TMI Blog2017 (7) TMI 260X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) than what was directed by the Ld. CIT (Appeals), there is no reason for making any further disallowance and disallowance made is, therefore, deleted. Disallowance of interest made on account of difference of interest charged from Hero Motors on loan - Held that:- assessee had enough and sufficient own funds to give the impugned loan and following the decision of the I.T.A.T. in assessee’s case for assessment year 2009 10 it can be safely presumed that the loan had been given out of the own funds of the assessee and, therefore, called for no disallowance to be made on account of interest. Further has held by the I.T.A.T. in assessment year 2009 10, the Assessing Officer cannot sit in the arm chair of the assessee and decide the rate of interest at which the loan ought to have been given and moreover the Hon'ble Supreme Court has also deleted the addition made on account of notional interest earned in assessee’s case. Thus disallowance deleted Capitalization of interest on investment under the head “Capital Work in Progress”-Building under Construction - Held that:- The investments made in capital work-in-progress in the impugned year amounted to ₹ 6,06,85,936/-. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Assessee s appeal) : 3. The assessee has raised the following effective Grounds of appeal: 1. That the learned CIT(A)-II has erred in confirming the disallowance of ₹ 24950657/- u/s 14A / Rule 8D of the IT Rules, after giving credit of ₹ 22997000/- already disallowed by the appellant. 2. That the disallowance confirmed by the CIT(A)-II u/s 14A / Rule 8D is as under : - Under Rule 8D(ii) Rs.27743861 Under Rule 8D(iii) Rs.20203796 Total Rs.47947657 Less: Already disallowed Rs.22997000 Balance disallowance Rs.24950657 3.That the learned CIT(A)-II has failed to appreciate the following submissions:- a) That while making the disallowance the gross interest at ₹ 70088642/- of the main unit and of the Sahibabad unit has been considered while only the interest paidbythemainunitatRs.67143369/- was liable to be considered. b) That interest received at ₹ 8,40,86,604/- has not been deducted from the figure of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A of the Income Tax Act, 1961 (in short the Act ) amounting to ₹ 2,49,50,657/-. 5. Brief facts are that the Assessing Officer noted that the assessee had earned dividend income of ₹ 180,55,19,030/- and long term capital gain of ₹ 6,46,83,545/- during the year. These incomes were claimed exempt under the provisions of the Act. The Assessing Officer further noted that the assessee had investments of ₹ 387,34,93,407/-and ₹ 420,80,25,128/- as on 31.3.2009 and 31.3.2010 respectively, the income from which was not includible in the total income. The Assessing Officer also noted that the assessee had claimed interest expenses of ₹ 15,80,83,002/-. The Assessing Officer asked the assessee to explain why the provisions of section 14A r.w.r. 8D of the Income Tax Rules may not be applied in this case. The assessee submitted reply in the matter. The Assessing Officer observed that the computation of deduction u/s 14A r.w.r. 8D was not as per said section and rule. The Assessing Officer asked the assessee to explain why the computation submitted by the assessee may not be rejected and the computation may not be made for disallowance u/s 14A of the Act in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidered the figure of interest of all the units instead of the interest paid by the main unit for the purpose of computation of deduction u/s 14A r.w.r. 8D and; iv) Computation of disallowance u/s 14A is not correct in as much as the value of total assets has not been correctly taken by the Assessing Officer. 7. Thereafter the Ld. CIT (Appeals) dealt with each issue and held that the disallowance made by applying rule 8D was correct and held that it was the gross interest expenditure only which was to be considered for the purpose of calculating the disallowance. Further the Ld. CIT (Appeals) agreed with the assessee that since no investments were made by the C.R. division of the assessee, the interest incurred by that division had to be excluded for the purpose of calculating deduction u/s 8D (2)(ii) of the Act. He further directed that even the assets of the C.R. division were to be excluded in the total assets to be taken for the purpose of computing disallowance under rule 8D(2)(ii) of the Act. The Ld. CIT (Appeals) also agreed with the assessee s contention that the total assets to be taken for the purpose of computing the disallowance was to be taken at the total value ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the order are as follow: 8. