TMI Blog2016 (7) TMI 1439X X X X Extracts X X X X X X X X Extracts X X X X ..... ein there is a decrease in loan liability is logical as it pre supposes, assessee had sufficient interest free funds available with him to make the investment. In fact, the assessee through the fund flow statement for the financial year 1996 97 to 2000 01, has demonstrated before us that he had enough interest free surplus fund available to make the investments in exempt income yielding assets. See case of HDFC Bank [2016 (3) TMI 755 - BOMBAY HIGH COURT] Disallowance of expenditure claimed on account of payment made to Ocean Tech - Held that:- Only because the party did not respond to the notice under section 133(6), the payment made by the assessee cannot be held to be bogus as the assessee through other documentary evidence has been able to establish the authenticity of the payment. Moreover, when it is not disputed that the payment has been made through cheque, the Department could have enquired from the concerned bank the genuineness of the payment made. Further, when the entire payment to sub contractors has been accepted as genuine, it is unacceptable that assessee would have inflated the expenditure to the extent of ₹ 14,76,291 in respect of one of the parties. In t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... issioner (Appeals) directed the Assessing Officer to verify the fact and if it is found that same disallowance was made twice, then delete the addition. Disallowance of claim of depreciation - possession of property - Held that:- The machinery / equipments were purchased by the principal but the assessee had been vested with the possession of them and has utilized them for its business. It is also not disputed that the principal has debited the cost of machinery to the assessee s account and the assessee has capitalized it in its books of account. That being the case, applying the ratio laid down by the Hon'ble Supreme Court in Mysore Minerals Ltd. (1999 (9) TMI 1 - SUPREME Court) the assessee is eligible for depreciation. Sales tax liability by applying the provisions of section 43B - Held that:- it is the stand of the Department that the deduction claimed is not allowable as per section 43B as the assessee has not paid within the time stipulated under the said provision. However, it is the claim of the assessee that the amount has been adjusted on 31st March 2001, hence, it is allowable as deduction. Considering the aforesaid submissions of the assessee, we direct the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of interest attributed on loans and advances made to subsidiary companies, a partnership firm in which the appellant is a partner and to a sister concern. 3. The learned Commissioner (Appeals) erred in presuming that the whole of the borrowings of ₹ 793.25 lakhs had been utilised for making advances to subsidiaries, a partnership firm and a sister concern. 4. Without prejudice, the learned Commissioner (Appeals) erred in considering the average rate of interest at 15.44%. Disallowance under section 14A 5. The learned Commissioner (Appeals) erred in confirming the disallowance of proportionate interest expenses as incurred towards earning income that does not form part of the total income. 6. The learned Commissioner (Appeals) erred in confirming the action Assessing Officer in estimating and disallowing interest expenses \ establishing any nexus between investments generating tax-free income and borrowed funds. 7. The learned Commissioner (Appeals) erred in holding that the provisions of section 14A are applicable in respect of investments made by the appellant in the shares of the company and in the partnership firm. 8. Without prejudice, the learned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ejudice to the above, the learned Commissioner (Appeals) ought to have directed the Assessing Officer to allow deduction for sales tax liability of ₹ 7.97 lacs in the previous year relevant to the assessment year 2002-2003. Interest under section 234D 17. The learned Commissioner (Appeals) erred in confirming the action of the Assessing Officer in charging interest under section 234D. The appellant denies liability to pay interest under section 234D. 18. Without prejudice to the above, the learned Commissioner (Appeals) erred in not deleting the interest charged under section 234D for the period prior to June 1, 2003. General 19. Each one of the above grounds of appeal is without prejudice to the other. 20. The appellant reserves the right to amend, alter or add to the grounds of appeal. 2. Grounds no.19 and 20, being general in nature, do not require any adjudication. 