TMI Blog2018 (12) TMI 1679X X X X Extracts X X X X X X X X Extracts X X X X ..... in the assessment year 2008-09 and 2009-10, this deduction was allowed. We have also noticed that 1/5 expenses of ₹ 52,50,805/- to the amount of ₹ 1111226/- was allowed by the CIT(A) in assessment year 2008-09 and 2009-10. Therefore, we justify the decision of ld. CIT(A) to allow the claim of preliminary expenses to the amount of ₹ 20,11,387/- consisting of ₹ 11,11,226+9,00,161. After perusal of the above facts, we observed that claim of the assessee to the amount of ₹ 11,11,226/- was never disallowed in any of the earlier years and similarly for the assessment year 2008-09 and 2010-11 the Ld.CIT(A) had allowed the deduction of ₹ 900161/-. In the light of the fact and findings reported in the decision of the Ld.CIT(A), we do not find any merit in the ground of appeal of the revenue therefore the same is dismissed. Deemed interest disallowance u/s. 36(1)(iii) - HELD THAT:- After referring the assessment year 2009-10, the assessing officer was of the view that assessee has given interest free advances to M/s. Red Event India Pvt. Ltd. and this amount was advanced for non-business purposes. Therefore, considering the average rate of interest @ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inually being allowed by the Ld. CIT(A) from assessment year 2008-09 to assessment year 2010-11, therefore, we consider CIT(A) is not justified. Therefore , we allow the claim of the assessee to the amount of ₹ 9,00,161/- out of the preliminary expenses of ₹ 52,50,805/- pertaining to assessment year 2008-09 as allowed in the preceding assessment year on identical issue and identical facts. In respect of the remaining claim we have noticed that in assessment year 2009-10 similar claim was disallowed by ld. CIT(A) in respect of ₹ 3,40,380/- and similarly to the amount for the claim of ₹ 2,52,504/- for assessment year 2010-11 the ld. CIT(A) has disallowed the claim of as the assessee has failed to substantiate that the said expenditure were incurred for the extension of its undertaking or in connection with setting up of new unit, we do not find any change in this facts during the year under consideration, therefore, the disallowance up to this amount is justified on the reason specified in the preceding year in the order of the Ld.CIT(A). Therefore, this ground of the assessee on this issue is partly allowed. Disallowance of interest expenses - HELD THAT: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come from shares of domestic subsidiary companies was exempt from tax but no dividend income either from subsidiary companies or other domestic companies were shown by the assessee. Therefore, the assessee was called upon to explain why the disallowance u/s. 14A r.w Rule 8D of the IT Rule should not be made. The assessee responded that there was no fresh investment made during the year. It is further stated that the investment made in the earlier years were made out of internal accrual and interest free funds. It was also contended that there was no exempt income, therefore, the provision of section 14A cannot be applied. The assessing officer has not accepted the explanation of the assessee and stated that assessee has actually incurred expenditure by way of using of man hours of directors / managers and using of office manpower, infrastructure facilities for making investment the income from which is exempt from tax. He has observed that the funds of the assessee company have been diverted to the investment income which was exempt from tax. He further stated that despite incurring some expenditure for investment activity, the assessee company has not disallowed any expenditure u/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee has not earned any exempt income. Since the assessee has not earned any exempt income, therefore, we are of the view that no disallowance u/s. 14A is required in the case of the assessee. Vide a number of judicial pronouncements the Co-ordinate Benches of the ITAT Ahmedabad have held that the no disallowance shall be made under section 14A of the act if the assessee has not earned any exempt income and the disallowance shall be restricted to the exempt income. Section 14A(1) provides that for the purpose of computing total income under chapter IV, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of other total income under the act. However, in the case of the assessee, it has not made any claim or exemption of any income from payment of tax for the year under consideration. We have perused the decision of the Coordinate Bench of the ITAT in the case of Shah Alloys Ltd. (2315/Ahd/2010 dated 27-03-2015 and the decision of the Hon ble Gujarat High Court in the case of CIT vs. Corretech Energy Pvt. Ltd. (45 Taxmann.com 116) on identical issue of disallowance u/s. 14A when no dividend income is earned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... impugned previous year without any reason is neither justified nor sustainable. The A.O. is directed to allow such claim and delete the addition. The appellant gets relief of ₹ 1111226/-. In reference to claim