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material available on record. From the perusal of the balance sheet and other documents filed in the Paper Book, we see that the total investment in shares and mutual funds as on 31.3.2007 was of ₹ 3,83,82,47,226/- while the investment as on 31.3.2008 is of ₹ 4,64,37,73,922. Therefore, there was an increase of around ₹ 80 crores in the investment during the year. While reserves and own funds of the assessee company as on 31.3.2008 are amounting to ₹ 6,24,18,74,854/-. From these figures, it is quite clear that own funds and reserves of the assessee are more than sufficient to cover the investment made during the year. In such a scenario, it can be very conveniently presumed that all the investment have been made out of own funds. For this purpose, reliance is placed on the judgment of Hon'ble Jurisdictional High Court in the case of Bright Enterprises Pvt. Ltd. Vs. CIT in ITA No.624 of 2013 (O M) dated 24.7.2015, whereby it has been held as under : 16. As we noted earlier, the funds/rese ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Loss A/c for the year shows that the profit for the year earned by the assessee in itself was 342.98 crores, which was more than sufficient to make the investments during the year of ₹ 92.90 crores. Thus with respect to disallowance made u/s 8D(2)(ii) of the Act, pertaining to interest, the decision rendered by the I.T.A.T., Chandigarh Bench in the case of the assessee for assessment year 2008-09 squarely applies following which addition made on account of disallowance of interest u/s 14A is deleted. 12. As far as disallowance made on account of administrative expenses as per rule 8D(2)(iii) of the Act, the Ld. counsel for the assessee submitted that it had suo moto made a disallowance of ₹ 2,29,97,000/- on account of the same, while as per the order of the Ld. CIT (Appeals) the disallowance was to be ₹ 2,02,03,796/-. The Ld. counsel for the assessee submitted that the assessee had suo moto disallowed more that what was directed by the Ld. CIT (Appeals), no further disallowance for administrative expenses as per rule 8D(2)(iii) of the Act was called for. The Ld. DR did not dispute the same. In view of the same since we find that the assessee suo moto had ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se noted that the average rate of interest payment made by the assessee on loans raised by it was 7.75% and, therefore, the excess interest payment @ 1.75% on the loans paid as against interest recovered from M/s Hero Motors Ltd., was disallowed. The I.T.A.T. in the said case had held that the assessee had amply demonstrated that it was a cash rich company having own huge funds and in such a scenario it could be safely presumed that the loans were given out of own funds. The I.T.A.T. had further held that the rate of interest at which the loan was given by the assessee being a business decision of the assessee could not be challenged by the Revenue and followed the decision of the Hon'ble Delhi High Court in the case of CIT Vs. M/s Dalmia Cement Ltd. (2002) 254 ITR 377. The I.T.A.T. also observed that the Hon'ble Supreme Court in assessee s own case had held that no notional addition on account of lesser rate of interest charged could be made. The relevant findings of the I.T.A.T. at para 16 of the order are as follow: 16. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material available o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecide the rate of interest at which the loan ought to have been given and moreover the Hon'ble Supreme Court has also deleted the addition made on account of notional interest earned in assessee s case. In view of the same, the disallowance made amounting to ₹ 55,57,069/- on account of differential interest charged from M/s Hero Motors Ltd. is thereby deleted. The ground of appeal No.8 raised by the assessee is, therefore, allowed in above terms. 20. In ground No.9 the assessee has challenged the action of the Ld.CIT(A)in upholding the capitalization of interest of ₹ 2,78,564/- on investment under the head Capital Work in Progress -Building under Construction. 21. The brief facts relating to the issue are that the Assessing Officer called for details for capital work-in progress for the year and asked the assessee as to why interest on the same may not be capitalized. The assessee submitted that C.R.(Cold Rolling) division of the assessee had already capitalized interest on capital work-in progress at ₹ 5,69,168/- and further submitted that the remaining expenditure on capital work-in-progress was only routine type towards modification/replacement in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id finding of the CIT (Appeals) had not been controverted by the learned D.R. for the Revenue. Further the CIT (Appeals) has also noted that the total investment made by the assessee during the year on capital work-in-progress was ₹ 42.46 lacs spent on furnace and ₹ 33.23 lacs on the building as against the net profit of the assessee for the year at ₹ 1.97 crores. In view of the above said facts and circumstances, we find no merit in the disallowance made by the Assessing Officer. Uploading the order of the CIT (Appeals) we dismiss ground No.1 raised by the Revenue. 23.Since no distinguishing facts were brought to our notice during the course of hearing,respectfully following the order of the coordinate Bench,we allow this ground of appeal 24. The facts in the present case are identical to that in the preceding year. The investments made in capital work-in-progress in the impugned year amounted to ₹ 6,06,85,936/-. The profits earned by the assessee during the impugned year amounted to ₹ 342.98 crores. Thus the assessee had sufficient funds for the purpose of making investment in the capital work-in-progress and the decision rendered in ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eing exorbitant and unjustifiable is not being wholly and exclusively for the purpose of business. (b) That the Ld. CIT(A) has erred in law and on facts in failing to appreciate that even though M/s Munjal Sales Corporation and M/s Hero Cycles Ltd. are not strictly related as per section 40A(2) of the Act, the partners of the former are family members of the directors of the latter and thus the key personnel of both the concerns are related;- and hence, the ratio laid down by the Hon'ble Supreme Court in the case of C/T Vs. Glaxo Smith/dine Asia Pvt. Ltd. (236 CTR 113) is not applicable in this case. 30. This ground is against deletion of disallowance of commission paid to M/s Munjal Sales Corporation amounting to ₹ 7,55,25,848/-. 