3. Insofar as grounds no.10 and 12 are concerned, at the outset, Shri J.D. Mistry, Senior Counsel appearing for the assessee submitted, on the instruction of the assessee, he does not want to press these grounds, as the assessee has been given relief in giving effect to order passed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nterest paid by the assessee on the funds borrowed at 19% he worked out the total interest paid by the assessee at ₹ 474.18 lakh as against interest recovered by the assessee from subsidiary companies @ 11% at ₹ 219.42 lakh. He, therefore, disallowed the differential amount of ₹ 254.76 and added to the income of the assessee. Being aggrieved of such disallowance, the assessee preferred appeal before the learned Commissioner (Appeals). 7. Before the first appellate authority, the assessee challenging the disallowance of interest submitted, it had borrowed funds for specific purpose and also utilised for that purpose. Therefore, as the funds borrowed were utilised for the purpose of business, no disallowance out of interest expenditure should have been made. It was submitted, the loans advanced to subsidiary companies were out of assessee s own funds in the form of share capital and reserves, besides, loans given were for the purpose of business. Therefore, no disallowance of interest can be made. It was submitted, while confirming the disallowance of interest for the assessment year 1997 98 to 2000 01, the first appellate authority had directed the Assessing Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sallowance sustained by the learned Commissioner (Appeals), assessee is in appeal whereas, against partial relief granted by the learned Commissioner (Appeals), the Revenue has also preferred appeal. 8. Learned Authorised Representative submitted, loans advanced to Afcons Pauling (India) Ltd., amounted to ₹ 778.72 lakh. He submitted, the assessee has deep interest in all the subsidiary companies to which loans were advanced, therefore, such loans advanced was out of commercial expediency. Hence, no disallowance of interest expenditure can be made. In this respect, he relied upon the decision of the Hon'ble Supreme Court in S.A. Builders v/s CIT, [2007] 288 ITR 001 (SC). The learned Authorised Representative submitted, in assessment year 1997 98, the issue of disallowance of interest in respect of loans advanced to Afcons Pauling (I) Ltd., was subject matter of dispute before the Hon'ble Jurisdictional High Court and the High Court taking note of the fact that the issue was covered by the decision of the Tribunal in assessee s own case for assessment years 1998 99, 1999 2000 and 2000 01, directed the Assessing Officer to decide the issue of disallowance of interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tilised for advancing loans to the subsidiary companies and sister concerns. Therefore, the average rate of cost of fund computed by the assessee at 7.69% should be applied to the incremental advance of ₹ 793.25 lakh for determining the disallowance, if at all, it is to be made. Finally, the learned Sr. Counsel submitted, the assessee has recovered interest @ 11% on the loans advanced to the subsidiary companies and such interest has been assessed under the head Business . He submitted, only because the interest charged to the subsidiary is lesser than the interest paid by the assessee on borrowed capital, no disallowance can be made once it is accepted that capital was borrowed for the purpose of assessee s business. In this context, he relied upon the decision of the Hon'ble Madras High Court in CIT v/s Pudukottai Co. Pvt. Ltd., [1972] 84 ITR 788 (Mad.). 10. Learned Departmental Representative on the other hand while supporting the disallowance sustained by the learned Commissioner (Appeals) also argued for restoration of the disallowance made by the Assessing Officer while pressing the corresponding ground raised by the Department on the same issue. 11. We have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s no reason why disallowance of interest attributable to such loans is to be made. This is, keeping in view the principle laid down by the Hon'ble Supreme Court in S.A. Builders (supra) and Hero Cycles Pvt. Ltd. (supra). Therefore, the assessee having established on record that the loans advanced to Afcons Pauling (India) Ltd. is for the purpose of its business, no disallowance of interest expenditure can be made at least in respect of loans advanced of ₹ 778.72 lakh to Afcons Pauling (India) Ltd. As far as loans advanced to other subsidiaries are concerned, it is the plea of the assessee that it had sufficient own interest free funds available to advance the loan to subsidiary companies and no borrowed funds were utilised. In this context, he has referred to the fund flow statement for the assessment year 1996 97, 1997 98, 1997 98, 1998 99, 1999 2000 and 2000 01 to demonstrate that the assessee had sufficient interest free funds available to make the investment in the subsidiary companies. On a perusal of the fund flow statement placed at Page 335 to 339 of the paper book, we are convinced that the assessee had sufficient interest free funds available with it to advance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowance under section 14A relates to interest expenditure only. Referring to the observations of the learned Commissioner (Appeals) that in the financial year wherein the borrowing decreased there should not be any disallowance under section 14A, learned Sr. Counsel submitted, disallowance under section 14A was in respect of dividend income earned on two investment aggregating to ₹ 5,70,37,000 out of which investment in Unit Trust Of India is ₹ 5,65,57,000. Learned Sr. Counsel for the assessee referring to a statement showning year wise investment and increase / decrease of loans at Page 373 of the paper book submitted, investment in UTI was made in the financial year 1985 86, wherein there is a decrease in loans to the tune of ₹ 16.54 lakh. He, therefore, submitted, applying the reasoning of the learned Commissioner (Appeals) in directing the Assessing Officer to exclude the investment made in the financial year 1985 86, 1988 89, 1990 91 and 1991 92 on account of decrease in loans, the investment in UTI should not have been considered for the purpose of disallowance under section 14A, as it pre supposed utilisation of own funds. The learned Sr. Counsel submitted, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in loan liability of the assessee to the tune of ₹ 16.54 lakh. In fact, in Para 73 of his order the learned Commissioner (Appeals) has referred to financial year 1985 86 as one of the years in which loan liability has decreased. In our view, the direction of the learned Commissioner (Appeals) to exclude the investment made in the financial years wherein there is a decrease in loan liability is logical as it pre supposes, assessee had sufficient interest free funds available with him to make the investment. In fact, the assessee through the fund flow statement for the financial year 1996 97 to 2000 01, has demonstrated before us that he had enough interest free surplus fund available to make the investments in exempt income yielding assets. Therefore, applying the principle laid down by the Hon'ble Jurisdictional High Court in HDFC Bank Ltd. (supra) and Reliance Utilities Power Ltd. (supra), we direct the Assessing Officer not to make any disallowance under section 14A of the Act. Grounds no.5 to 8 is allowed. 21. In ground no.9, assessee has raised the issue of disallowance of depreciation of leased assets in case lease rental paid is not allowed as revenue expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed by the concerned party counter signed by the assessee. The learned Commissioner (Appeals), however, observed that the payment made to Ocean Tech is unverifiable in view of lack of response from the said party. He, therefore, rejected assessee s claim of deduction to the extent of ₹ 14,76,291. 25. Learned Sr. Counsel reiterating the stand taken before the learned Commissioner (Appeals) submitted, relevant and necessary documentary evidences were produced before the Departmental Authorities to prove the genuineness of the deduction claimed. He submitted, when payments made to all the parties were accepted, it is unbelievable that assessee would be inflating the expenditure only in respect of one of the contractors / parties. He submitted, the very fact that the notice issued by the Assessing Officer was served on Ocean Tech proves the existence of the party. He submitted, when the assessee produced documentary evidence to prove the payment, the disallowance made is unjustified. 26. Learned Departmental Representative on the other hand relied upon the order of the Assessing Officer and the learned Commissioner (Appeals). 27. We have considered the submissions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n daily basis. It was submitted, as the payment made was for purchase of an article or information, there is no requirement for deduction of tax at source. The Assessing Officer, however, was not convinced with the submissions of the assessee and concluded that the payment is not allowable as per section 40(a)(i). He further observed even otherwise as per assessee s own admission the amount having been paid for purchase of an article or information which is in the nature of books and periodicals cannot be allowed as revenue expenditure. Accordingly, he disallowed the same. Being aggrieved, the assessee was in appeal before the learned Commissioner (Appeals). 