TMI Blog2017 (10) TMI 53X X X X Extracts X X X X X X X X Extracts X X X X ..... see is dismissed Disallowance of expenses claimed to be crystallized during the year under consideration - Held that:- Firstly, regarding amount of ₹ 9,43,693, it relates to income under the co-marketer arrangement which was booked in excess in the previous financial year and now been reversed during the current financial year. It is thus not an expense but a reversal of income excess booked earlier and now been rectified during the year under consideration. There is thus no question of disallowance of the same. The other expense relates to godown rent for which a request was made by the assessee to NAFED for waive off in the previous financial year however, the final decision of NAFED was received by the assessee during the subject financial year wherein NAFED refused to waive off the rent. Since the assessee didn’t lift the material from the godown of NAFED during the previous financial year, it was contesting its liability to pay the godown rent which was finally crystallised during the year under consideration and accordingly, the same was claimed as an allowable expenditure. Similar is the position regarding travel bill the same was finally traced and processed in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the borrowed funds withdrawn from the cash credit account. We also confirm the findings of the ld CIT(A) regarding disallowance of ₹ 387,800 which is the actual interest charged by the HDFC bank on the cash credit account during the period Dec 2008 to March 2009 when the major investment has been made by the assessee in the mutual fund units and the funds have been withdrawn from the cash credit account. Disallowance of interest on NCD - Held that:- We find that the ld CIT(A) has worked out the interest without taking into consideration the fact that these NCDs of ₹ 60 Crores were availed on 10.12.2008 and were repaid between 11th to 15th December and NCD’s of ₹ 50 crores were availed on 29.01.2009 and were repaid on 9th February 2009. The interest disallowance has therefore to be restricted for the period NCDs were availed and repaid. The matter is accordingly set-aside to the file of the AO for the limited purposes of working out the interest on NCDs and limit the disallowance to that extent in relation to NCDs. Addition of interest - nexus between the borrowed funds and the investments in the subsidiary company - Held that:- As gone through SBH’s bank sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 2,44,736/- paid by assessee for membership of its employees; iv) Whether on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in allowing rent paid for flat of ₹ 10,80,000/- to a person specified u/s 40A(2)(b); v) Whether on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in deleting the disallowance of ₹ 60,72,592/- u/s 35D out of payments of ₹ 67,47,325/- made by the assessee to Zuari Investment Ltd. without appreciating the fact that these expenses are w.r.t. shipping division whose income was offered on the basis of Tonnage Scheme, hence no expenditure of this division can be separately allowed. Otherwise also these expenses were falling under the mischief of section 35D of the I.T. Act and should have been accordingly allowed; vi) Whether on the facts and in the circumstances of the case, the Ld. CIT(A) has erred in curtailing disallowance out of interest paid on borrowed funds to ₹ 37,65,316/- as against that of ₹ 78,47,330/- made by A.O. since the decision of Ld. CIT(A) is not in conformity with the ratio laid down by the 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 ..... nterest of ₹ 1,79,04,632/- without proving any nexus between investments and interest bearing loans. Hence the addition made on this account deserves to be deleted. 3. That the L d Joint Commissioner erred in not allowing the deduction from income of ₹ 3,05,18,573/- and holding that education cess is a disallowable expenditure u/s 40(a)(ii) and not allowable expenditure u/s 37 and the L d CIT(Appeals) erred in confirming the same. Hence the claim for deduction from income in respect of education cess of ₹ 3,05,18,573/- should be allowed. 4. That the L d Joint Commissioner erred in making the disallowance of ₹ 25,00,816/- in respect of previous years expenses crystallized during A.Y. 2009-10 and the L d CIT(Appeals) further erred in confirming the same. Since the expenditure crystallized during the year the same are allowable expenses and the disallowance made should be deleted. 