31. Brief facts relevant to the issue are that the Assessing Officer noted that the assessee had paid commission amounting to ₹ 9,79,45,458/- to M/s Munjal Sales Corporation. The Assessing Officer asked the assessee to furnish the details of the terms on which the commission was paid, to justify the service rendered by the agent, to provide the qualification of the employees of the agent and nature of job to justify the paym ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant findings of the Ld. CIT (Appeals) at paras 5.8 to 5.10 of the order are as follow: 5.8. I have carefully considered the rival submissions. It is an admitted fact on record that M/s Munjal Sales Corporation had rendered services to the appellant company during the year. This is evident from the fact that the AO has not held that the commission expenses were bogus or that no services were rendered by M/s Munjal Sales Corporation to the appellant company. The AO has held that the expenditure amounting to ₹ 1,85,34,025/- was genuine expenses. The AO has held that the commission expenses paid by the appellant to M/s Munjal Sales Corporation were excessive and after allowing the gross profit of 20.97%, the AO has held that the remaining expenses were excessive and has disallowed the same. The only issue to be considered here is that in the given facts and circumstances of the case , was the AO justified in disallowing a part of the commission expenses on the ground that the same were excessive or not. In this regard the following facts need consideration: 1. M/s Munjal Sales Corporation, a partnership concern, established in the year 1962 had been acting as a sole s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessment year 2010-11 M/s Munjal Sales Corporation had filed return of income declaring income of ₹ 95072250/-. Further the rates of taxes being the same for the appellant and M/s Munjal Sales Corporation there was no loss of revenue and the transaction was revenue neutral. In fact the appellant had paid service tax to the tune of ₹ 91.46 lacs and as such the appellant had paid more tax in view of this commission payment to M/s Munjal Corporation as compared to the situation where no commission had been paid to M/s Munjal Sales Corporation. 10. Munjal Sales Corporation is not a person covered u/s 40A(2) of the I.T. Act. 5.9. There are two issues to be considered in this ground of appeal:- 1. Whether the payments made by the appellant to M/s Munjal Sales Corporation were excessive. 2. Whether a part of the payments made by the appellant to M/s Munjal Sales Corporation can be disallowed in the facts and circumstances of the case on the ground that the same were excessive even though M/s Munjal Sales Corporation is not a person covered under Section 40A(2)(b) of the I.T. Act. Each of the two issues is being considered as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case on the ground that the same were excessive even though M/s Munjal Sales Corporation is not a person covered under Section 40A(2)(b) of the I.T. Act. a) It is an undisputed fact on record that M/s Munjal Sales Corporation is not a person covered u/s 40A(2) of the I.T. Act. It is not the AO's case that M/s Munjal Sales Corporation is related person u/s 40(A)(2)(b). The appellant's contention that M/s Munjal Sales Corporation is not a person covered u/s 40A(2) and therefore no disallowance can be made in it's case on the grounds that such expenditure is excessive or unreasonable and the appellant's reliance on the decision of the Hon'ble Supreme Court in the case of CIT vs. Glaxo Smithkline Asia Pvt. Ltd. 236 CTR 113 was also brought to the notice of the AO. The AO in his report dated 06.03.2014 has submitted that the decision of the Hon'ble Supreme Court in the case of CIT vs. Glaxo Smithkline Asia Pvt. Ltd. (Supra) was not applicable to the appellant ;a this decision was on the issue of transaction between related parties u/s 40A(2). This submission of the AO is not based on correct appreciation of facts. The Hon'ble ITAT had given a clear fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supra) is applicable to the appellant's case. d) Reference in this regard may also be made to the case of Bakeman's Home Products vs. ITO (1984) 7 ITD 371 (Chd). In this case, the contention of the assessee before the Hon'ble ITAT, as brought out in the order of the Hon'ble ITAT, was as under: 9. The learned counsel for the asses see submitted before us that insofar as the terms of the agreement are concerned, the fact of payment is not in doubt, the agreement has been accepted and the revenue has disallowed part of payment on the ground that they are excessive or unreasonable considering the provisions of section 40A(2)(a). He however, submitted that the authorities below have failed to show how the provisions of this section were