TMI Blog2017 (7) TMI 256X X X X Extracts X X X X X X X X Extracts X X X X ..... able, the presumption in such cases would be that the advances have been made out of the same and hence there can be no occasion for making disallowance of any interest on account of the interest free advances made. We are in complete agreement with the Ld.Counsel of the assessee in this regard. Moreover we find that the LD CIT(A)has given a factual finding in this regard stating that the amount advanced interest free is far less than the share capital and free reserves of the assessee company. No infirmity in the order of the Ld.CIT(A) deleting the disallowance made on account of interest u/s 36(1)(iii) - Decided against revenue Disallowance u/s 14A - non recording of satisfaction - Held that:- Assessing Officer made disallowance by stating that, had the advance not been adjusted against share capital, the same would have been returned to banks reducing liability to interest of the company. Thus, we find that there was no satisfaction of the AO that the assessee had incurred any interest expenditure while making the impugned investments and least of all based on any credible evidence in this regard. The AO, we find, did not establish any nexus between interest bearing funds and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the production capacity of the unit of the assessee for assessment years 2002-03, 2003 04 was estimated by the Assessing Officer at 13, 30,000/- pieces and 8 lacs pieces respectively being 50% of its actual production and therefore, deduction under section 80IB of the Act was allowed to the assessee @ 50% of the eligible profits for the relevant block period. The AO found that the same yardstick was applied in the assessment years 2004-05 and 2005-06 because as per the Assessing Officer the infrastructure/man power during these years remained the same. The AO thereafter held that though in the assessment year 2005-06 the stand of the Department was not confirmed by the CIT (Appeals), the decision of the CIT (Appeals) was not accepted by the Department and second appeal before the I.T.A.T. in this regard was filed. Keeping in view these facts the Assessing Officer held the deduction under section 80IB of the Act to be eligible to the assessee @ 75% of the eligible profits and consequently disallowed the balance adding the same to the income of the assessee. The Ld. CIT (Appeals) allowed assessee s claim following the order of the CIT (Appeals) in the preceding year i.e. assessment y ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y half of the production declared as eligible for benefit u/s 80IB of the Act. The Commissioner of Income-tax (A) has deleted the addition by relying on the order of his predecessor in assessee's own case while dealing with the block assessment. In this regard, we find that the assessment made by the Assessing Officer for the block period 1.4.1996 to 5.2.2003 was in appeal before the Tribunal vide I.T.(SS)A.No.1 08 109/Chandi/2005 (supra.). The Tribunal considered a similar addition regarding scaling down of deduction u/s 8QIB of the Act by the Assessing Officer. The Tribunal has upheld the order of the Commissioner of Income-tax (A) whereby the action of the Assessing Officer was set aside. The relevant portion of the order of the Tribunal is reproduced as under :- 9.4 In nutshell, all what emerges from the above is that undisclosed income should be computed only on the basis of documents found as a result of search, and. such material or information as are available with the Assessing Officer and relatable to such evidence found as a result of search. It has been judicially held that only such evidence which has been found as a result: of a search alone, can be made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly assessment year 2002-03 and 2003-04 on within the prescribed period. The returns so filed by the assessee wherein deductions- Claimed under section 80IB of the Act of ₹ 14,67,75,459/- and 19,81,12,898/- respectively stood accepted and allowed. Thus, the factum of the claim of deduction was duly disclosed and allowed in regular assessment made under the Act and however, since no evidence has been found as a result of search on the assessee company, the disallowance of claim of deduction is altogether untenable in a block assessment under 'Chapter XIVB of the Act. Infact, all what has happened is that certain material has been gathered as a result of search, which cannot be a ground to restrict the claim of deduction. 9.7 In light of the above discussion on the position of law and facts of the case, in our view,, it has been rightly held by the CIT(A) that the Assessing Officer was not justified in making the addition of the undisclosed income of the assessee by disallowing the claim of deductions under section 80MHC and 80IB of the Act. However, in light of submissions having been made by the parties on merits, we deem it expedient 10 deal this case on merit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... --Saluja Exim Ltd. is printed. Kindly -----------whether the stock belongs to Saluja Exim Ltd. or Saluja International. Ans. You have found --------------- of stock-Tshirts, Boxes------- -and vestor, out of which only T- shirts are packed in polythene printed with. Her name of Saluja Exim have happened due to nonavailability of packing material. In the case of other two. items nothing is mentioned but the goods belongs to Saluja International. This may have happened due to negligence of the staff. Q.5 Kindly produce any packing material with Saluja International printed on it or any tag of Saluja International. Ans. There is lot of packing material on which nothing is printed: As I told you, it is out of stock so I cannot produce : any packing material or tag of Saluja International at present. 10.3 It will be thus seen on careful perusal of the above statement that no inference can be recorded that the assessee was carrying on any manufacturing activities at the premises of M/s Saluja International. Mere fact that packing material of' the assessee company has been utilized cannot be assumed to allege and hold that the assessee is carrying on manufacturi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order as under: In this regard, it seen that DDIT had already made a spot visit to the factory to enquire and about estimate the normal capacity of manufacturing of the factory. 