, the provisions of Rule 8D(2)(ii) of the I.T. Rules, have no application. Reference in this context is made to the decision of Hon ble Punjab Haryana High Court in the case of CIT vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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