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TMI Blog2017 (4) TMI 396X X X X Extracts X X X X X X X X Extracts X X X X ..... o the above, it is submitted that, the disallowance of Rs. 94,96,899/- as made by the Assessing Officer under section 14A is highly excessive and unreasonable. 2. The Assessing Officer erred in making an addition of Rs. 29,83,988/- towards Transfer Pricing adjustments under section 92CA(3) of the I-T Act. Your appellant submit that, on the facts and in the circumstances of their case, no such addition to total income and/or adjustment under section 92CA(3) of the I-T Act is justified. 3. The Assessing Officer erred in disallowing a sum of Rs. 6,46,24,948/- on an estimated basis towards interest in respect of investments in overseas companies. Your appellant submit that, on the facts and in the circumstances of their case, no such disallowance out of interest in respect of overseas investments is called for. Without prejudice to the above, and, in the alternative, the appellants submit that, interest on overseas investments is an allowable deduction under section 57(iii) of the I-T Act. Your appellant craves leave to add to, to after or amend the afore-stated Grounds of Appeal." 2. Briefly stated, the facts of the case are that the assessee company which is engaged in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stablish the proximity of the direct and the indirect expenditure with the earning of the exempt income, had however proceeded with most arbitrarily and drawn adverse inferences in the hands of the assessee for the reason that the latter had failed to disprove the existence of any proximity between the incurring of the interest expenditure claimed as an expenditure by the assessee in its 'P & Loss a/c' and the earning of the exempt income, by observing as under:- "In respect of the disallowance u/s. 14A, the assessee company has submitted that there is no direct/indirect expenditure directly attributable or which has the proximity with the earning of exempted income. While the contention regarding direct expenditure is found to be based on the facts, the contention regarding indirect expenditure is vague and contradictory to the facts of the case. The investments in Indian subsidiaries of the assessee company are made out of the funds of the business, which are a mix of own funds as well as the interest bearing borrowed funds. The assessee has not been able to prove that the interest expenditure claimed in the P&L a/c is incurred wholly and exclusively for the purpose of business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as at the end of such financial year. The Hon'ble jurisdictional High Court in the case of CIT v. Reliance Utilities and Power Ltd. [(2009) 313. ITR 340 (Bom)] has held that if there be interest free funds available to the assessee sufficient to meet its investments and at the same time loan has been raised, it can be presumed that the investments were made from interest free funds. While reaching this conclusion the Hon'ble jurisdictional High Court considered the judgment of the Hon'ble Supreme Court in the case of East India Pharmaceutical Works Ltd Vs. CIT (1997) 224 ITR 627(SC)]. In view of the aforesaid precedent of the Hon'ble jurisdictional High Court, it is apparent that no interest bearing funds can be said to have been deployed by the assessee for the purposes of making investment in the shares of these three companies, from which exempt dividend income was earned. It is axiomatic that where investment is made out of assesses own funds and not out of borrowed funds, there can be no disallowance u/s 14A. Our view is fortified by the judgment of the Hon'ble jurisdictional High Court in the case of CIT vs. K. Raheja Corporation Put. Ltd., a copy of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of law, we herein restore the matter to the file of the A.O, who is directed to verify the aforesaid contention of the Ld. A.R that the interest free funds by way of share capital, reserves and surplus and cash accruals over the years, so available with the assessee during the year under consideration, far exceeded the amount of investments in the tax free securities, and in case the said claim is found to be in order, then in light of our aforesaid observations no disallowance with respect to the interest expenditure would be called for in the hands of the assessee under Sec. 14A of the 'Act'. Before parting, we may also record another plea of the assessee to the effect that the only dividend income received is Rs. 600/- from shares which as submitted by the Ld. A.R had already been transferred, and as such the same were not a part of the investments in the 'balance sheet' of the assessee for the year under consideration. It was submitted by the Ld. A.R that the dividend had been received merely because the transferees had not got the shares transferred, which thus would imply that no dividend income has been received in the year under consideration, so there cannot be any disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2004-05. The Ld. A.R therein averred that in the backdrop of the observations of the Tribunal arrived at in the case of the assessee for A.Y. 2003- 04 and A.Y. 2004-05, wherein the Tribunal after observing that as the assessee had not charged interest on outstanding receivables from the overseas subsidiaries, arms length price of the same had to be determined, had therein concluded that LIBOR rate plus 300 points would be the appropriate interest rate applicable to the international transactions relating to advancement of interest free loan /extended credit facility to the overseas A.Es. That on the other hand the Ld. D.R heavily relied on the order passed by the A.O under Section 143(3)(ii) r.w.s. 144C(13), and therein submitted that the adjustments of Rs. 29,83,988/-made in respect of the notional interest of outstanding advances to subsidiaries companies had rightly been made by A.O/TPO. 5.1 We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the records produced before us. We have given a thoughtful consideration to the facts of the case and are of the considered view that there is no dispute to the fact that thoug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for the aforesaid years had allowed the interest expenditure under Sec.36(1)(iii) in the hands of the assessee, by observing as under:- "We have considered the submissions of the parties and perused the material available on record. It is evident from the orders of the Departmental Authorities, though the assessee had contended that borrowed funds were utilized for acquiring fixed asset and working capital, whereas, interest free funds available through reserve and surplus and internal accruals were utilized for advance to the subsidiary but the Assessing Officer had rejected such claim of the assessee and disallowed proportionate expenditure from the interest cost alleging utilization of borrowed funds towards investment in shares of foreign subsidiary. It has been brought to our notice by the learned Authorized Representative by furnishing a summary of cash flow that during the financial year 2002-03, the total interest free funds to the assessee by way of internal accruals and infusion of equity was to the tune of Rs. 14,93,70,838/-, whereas the Investment made in subsidiary was to the tune of Rs. 14.30,50,843/-,thereby still leaving a surplus interest free funds available w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs clearly establish that there is a business/trade relationship between the assessee and overseas subsidiary. That being the case, it cannot be said that investments made are not wholly and exclusively for the purpose of business. Thus, any interest expenditure attributable to such investment / advance to overseas subsidiary would be allowable under section 36(1)(iii) as it is wholly and exclusively for the purpose of business. As held by the Hon'ble Supreme Court in S.A. Builders (supra) and subsequently reiterated in Hero Cycles Ltd. (supra), commercial expediency has to be seen through the position of a prudent businessman and the Assessing Officer cannot step into the shoes of a businessman to find out the necessity or reasonableness of expenditure incurred. Thus, in our view, for the afore stated reason, no disallowance out of interest expenditure can be made. As far as the findings of the learned Commissioner (Appeals) that assessee is eligible for deduction under-section 57(iii), we are of the view that only because the assessee accepted the decision of the learned Commissioner (Appeals) in assessment year 2002-03, for whatever may be the reason that will not deprive th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest expenses on a notional basis could justifiably be made in the hands of the assessee. We have given a thoughtful consideration to the facts of the case and are of the considered view that as observed by us hereinabove, the facts involved in the present case are identical to those which were there before the Tribunal in the case of the assessee for A.Y 2003-04 and A.Y 2004-05. We find that the coordinate bench of the Tribunal while disposing of the appeals of the assessee for the aforementioned preceding years vide its consolidated order dated. 20.04.2016, had deleted the disallowance on notional basis of interest in respect of such overseas investments, after appreciating the contentions advanced by the assessee on both the issues which had been averred by the assessee in the course of the proceedings for the year under consideration, viz. (i). Investments had been made by the assessee out of commercial expediency and wholly and exclusively for the purposes of its business, and (ii).The investments were made by the assessee out of its own funds. We thus in the absence of any averment by the Ld. D.R which could go to prove that the facts involved in the case of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X
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