5. That the L d Assessing Officer erred is not allowing deduction of ₹ 1,73,53,860/- for the expense incurred against the sale of mining rights and thereby not reducing the short term capital gains as directed by the Hon ble ITAT, Jaipur Bench in the assessee s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company. The expenditure was treated as donation. The Hon'ble Jurisdictional High Court in the case CIT Vs. Rajasthan Spinning Weaving Mills Ltd.,(supra) observed that the question of claim to deduction of any amount spent by the assessee as expenditure laid out wholly and exclusively for the purpose of assessee's business is not to be decided in the light that the assessee must be entitled to the whole benefit accruing from such expenses and nobody else should be sharing this benefit as is derived by the assessee by dint of such expenses. The Hon'ble Bombay High Court in the case of CIT Vs. B.C. Shirke Co., 264 ITR 83 had an occasion to consider the allowability of contribution to the three trusts formulated for the welfare of the employees. The Hon'ble Bombay High Court in this case has observed as under:- Voluntary payments made by an employer for the general welfare and benefit of the employees on grounds of commercial expediency are revenue expenditure, deductible under section 37 of the Income- tax Act. Such expenditure has nexus with the conduct of business and the expenditure incurred for maintaining industrial peace and cordial relations with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a case where the assessee has paid corporate fee to the club. There is no payment for the period exceeding one year so that the benefit may be given to the employees for more than a year. The expenditure as club membership fee is an expenditure for the purpose of the business. Hence, the expenditure is allowable u/s 37 of the Act. Therefore, the ld. CIT(A) was justified in deleting the disallowance of ₹ 6,70,422/-. Admittedly, there is no change in the facts and circumstances of the case as compared to earlier years where the matter has been decided in favour of the assessee company. By respectfully following the order of the Coordinate Bench in assessee s own case for the A.Y. 2005-06, we uphold the order of the ld. CIT(A) for the impunged assessment year. Accordingly, this ground of the revenue s appeal is dismissed. Ground no. 4 relating to rent payment under section 40A(2)(b): 31. We have heard the rival contentions of both the parties and perused the material available on the record. The ld CIT(A) has given a finding that the employees of the assessee company stayed at the guest house in respect of which an amount of ₹ 10,80,000 has been paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment and the extended date of payment. However Board Circular 496 dated 25.9.87 stated that statutory liability is to be treated as paid in case the State Govt. makes an amendment that sales tax deferred under the scheme is to be treated as actually paid. Benovelent Circular of Board are mandatory. The liability is not that of sales tax but it is a liability of loan. Hence the decision of special bench in the case Sulzer India Ltd. is squarely applicable. It will be useful to reproduce Head Note in the case of Sulzer India Ltd. Business income-Profits chargeable to tax under s.41(1)-Payment of net present value against deferred sales-tax liability-Assessee company obtained incentive by way of sales-tax deferral schemes of 1983 and 1988 notified by the Government of Maharashtra-As per the said schemes, the sales-tax collected by the assessee during the period from 1st Nov., 1989 to 31st Oct., 1996, was to be paid after 12 years in six equal annual instalments-Fourth proviso to s. 38(4) of Bombay Sales-tax Act, 1959 provides that where an entitlement certificate has been granted to the eligible unit for availing of the incentives by way of deferment of sales-tax, etc. such u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. Vs. CIT (2003) 182 CTR (Bom) 34 : (2003) 261 ITR 501(Bom) : (2003) 128 Taxman 394 (Bom), has explained that s. 28(iv) seeks to charge the value of any benefit or perquisite, meaning thereby that the benefit must be in kind; the Court further held that waiver of loan is in respect of money transaction and, therefore, would not be in nature of any benefit or perquisite as construed in s. 28(iv). 2.21 The argument of the ld. DR that scheme of Rajasthan Govt is different is not of relevance. In the case of Maharashtra, the scheme of receipt of prepayment of loan was by a State Corporation while in Rajasthan it has been implemented by State Govt. The implementing agency may be different but the nature of the scheme is the same 2.22 We therefore hold that Ld.CIT(A) was not justified in confirming the addition of ₹ 12,06,33,254/- as provisions of section 41(1) are not applicable. For the case of A.Y. 2007-08, the Coordinate Bench in ITA No. 374/JP/2010 has held as under:- 16.2 Following our order for the assessment year 2005-06 (supra) we hold that the ld. CIT(A) was not justified in holding the receipt of ₹ 1,74,49,093/- as capital receipt. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of ₹ 1,58,71,98,115/- u/s 40(a)(ia) of the Act. 7. Being aggrieved, the assessee carried the matter in appeal before the ld CIT(A) and his relevant finding of the CIT(A) are reproduced as under:- 4.132 Discussion and the Appellate Decisions I have gone through Assessing Officer s findings and Assessee s submissions The payment covered u/s 194J covers fees for professional or fees for technical services. The payment made to lawyers, advocates, CAs, architects, are covered u/s 194J. Whereas payments u/s 194C covers payment for work contract. Payments for construction of Roads, building, excavation, transportation etc are covered u/s 194C. In my opinion the payment covered u/s 194J were related to use of technical or professional knowledge of an individual and only a small part of fees paid may be related to material consumed or equipment used or expenses actually incurred. E. g. A lawyer s fee is mostly for use of his expert knowledge and fee paid hardly relates to expenses on material consumed or equipment [computers etc] used. Same is the case when payment is made to an Architect, CA, or a company secretary etc. Whereas the pay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... works contract as envisaged in section 194C of the Act. Hence in such circumstances, provisions of Chapter XVII-B of the Act are not applicable on the component of Gas Transportation charges, paid by the purchaser to the Owner/seller of the gas. The use of different modes of transportation of gas by owner/seller will not alter the position. The Hon ble ITAT vide its order dated 18.02.2013 [appeal No. 337 338/JP/2012] in the case of assessee, while deciding the issue of charging of interest u/s 201(1A) and TDS u/s 201 has held as under:- In our considered opinion, a contract, which is intended to be a contract for sale of goods [for delivery], cannot be construed as anything else but a contract of sale. Accordingly, no duty is cast, in the facts and circumstances of the case, on the assessee company to deduct any TDS either u/s 194C of 194J of the Act. Therefore, interest charged u/s 201(1A) of the Act for alleged short deduction of tax has been correctly set aside by the ld. CIT(A). The fact that the assessee was deducting TDS u/s 194 C was stated to be on account of abundant caution taken by the assessee. This conduct of the assesee, being taken to be on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ITA No. 412/JP/2013 10. Now, coming to assessee s grounds of appeal, other than common grounds of appeal which we shall be discussing subsequently. 11. In Ground no. 3, the assessee has challenged the action of ld CIT(A) in confirming the action of AO in holding that education cess of ₹ 3,05,18,573/- is a disallowable expenditure u/s 40(a)(ii) and not allowable expenditure u/s 37. 12. Both the parties submitted that the issue is covered against the assessee and in favour of the revenue by the decision of the Coordinate Bench ITA No. 459 558/JP/2012 dated 28.10.2016. 13. We now refer to the relevant findings of the Coordinate Bench in ITA No. 459 558/JP/2012 dated 28.10.2016 which are reproduced are as under:- 63.1. Now coming to the contention of the AR that where the legislature wanted certain taxes other than income-tax to be excluded for the purposes of computation of taxable income, it has specially provided for the same. The instances are amounts paid as wealth-tax, securities transaction tax and fringe benefit tax in section 40 of the IT Act. Had there been any intention of disallowing education cess, such provision would have been specificall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . However NAFED did not accept the request and the same was conveyed to the appellant after closure of the financial year vide letter received by the assessee on 26.04.2008, hence the appellant booked the expenses in financial year 2008- 09 through document no. 100107966 dt. 15.10.2008. As far as the assessee is concerned the liability to pay only crystallised in the assessment year 2009- 10. 3. ₹ 267,780.00:- During the financial year 2007-08 the appellant arranged a tour for its business associates through M/s Lionel Holdings. Initially and gave an advance of ₹ 8,71,600/- to M/s Lionel Holidays and the balance amount was to be settled after receipt of the final bill. However, the final bill was misplaced at the appellant s office and was finally traced in December 2008 and the same was processed through document no. 100135535 dt. 31.12.2008. It is humbly submitted that if for any reason the claim of deduction for expenditure is for any reason not allowed in AY 2009-10, direction may kindly be given to allow the same in AY 2008-09. 17. The relevant findings of the CIT(A) are reproduced as under:- 4.122 The issue is dealt separately for each item, as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n allowable expenditure. Similar is the position regarding travel bill of ₹ 267,780, the same was finally traced and processed in December 2008. There is no dispute that all these expenses have been incurred for the purposes of the business and all are duly supported by verifiable documentation which has been produced and available on record. Further, it is not the case of the Revenue that the tax rates have changed from last year and any prejudice have been caused to the Revenue. In the entirety of facts and circumstances of the case, we set-aside the order of the lower authorities and the AO is directed to allow these expenses as an allowable expenditure in the hands of the assessee. In the result, ground no. 4 of assessee s appeal is allowed. Common grounds of appeal 20. Now, we refer to the common grounds of appeal wherein both the parties are in appeal before us against the findings of the ld CIT(A). 