30. Before the learned Commissioner (Appeals), it was submitted by the assessee that the information provided by the Meteo Consult, B.V., Netherlands, on weather situation viz. air pressure, wind situation, tide level is not confidential in nature but was a general data which can be obtained by anybody on payment of requisite fee. It was further submitted, as Meteo Consult, B.V., Netherlands, does not have Permanent Establishment (P.E.) in India, the profit earned is not chargeable to tax in view of Article 7(1) of DTAA betw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ontended provisions of section 40(a)(ia) of the Act was brought into the statute by Finance Act 2003, therefore, as per Article 24 of the Indo Netherland DTAA by application of non discrimination clause, no disallowance under section 40(a)(i) can be made as similar disallowance applicable to resident as per section 40(a)(ia) of the Act was brought into the statute by Finance Act, 2003. He, therefore, submitted in terms of Article 24, no disallowance u/s 40(a)(i) can be made. For such proposition, he relied upon the following decisions: i) Sandoz Pvt. Ltd. v/s ACIT, 149 ITD 507 (Mum.); ii) Central Bank of India v/s DCIT, 42 SOT 450 (Mum.); and iii) Herbalife International India P. Ltd., 101 ITD 450. 33. Learned Departmental Representative on the other hand relied upon the observations of the Assessing Officer and the learned Commissioner (Appeals). 34. We have considered the submissions of the parties and perused the material available on record. Undisputed facts are, assessee has undertaken a project which required execution of work in sea. Therefore, the assessee to know the condition of sea required daily weather forecast providing data relating to sea condition, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeal, we have held in Para 20 of this order that no disallowance under section 14A is called for. In view of such decision, ground no.(ii) having become infructuous is dismissed. 40. In ground no.(iii), Department has challenged the decision of the learned Commissioner (Appeals) in deleting the addition made by the Assessing Officer on account of lease rental. 41. Brief facts are, the Assessing Officer in the course of assessment proceedings, noticing that the assessee has claimed deduction on account of lease rentals paid and charged for certain assets taken on lease called upon the assessee to furnish necessary details. It was submitted by the assessee that an amount of ₹ 10.28 crore was paid towards lease rent on the basis of lease agreement. On a perusal of lease agreement, the Assessing Officer was of the view that they are more like financial transaction rather than lease transaction. He noticed that the amount of ₹ 10.21 crore was paid to SCICI Ltd., as per lease agreement dated 8th June 1996. On going through the terms and conditions of lease agreement, the Assessing Officer was of the view that apart from paying lease rental, the assessee had to ensure m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertain clauses of the agreement, it was submitted that the assessee was prohibited from selling, transferring, assigning, mortgaging the equipment taken on lease. Referring to clause 4.7 to 4.10 of the lease agreement, it was submitted that lessor was being shown as the owner and any claim received from insurance company had to be paid over to the lessor. With reference to the clause 4.13 of the agreement, it was submitted that lessee is not permitted to make any alteration, addition or improvement to the equipment or change the conditions thereof without the prior written consent of the lessor. With reference to clause 6.6 to 7.1 of the agreement, it was submitted that the intention of the parties is to deliver back the equipment of the lessor in good working condition on expiry of the lease agreement. Thus, it was submitted that the lease rent paid is to be allowed as revenue expenditure. Alternatively, it was submitted by the assessee in the event the transaction is held as financial transaction, the assessee should be allowed depreciation on the asset. In support of such contention, assessee relied upon certain judicial precedents. Learned Commissioner (Appeals) after consideri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the decision of the learned Commissioner (Appeals) and submitted that as the lease agreement between the assessee and lessor is an operational lease, assessee is entitled to claim lease rental paid as deduction. Alternatively, he submitted in the event the principal component is disallowed assessee should be allowed depreciation. For such proposition, he relied upon the decision of the Apollo Finvest India Ltd., 382 ITR 33 (Bom.) and Development Credit Bank Ltd. v/s DCIT, 40 Taxmann.com 532. 45. We have considered the submissions of the parties and perused the material available on record in the light of the decisions relied upon. On a perusal of different clauses of lease agreement, we agree with the observations of the learned Commissioner (Appeals) that the arrangement between the SCICI Ltd. and the assessee is in the nature of operational lease and not financial lease. On a perusal of the assets taken on lease, the details of which were submitted at Page 395 to 399 of the paper book, it is noticed that the assessee had taken on lease various equipments / machineries from different companies for using them in its business activity. It is not disputed that the lease rental p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... before