10.4 It is thus clear that the; Assessing Officer has only proceeded to rely upon the enquiries made by DDIT and did not conduct any investigation whatsoever though a specific request was made by the assessee. In light of the above factual situation, it cannot be held that there was inadequate machinery available with the assessee to carry on the stated manufacturing activities. Our above conclusion, is amply supported by the fact, which remains unrebutted, that in the succeeding year namely assessment, year 2004-05, the assessee had manufactured 27,07,416 pieces with the same machinery and same capacity and such production stands duly accepted by excise authorities Infact, even in assessment years 2002-03 and 2003-04, production made by the assessee is 24,46,000 pieces for financial year 2001-02 and 2,07,543 piece for financial year 2002-03 which is far less than the production done in financial year 2003-04 of 27,07,416 pieces. Moreover, the entire sales made by the assessee stand accep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that an interest free advance of ₹ 22.32 crores was outstanding in the account of M/s S.E. Exports as on 31-03-2005 which was transferred to the capital account of the assessee in piecemeal during the year. On being confronted as to why interest pertaining to the same not be disallowed in view of the decision of the Hon'ble Jurisdictional High Court in the case of CIT Vs. Abhishek Industries Ltd. (2006) 286 ITR 1, the assessee replied that all were business advances. The Assessing Officer rejected the assessee s contention in the absence of any evidence and further noted that the advance to one M/s Saurabh Knitwears was old and no attempt was made to recover the same. The Assessing Officer held that since the assessee had failed to discharge its onus to prove that the interest was paid on loans taken for business purpose, the balance interest remaining, after making disallowance under section 14A of the Act, amounting to ₹ 59,01,329/- was disallowed following the decision of the Hon'ble Jurisdictional High Court in the case of Abhishek Industries Ltd. (supra). 12. The Ld. CIT (Appeals) deleted the addition made by stating that the interest bearing term loans ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al High Court in the case of Bright Enterprises Pvt. Ltd. Vs. CIT 381 ITR 107(P H), CIT Vs. Kapsons Associates, 381 ITR 204(P H) and Hero Cycles Ltd. vs. CIT 379 ITR 347(SC). 15. We have heard the rival contentions. We find that though the Ld.DR has contested the deletion of the disallowance of interest made u/s 36(1)(iii) on various counts, the Ld Counsel for the assessee has supported the order of the Ld.CIT(A) on one count only, which is the availability of enough own interest free funds to make the impugned advances. Ld Counsel has relied upon various decisions of the jurisdictional high court as cited above which in the context of section 36(1)(iii) have laid down the proposition that where there are sufficient interest free funds available, the presumption in such cases would be that the advances have been made out of the same and hence there can be no occasion for making disallowance of any interest on account of the interest free advances made. We are in complete agreement with the Ld.Counsel of the assessee in this regard. Moreover we find that the LD CIT(A)has given a factual finding in this regard stating that the amount advanced interest free is far less than the sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit was claimed as exempt under various provisions of section 10 of the Act. The Ld. CIT (Appeals) deleted the disallowance for the following reasons : a) All investments were old and no disallowance was made for interest for any such investment in the preceding year. b) No disallowance under section 14A could be made by computing expenses on proportionate basis as held by the Hon'ble Punjab Haryana High Court in the case of Hero Cycles Ltd. Vs. JCIT in ITA No.205/Chd/2008 vide order dated 4.7.2008. c) No nexus of interest bearing funds and investments made, has been established. d) Investments were covered by the paid-up share capital/surplus/free reserves of the assessee. Therefore, no part of interest bearing borrowed funds could be taken to be invested by the assessee. The decision of the Hon'ble Apex Court in Munjal Sales Corporation Vs. CIT, 298 ITR 298 was followed by the Ld. CIT (Appeals). 20. Before us, the Ld. DR stated that the provisions of section 14A(1) of the Act were very clear requiring expenses relating to exempt income to be disallowed and therefore, financial expenses in proportion to investment made had to be disallowed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee has denied using interest bearing funds, proceed to infer that interest bearing income must has been used to earn exempted income. Section 14A of the Act, being in the nature of an exception, has to be construed strictly and only where the Assessing Officer records satisfaction, on the basis of clear and cogent material, shall an order be passed under Section 14A of the Act, disallowing such a claim. As there is no tangible material on record that could have enabled the Assessing Officer to record satisfaction in terms of Section 14A of the Act, findings recorded by the CIT(A) and the ITAT that the Assessing Officer has failed to discharge this onus are neither perverse nor arbitrary and, therefore, do not call for interference. 25. The Jurisdictional High Court in the case of Kapsons Associates reiterated this view following its judgement rendered in the case of Abhishek Industries (supra). 26. Examining the facts of the case in the light of the aforestated decisions we find that in the present case the assessee was found to have made investments amounting to ₹ 17,80,78,288/-, income from which exempt under section 10 as follows : Investm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessment Year 2008-09): 32. This is to observe here that the ground Nos.1, 2, 3 4 raised in this appeal are similar to ground Nos.2, 3 and 1 raised in ITA No.880/Chd/2009 and the findings given in ground Nos.2, 3 and 1 in ITA No.880/Chd/2009 vide paras 14 to 15, 23 to 27 and 7 to 8 respectively shall apply to these grounds also mutatis mutandis. ITA No.1250/Chd/2012(Assessment Year 2009-10): 33. It is relevant to observe here that the only effective ground being ground No.1 raised in this appeal is similar to ground No.1 raised in ITA No.880/Chd/2009 and the findings given in ground No.1 in ITA No.880/Chd/2009 vide paras 7 to 8 shall apply to this ground also with equal force. ITA No.1117/Chd/2012(Assessment Year 2009-10): 34. It is observed that the only ground raised in this appeal is similar to ground No.3 raised in ITA No.880/Chd/2009 and the findings given in ground No.3 in ITA No.880/Chd/2009 vide paras 23 to 27 shall apply to this ground also mutatis mutandis. 35. In the result; i) The appeals of the Revenue in ITA No.880/Chd/2009, ITA No.76/Chd/2012, ITA No/106/Chd/2012 and ITA No.1250/Chd/2012 are dismissed. ii) The appeal of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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