TMI Blog2018 (5) TMI 1630X X X X Extracts X X X X X X X X Extracts X X X X ..... eful in expanding the export business of the company in long run - this expenditure is in the nature of training expenditure of the Director herself - thus full tuition fee is allowed - Decided in favor of assessee. Disallowance of interest on term loan and car loan u/s 14A - Held that:- interest is related for the purposes of investment in exempt income yielding investment - thus allowed - Decided in favor of assessee. - I. T. Appeal No. 4539 (Del) of 2014 And I. T. Appeal No. 5058 (Del) of 2014 - - - Dated:- 21-5-2018 - SHRI S. K. YADAV, JUDICIAL MEMBER AND SHRI PRASHANT MAHARISHI, ACCOUNTANT MEMBER For The Assessee : Shri Salil Aggarwal, Adv.; And Shri Shailesh Gupta, C. A. For The Department : Shri S. L. Anuragi, Sr. D. R. ORDER. PER PRASHANT MAHARISHI, A.M.: 1. The Revenue and assessee has filed appeals against the order of the learned Commissioner of Income Tax (Appeals)-XV, New Delhi, dated 20.06.2014, for assessment year 2010-11. 2. The Revenue has raised the following grounds of appeal :- 1. On facts and circumstances of the case, the CIT(A) has erred in deleting notional interest of ₹ 3,47,58,711/- on interest free lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome on account of loans given to other parties. It is also carrying on the business of dying yarn, knitting, hotel business and export of home furnishing items. The assessee filed its return of income declaring loss of ₹ 2,51,08,473/- on 27.09.2010 and assessment under section 143(3) of the Income Tax Act was made on 28.02.2013 at a total income of ₹ 1,90,67,002/-. The learned Assessing Officer made 6 disallowances to the total income of the assessee which were contested before the learned CIT (Appeals) and he gave part relief vide order dated 20.06.2014. Therefore, both the parties are in appeal before us. 5. The first ground of appeal of Revenue is against deletion of disallowance of interest of ₹ 3,47,58,711/- on interest free loan and advances given to subsidiary companies. Ground No. 2 of the appeal was also related to that wherein the learned CIT (Appeals) has restricted the disallowance alternatively made by the Assessing Officer of ₹ 99,44,878/- to ₹ 14,76,678/-. The assessee has also raised ground No. 2 of his appeal against the sustaining of disallowance of ₹ 14,76,678/-. The learned Assessing Officer has noted that assessee has give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total 7,42,97,637/- 30,50,14,227/- 3.1 From the above, it appears that the assessee has given huge funds to its subsidiaries and sister concern against which no interest has been charged. It also appears that most of the above companies have very nominal capital and no business accept making investment in shares and properties out of fund taken from the assessee company. 3.2 The assessee company is a Non Banking Financial Company and as per memorandum of article its main object is to earned interest by lending funds on interest in the market. But, in contrary to its main object the assessee has given huge funds to its subsidiaries and sister concerns against which no interest is being charged. The subsidiaries and related parties of the company have invested the funds in shares and properties and they are beneficiary of any income is earned on account of such investment. Considering the facts of the case vide order sheet entry dated 11.02.2013, the assessee was asked as under :- Assessee Company is a NBFC company and the earning of interest on loans given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he funds given to other parties. As per memorandum of article of the company one of the main objects is lending money in the market on interest, but in contrary of its own object the assessee is not charging any interest and suffering huge losses year by year. Considering the all aspects of the case it would be quite justified to compute interest on prevailing minimum market rate and amount of interest so quantified be added to the total income of the assessee. Opening balance of interest free funds given to the subsidiaries is ₹ 27,42,97,637/- whereas closing balance is ₹ 30,50,14,227/-. From the copy of account of above different parties it is noted that there were very few transactions during the under assessment. Thus, it would be logical if interest is computed on average amount of investment during the year under reference. Average investment works out at ₹ 28,96,55,932/- and interest thereon @ 12% (which suppose to be minimum