the learned Commissioner (Appeals) that an amount of ₹ 15,92,424 was actually paid to Shri Sukhdev Singh Dhiman. In support of the genuineness of payment assessee also produced certain documentary evidences on the basis of evidences produced learned Commissioner (Appeals) called for a remand report. During the remand proceeding, Shri Sukhdev Singh Dhiman was also produced before the Assessing Officer. It was noted by the learned Commissioner (Appeals) that in the remand report, the Assessing Officer has not made any adverse comment against Shri Sukhdev Singh Dhiman and further has not commented upon double addition made of the amount paid by the assessee to Shri Sukhdev Singh Dhiman. The learned Commissioner (Appeals), after considering these submissions of the assessee in the light of the facts and material on record, held that the amount paid to Shri Sukhdev Singh Dhiman is allowable as deduction. As far as the contention of the assessee that double disallowance was made by the Assessing Officer, learned Commissioner (Appeals) directed the Assessing Officer to verify the fact and if it is found that same disallowance was made twice, then delete the addition. 49. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmissions of the parties and perused the material available on record in the light of the decisions relied upon. As could be seen from the facts on record the machinery / equipments were purchased by the principal but the assessee had been vested with the possession of them and has utilized them for its business. It is also not disputed that the principal has debited the cost of machinery to the assessee s account and the assessee has capitalized it in its books of account. That being the case, applying the ratio laid down by the Hon'ble Supreme Court in Mysore Minerals Ltd. (supra), Varanasi Auto Sales (P) Ltd. [2010] 326 ITR 182 (All.) and CIT v/s Dilip Singh Sardarsingh Bagga [1993] 201 ITR 995, the assessee is eligible for depreciation. Accordingly, we uphold the order of the learned Commissioner (Appeals) on this issue. Ground no.(v) is dismissed. 54. In ground no.(vi), the Department has challenged the deletion of addition made on account of bogus and inflated expenditure. 55. As already discussed elsewhere in the order during the assessment proceedings the Assessing Officer had disallowed payment made to sub contractors amounting to ₹ 628.44 lakh alleging no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of ₹ 42,50,221. The assessment order was passed on 31st March 2001 and after adjusting the demand against TDS a refund of ₹ 32,71,897, though, was computed but no refund voucher was actually issued to the assessee. Subsequently, the assessment order was revised by the higher authority determining the sales tax liability at ₹ 15,47,640 vide order dated 29th December 2001. It was submitted, since no accounting entries were passed while receiving the assessment order the entire payment of ₹ 50,47,640 was accounted in the books of account in financial year 2001 02 relevant to assessment year 2002 03. It was submitted by the assessee, the entire payment of ₹ 50,47,640, became payable on 31st March 2001 and was adjusted against the TDS on the said date. Thus, it was submitted, the expenditure is allowable as the amount was actually paid. The learned Commissioner (Appeals) after considering the submissions of the learned Commissioner (Appeals) held that sales tax liability of ₹ 42,52,221 has crystallized during the year on the basis of order passed by the sales tax officer on 31st March 2001. He, therefore, directed the Assessing Officer to allow dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommissioner (Appeals) erred in directing the Assessing Officer to delete the disallowance of ₹ 40,08,929 made in the assessment order passed under section 143(3). 65. The Assessing Officer while completing the assessment for the impugned assessment year made disallowance in respect of sub contract charges. 66. The learned Commissioner (Appeals), while deciding the issue of disallowance in an appeal preferred by the assessee directed the Assessing Officer to delete all disallowance except the disallowance of payment made to Ocean Tech. However, in the order passed by the Assessing Officer while giving effect to the order of the learned Commissioner (Appeals), the Assessing Officer did not delete the disallowance of an amount of ₹ 40,08,929. Being aggrieved, assessee preferred appeal before the first appellate authority. 67. The learned Commissioner (Appeals) after considering the submissions of the assessee in the context of appeal order passed by him earlier found the claim of the assessee to be correct and accordingly directed the Assessing Officer to delete the addition. Being aggrieved of the order of the learned Commissioner (Appeals), Department is in app ..... X X X X Extracts X X X X X X X X Extracts X X X X
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