applicable and the disallowance is merely on conjectures and surmises. He submitted that insofar as the reasonableness of the payment is concerned, the best judge is the businessman and not the revenue in view of the following judgments-CIT v. Walchand Co. (P.) Ltd. [19671 65 ITR381 (SC), J.K. Woollen Manufacturers v. CIT [1969] 72 ITR 612 (SC) and Aluminium Corpn. of India Ltd. v. CIT [1972] 86 ITR 11 (SC). It was, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the impugned- agreement are directed to be allowed. The assessee succeeds on this issue in each year. Further, as per the submissions of the appellant, the ecision of the Hon'ble ITAT was accepted by the department and no appeal was filed on this issue. e). Further, as discussed in para 5.8 above M/s Munjal Sales Corporation had acted as a sole selling agent for the appellant, since 1962 and had paid commission @ 1% in the last many years which was allowed by the department in assessments u/s 143(3). f) Moreover, the payments of commission @ 1% had been approved by the Board of Directors, by the meeting of shareholders and also by the Ministry of Corporate Affairs. g) In view of the aforesaid factual and legal position, in the given facts and circumstances of the case, it is held that no disallowance can be made on the ground that the payments/expenses are excessive. 5.10. Keeping in view the aforesaid factual and legal position the disallowance made by the AO is deleted. This ground of appeal is allowed. 33. Before us the Ld. counsel for the assessee relied upon the order of the Ld. CIT (Appeals) while the Ld. DR relied upon the order of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... direct cost attached to it which leads to reduction of profit of the assessee. The ratio of decision of the Hon'ble Punjab Haryana Court in the case of M/s Abhishek Industries Ltd 298 ITR 1 squarely applies to this case. 37. The brief facts are that during the course of assessment proceedings, the Assessing Officer called the details of debtors standing in the balance sheet of the assessee as on 31.03.2010. The Assessing Officer noted that there was a debit balance of ₹ 17,02,59,780/- in the name of M/s Hero Exports and a debit balance of ₹ 2,41,53,924/- in the name of M/s Hero Motors Ltd. as on 31.03.2010. With regard to the debit balance in the case of M/s Hero Exports, the Assessing Officer observed that there was a net opening balance of ₹ 26,39,28,512/- as on 01.04.2009 and a net closing debit balance of 17,02,59,780/- as on 31.03.2010. The Assessing Officer further observed that though there were regular transactions between the two concerns but throughout the year, neither the balance had been squared of nor the debit balance has been turned into credit balance. The Assessing Officer also pointed out that the payments received by the assessee fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... division and that all the advances were clearly in the nature of interest free advances. The assessee submitted that the balance due from M/s Hero Motors was on account of supply to CR Strips and Auto rims. The assessee further submitted that the accounts of M/s Hero Motors with CR Division were running accounts with regular supply and receipts of payment in the normal course. The assessee further submitted that the balance due in the Auto Rim Division and the main unit was on account of supply of auto rims for two wheelers and that due to some unavoidable reasons during the last year production of two wheelers was totally stopped and hence the payments were stuck up. The balance due for both the above units had been settled during the year under consideration. The Assessing Officer was not satisfied with the assessee s submissions. The AO observed that Hero Motors Ltd. was a group concern of the appellant and held that these amounts were interest free advances to the group concerns and accordingly disallowed proportionate interest on these debit balances @ 7.38%. The total disallowance on the aforesaid advances to M/s Hero Exports and Hero Motors was made at ₹ 2,09,66,994/- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the ratio laid down by the Hon'ble Punjab Haryana High Court in the case of Abhishek Industries (Supra). This observation of the Hon'ble IT AT was also noted by the Hon'ble Punjab and Haryana High Court in the case of Power Drugs Ltd. Vs. CIT (2011) 62 DTR(P H) 276. Keeping in view the aforesaid decisions of the Hon'ble ITAT and Hon'ble Jurisdictional High Court, it is held that the case of M/s Abhishek Industries Ltd. is not applicable where any amount was not advanced as loan. In the instant case, the undisputed fact is that no amount of debit balance is on account of any loan given by the appellant to M/s Hero Exports Ltd. or to M/s Hero Motors Ltd. This fact had been stated by the appellant during the course of assessment proceedings. The same was not controverted by the AO. The AO merely held that in view of the fact that the three companies are group concerns and in view of the fact that huge amounts were outstanding from both M/s Hero Exports Ltd. and M/s Hero Motors Ltd. the same is in the nature of interest free advance. This observation of the AO is not based on proper appreciation of facts as discussed in the findings above. The total ..... X X X X Extracts X X X X X X X X Extracts X X X X
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