prevailing interest during the year under reference) works out ₹ 3,47,58,711/-. Accordingly, a sum of ₹ 3,47,58,711/- is added to the total income of the assessee company. Since, I am satisfied that the assessee has furnish ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nces, based on which the Hon'ble jurisdictional High Court had held that the funds / advance to sister concerns have to be attributed to the own funds of the assessee company. It will not make any difference whether the appellant was NBFC or not, as the ratio decidendi is common to all such cases. Moreover, the action of the AO itself lacks the legal basis, as there is no provision under the Act to make a notional addition of income, which has neither been accrued nor received. Under the circumstances, addition made by the Id. AO is being deleted. I also observe that in the subsequent year as well in the earlier years, no such addition, rightly, was made by the Id. AO. 6.4 Regarding the Ground No. 3 of the appeal relating to addition on account of notional interest income on the cash in hand, which was held as excessive by the Id. AO, in view of the settled legal position that the AO cannot sit in the shoes of the businessmen, the addition made notionally by the appellant lacks legal basis and is held as arbitrary and unreasonable. The AO had no basis, whatsoever to hold that the appellant should logically hold only an amount of ₹ 16,88,564/- for the business of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be granted benefit of the same; iv. He further stated that the advances were given in earlier years; v. He stated that assessee is a NBFC and, therefore, giving of the loan is the business of the assessee. 10. The learned Departmental Representative vehemently supported the order of the Assessing Officer and submitted that when assessee has given interest bearing funds to its sister concern without charging of the interest the same is correctly disallowed by the Assessing Officer. 11. We have carefully considered the rival contentions and perused the orders of the lower authorities. In the present case admittedly the assessee has given interest free funds amounting to ₹ 30.50 crores to its sister concern. Admittedly no business exigency or business prudence was shown before the Assessing Officer and, therefore, the learned Assessing Officer worked out the disallowance of the interest @ 12% thereon amounting to ₹ 3,47,58,711/-. However, as the assessee has paid interest only of ₹ 94.44 lakhs, he has alternatively restricted the disallowance. On hearing of the parties and considering the various arguments it is apparent that assessee is a company, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee, it is noted that most of the expenses has credit card and no bills and vouchers could be produced in of ₹ 25,91,194/- claimed stating it as prepaid expenses transferred to expenditure account. The assessee has submitted that a sum of ₹ 25,91,914/- was incurred in immediate preceding year which was fee for whole period paid to the University towards and of the previous financial year and as expense was related to this year the same was debited to prepaid expenses in the year under reference. The assessee could not furnish any bills pertaining to the above prepaid expenses also. 7.2 Vide order sheet entry dated 11.02.2013, the assessee was asked to show cause as to why the expenditure incurred on the education of one of the Director on account of his / her MBA Course may not be treated as capital in nature and disallowed accordingly. In response, the assessee vides its reply as under :- Your good self have been pleased to require to assessee firm to explain for the expenditure incurred on the education of one of the directors namely Miss Sonali Jain be not treated as deferred revenue expenditure / capital expenditure to be disallowed and adde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has nothing to do with the business of the assessee and such type of education very much available in the Country. The expenditure incurred is absolutely personal in nature and not for the purpose of business. Reliance placed on the following judgements:- i) Mac Explotec P. Ltd. Vs. CIT (Kar) 286 ITR 378 ii) Silicon (India) Ltd.Vs. DCIT (Mad) 295 ITR 422 iii) Echjay Forgings Ltd. Vs. ACIT (Bom) 328 ITR 286 iv) Enkay (India) Rubber Co. Pvt. Ltd. Vs. CIT (Del) 263 R 521 7.5 Considering the whole affairs in this regard a sum of ₹ 42,89,759/- is disallowed and added back to the total income of the assessee company. Since, I am satisfied tha't the assessee has furnished inaccurate particulars of proceedings under section 271(l)(c) are being initiated [Addition of ₹ 42,89,759/-] 16. The assessee aggrieved with the order and preferred an appeal before the learned CIT (Appeals) who dealt with the whole issue vide para Nos. 5.6 to 6.6.5 of his appellate order as under :- 6.6 Regarding the Ground No. 5 of the appeal relating to disallowance of education expenses of the Director, Ms Sonali Jain, I find that the Id AO initially questioned t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness connection. Under the circumstances, the objections of the AO lack merit. 