21. Regarding ground No. 10 of the Revenue s appeal and ground No. 5 of the assessee s appeal relating to deduction against sale proceeds of mining rights, the relevant facts and findings of the ld CIT(A) are reproduced as under:- 4.142 The assessee claimed e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he issue, which he failed to do therefore the same is being considered by me. The Hon ble ITAT has directed that in case the AO comes to conclusion that the capital expenses amounting to ₹ 1,73,53,860/- included in the cost of mining rights i.e. non-tangible assets then such cost may be considered to be deducted against the sale of mining rights in the assessment year 2009-10. Therefore the assessee was asked to furnished details of these expenses which were included in the mining rights. The assessee submitted that amount of ₹ 87,45,400/- were paid to M/s ANS construction for dismantling of existing structure, fencing of boundary, construction of temp. site office and security in plant area. Firstly from the above nothing could be concluded [no details were produced], secondly it s connection to mining was not proved. From the details already in the order of ITAT it can be concluded that of ₹ 8608460/- related to deep excavation and road work were related to mining operation and treated as included in sale of mining rights. Whereas misc. Capital expenses of 87,45,400/- [in absence of details] cannot be treated as related to mining rights. Theref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Regarding ground No. 7 of the Revenue s appeal and ground No. 3 of the assessee s appeal relates to disallowance of interest on loan on account of investment in Mutual Funds. The AO has disallowed interest of ₹ 12,90,03,457/- which was reduced to ₹ 1,79,04,632 by the ld CIT(A) and now both the parties are in appeal against the action of the ld CIT(A). 25. Briefly, the facts of the case are that during the course of assessment proceedings, the Assessing Officer observed that the assessee company has declared dividend income of ₹ 4,89,31,413/- on Mutual Funds which has been claimed as exempt income u/s 10(35) of the Act. The Assessing Officer further observed that total investment of ₹ 699.45 Cr has been made in units of various Mutual Funds during the year out of cash credit account maintained by the assessee with HDFC Bank, New Delhi. A show cause notice was issued to the assessee to explain why disallowance be not made out of interest paid on borrowed funds as per section 14A of the Act and also because the assessee has failed to prove any commercial expediency. In response, the assessee submitted that the investment in the Mutual Fund units have been m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stments in Mutual Funds, which is not the regular business of the company. Additionally, the efforts put to do such investment in Mutual Funds were miniscule and very low as compared to the other banking transactions of the Company as a whole. There were very few transactions of investment in the Mutual Funds during the whole of the Assessment Year under consideration. The major investment in the Mutual Funds were made during December 2008 to March 2009 from the HDFC Bank Account and the bank has charged cash credit interest of only ₹ 3,87,800/- during the period from December 2008 to March 2009. However, the L d Assessing Officer calculated notional interest based on the period of holding of the security without considering the actual interest paid during the relevant period. Considering the above, it is humbly submitted that the addition made on this account deserves to be deleted. Written submission dated 17.09.2012: It is humbly submitted that an amount of ₹ 4,89,31,413/- being dividend income was earned on Mutual Funds, which has been claimed as exempt income u/s 10(35) of the Act. The investments in the Mutual Funds were made out of the surp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Invested for 3 days 400,000,000.00 17-Jan-08 Invested for 1 days 2 Reliance Mutual Fund 450,000,000.00 17-Jan-08 Invested for 1 days 450,000,000.00 4-Aug-08 Invested for 1 days 500,000,000.00 5-Dec-08 Sale of Fertiliser Bonds 3 Birla Mutual Fund 125,000,000.00 5-Dec-08 Sale of Fertiliser Bonds 375,000,000.00 7-Dec-08 Sale of Fertiliser Bonds 4 ICICI Prudential Mutual Fund 335,000,000.00 10-Dec-08 Collection from sales NCD s 165,000,000.00 29-Jan-09 Collection/FD Matured/NCD,s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CD s of ₹ 50 crores were availed on 29.01.2009 and was repaid on 9th February 2009 i.e. the outstanding was only for 11 days. The appellant humbly submits that the maximum utilization of borrowed funds is for a period of 11 days whereas disallowed notional interest has been calculated up to a period of about 4 months. The appellant further reiterates that during the period December 2008 to March 2009 when the major investments were made from HDFC Bank, the bank has charged cash credit interests of only ₹ 3,87,800/- Thus the interest of ₹ 12,90,03,457/- disallowed by the L d Assessing Officer is unlawful and against law and the additions made on this account should be deleted. 