6.6.3 The appellant furnished break-up of education expenses incurred for this purpose as under :- Staff Education Expenses 1. 14.05.09 136.50 Pounds Internet 10,682 2. Amex Credit Card 1,28,625 3. Citi Bank Card 2,78,814 4. LMP Housing Services 4,91,013 5. ABS Holidays Inc 80,919 6. Travel CDG-MVC-DEL-CDG dt. 53,512 25.07.09 7. Singapore tickets (69610+59000) 1,28,610 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Citi Bank Card 2,78,814/- 28/10/2009 S P Securities 1,88,110/- - S P Securities 86,610/- Total 6,92,841/ It was informed that Ms. Sonali Jain, during the MBA course preferred to live in a service apartment, instead of being in the institutional premise, the expenses in which regard are being allowed by me. Moreover, with regard the amounts transferred for meeting living expenses, in the absence of any details, element of personal nature therein cannot be ruled out. Accordingly 40% of such expenses are also disallowed. 6.6.5 In view of this, the appellant is allowed full claim of tuition fee of ₹ 25,91,194/-, LMP Housing Services for residence of the said director amounting to ₹ 4,91,013/-, and to fro air travel expenses of ₹ 59,670/- and 60% of living expenses amounting to ₹ 4,15,705/-. In view of this, the total claim is allowed to the extent of ₹ 35,57,582/- only. 17. Therefore, in nut shell out of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... student to serve the assessee company post education. 21. The learned authorized representative relied upon the decision of 365 ITR 436 of the Hon ble jurisdictional High Court where such expenditure is allowed. 22. We have carefully considered the rival contentions as well as perused the orders of the lower authorities. One Ms. Sonali Jain, who was Director of the company since 2006 was looking after the business of the company. She got an opportunity to study MBA Programme in Singapore and, therefore, the Board decided to support her education expenditure vide Resolution dated 15.10.2008. The main purpose was shown by the company that her education would be useful in expanding the export business of the company in long run. The learned CIT (Appeals) has considered the Resolution passed by the company and the business expediency. It is undisputed that the assessee was Director of the company and was working with the company. Therefore, in nutshell this expenditure is in the nature of training expenditure of the Director herself. The learned CIT (Appeals) also noted the details of the programme and held that it has direct business relevance to the assessee. In view of this, w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iture. All those papers related to the tuition fees and admission fees, which has already been allowed by the learned CIT (Appeals). As the assessee could not provided any itemized details supported with the vouchers and bills of three parties, we find no infirmity in the order of the learned CIT (Appeals) in restricting the allowance of living expenses to the extent of 60%. 25. In the result, ground No. 3 of the appeal of the Revenue and ground No. 3 of the appeal of the assessee are dismissed. 26. Ground No. 4 of the appeal of the Revenue is with respect to deletion of disallowance under section 14A of ₹ 50,60,179/-. The brief facts show that assessee has earned dividend income of ₹ 1,24,30,074/- and it has disallowed ₹ 35,77,395/- under section 14A of the Act. Assessee also submitted the working of the disallowance. The learned Assessing Officer rejected the same and applied Rule 8D of the Act and made further disallowance of ₹ 2,72,535/-. On appeal before the learned CIT (Appeals), he directed the Assessing Officer to exclude ₹ 50,60,179/- from the interest expenditure as the interest has been paid for term loan and vehicle loan. The Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X
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