27. We now refer to the findings of the ld CIT(A) which are reproduced as under: 4.92 The assessee has diverted interest bearing funds for earning non- taxable income, therefore corresponding interest expenses has to be disallowed. However on verification it was seen that part of the investment was from its own funds (internal accrual) and disallowance related to same has to be deleted. It was also seen that part of the interest bearing loans were repaid o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l 683,736.30 2. ACTUAL INTEREST CHARGED ON CC A/C WITH HDFC BANK FOR THE PERIOD DEC. 08 TO MARCH 09 (W.R.T. INVESTMENT MADE OUT OF FUNDS). BANK DEC. 08 JAN. 09 FEB. 09 MARCH 09 TOTAL HDFC 246,866.00 19,047.00 79,927.00 41,960.00 387,800.00 3. INTEREST OF NCDS FOR THE PERIOD 10/12/08 TO 31/03/09 ON NCD OF 60 CRORES AND 50 CRORES CALCULATED AT AVG. RATE OF NCE INTT. FOR THE RELEVANT MONTH Amount From To NCD Rate Int. Interest 120,000,000 10-Dec.-08 31-Dec-08 8.49% 614,071,2329 150,00,00.00 10-Dec.-08 31-Dec-08 8.49% 767,589.0411 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid between 11th to 15th December and NCD s of ₹ 50 crores were availed on 29.01.2009 and was repaid on 9th February 2009. It was submitted that the maximum utilization of borrowed funds is for a period of 11 days whereas disallowed notional interest has been calculated up to a period of about 4 months. It was further submitted that during the period December 2008 to March 2009 when the major investments were made from HDFC Bank, the bank has charged cash credit interest of only ₹ 3,87,800/-. In light of above submissions of the assessee, it is therefore clear that borrowed funds in form of NCDs and cash credit facility have been utilised to an extent for the purposes of making investment in the mutual funds units and a clear nexus has thus been established between the borrowed funds and the investment in the mutual fund units. 29. The next question that comes is the determination of interest on such borrowed funds which have been utilised for making the investments in the mutual fund units. In this regard, we have gone through the findings of the ld CIT(A) and confirm his findings regarding disallowance of ₹ 683,736 for the reason that no specific source has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an amount of ₹ 78,47,330 determined using the rate of interest of 13.25/12.75% per annum payable on the cash credit accounts from where such investments were made. 33. Being aggrieved, the assessee carried the matter in appeal before the ld CIT(A) and submitted that CFCL Overseas Limited was incorporated as a Special purpose vehicle for consolidation of entire software business of assessee. It is a wholly owned subsidiary of the appellant. Chambal Infrastructure Ventures Limited is a special purpose vehicle and wholly owned subsidiary of the appellant i.e. a 100% subsidiary. This subsidiary is engaged in development and setting up of power projects. As desired by your good-self, please find enclosed herewith copy of relevant bank accounts reflecting above investment (page no. 3 to 12). Further, this is to submit that the investment have been made out of the internal accruals of the Company. The appellant Company had earned a profit (PAT) of ₹ 230.56 crores and cash profit of more than ₹ 439.26 crores (PAT+ Dep-Deff Tax credit) during the year. The investment in subsidiary companies was made out of internal accruals generated by the company. The position ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dice to the contention of the assessee that the investments were made out of the surplus earned by the assessee, and that the investments had a direct nexus to the existing business of the assessee, we submit that the interest disallowed cannot in any case exceed the interest actually charged by the bank. On this basis we have made a calculation of maximum interest that could be considered, which works out to ₹ 47.11 Lakhs. This calculation is without prejudice to the contention of the assessee that the investments were made out of the surplus earned by the assessee. 34. The relevant findings of the ld. CIT(A) are reproduced as under:- 4.82 I have gone through the details and it was see that the payment to it s wholly owned subsidiaries were made from cash credit account and same was therefore out of interest bearing funds. However it was seen that when payment of ₹ 5.24 crores was made the assessee had credit balance in the account and only ₹ 2.13 crores were over draft. Thus out of ₹ 5.24 crore only an amount of ₹ 2.13 crore was related to interest bearing funds. The other payment of ₹ 1.20 crore was directly related to over draft ..... X X X X Extracts X X X X X X X X Extracts X X X X
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