of ₹ 1312701/-, following the ratio of earlier years in the case of appellant i.e. A.Y. 08-09 A.Y. 09-10, the deduction of ₹ 900161/- is allowable while balance of ₹ 412540/-(1312701 - 900161) is disallowable. The A.O. is directed to allow the claim of ₹ 9001617- and delete the addition to this extent. The appellant gets part relief of ₹ 900161/- while disallowance addition of ₹ 412540/- is upheld and confirmed. In reference to claim of ₹ 145644/- being short claim of earlier year, there is no reasoning or proper facts of such claim. The disallowances so made by A.O. is therefore upheld and confirmed. In respect of legal preposition of allow ability of claim u/s 37(1) of the Act in view of Hon'ble Bombay high court order in the case of M/s Nimbus Communication Ltd., with due regards, the facts are distinguishable. The appellant never able to brought any IPO so to say that there was any aborting of IPO for which Hon'b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A), we do not find any merit in the ground of appeal of the revenue therefore the same is dismissed. Deemed interest disallowance u/s. 36(1)(iii) 12. During the course of assessment proceedings on perusal of the details of loan and advances the assessing officer noticed that assessee has shown ₹ 20 lacs as outstanding receivable from M/s. Red Event India Pvt. Ltd. He observed that during the assessment years 2008-09 and 2009-10 the assessing officer has given the findings that amount of advances to M/s Red Event Pvt. Ltd. was interest free advances and no purchases or services were obtained from the said party by the assessee. Accordingly the assessing officer has treated this amount advanced for non business purposes. Therefore, the assessing officer has charged interest @ 12% to the amount of ₹ 2,10,000/- on the said advances and added the same to the total income of the assessee. 13. Aggrieved assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has allowed the appeal of the assessee. Relevant part of the decision of the ld. CIT(A) is reproduced as under: I am partly inclined with appellant. The principle of Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT Appeals 1 Ahmedabad has erred in law and on facts in passing appellate order dated 27/01/2016 for A.Y, 2011-12 in the case of appellant by confirming disallowance made by the A.O. 2. The Ld. CIT Appeals erred in law and on facts in confirming disallowance made under section 14A of ₹ 755141 /- 3. The Ld. CIT Appeals erred in law and on facts in confirming disallowance of ₹ 27,54,269/ under section 35D. 4. The Ld. CIT Appeals erred in law and on facts in confirming addition for deemed Rental Income of ₹ 1 ,68,000 /-. Disallowance u/s. 14A 16. The assessing officer has made disallowance of ₹ 52,23,911/- after invoking the provision of section 14A on the ground that assessee has not disallowed interest and administrative expenses u/s. 14A for earing exempt income. In this connection the has assessee has stated that no borrowed funds were used for making investment in shares/mutual fund therefore no disallowance was required to be made. It is noticed that the assessee was having huge interest free fund in the form and share capital and reserves funds to the amount of ₹ 174.74 crores whereas the investm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment year 2008-09 and 2009-10, the assessing officer has allowed preliminary expenses to the amount of ₹ 11,11,226/- as 1/5 expenses of ₹ 55,56,127/-. Further, in assessment year 2010-11 the ld. CIT(A) has again allowed the claim of the assessee to the amount of ₹ 11,11,226/- pertaining to the preliminary expenses of ₹ 5556127/-. Further, we have noticed that without any reason, ld. CIT(A) has disallowed the claim of the assessee of 1/5 of this expense to the amount of ₹ 11,11,226/- without any relevant finding this claim of the assessee is rejected during this year which has been continuously allowed in the preceding assessment years. Regarding IPO expenses pertaining to F.Y. 2007-08 for the assessment year 2008-09 to the amount of ₹ 52,50,805/-, we have noticed that ld. CIT(A) has allowed the claim of he assessee to the amount of ₹ 9,00,161/- in assessment year 2008-09, 2009-10 and 2010-11 as these expenses were claimed by the assessee pertaining to public issue u/s. 35D of the Act. However, we have noticed that during the year under consideration, ld. CIT(A) has simply stated that he was not agreed with the findings of his predecessors a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... easonable and therefore addition made by the assessing officer of ₹ 1,68,000/- is confirmed. 20. During the course of assessment proceedings, the assessing officer has noticed that assessee was having 4 flats claimed as used for business purposes being guest houses. However, the assessing officer has treated the two flats as guest houses as decided in assessment year 2006-07 and in respect of other two flats made addition of ₹ 1,68,000/- after taking the national income @ 84,000/- per flats. The ld. CIT(A) has sustained the addition on the ground that assessee has not substantiated its claim with relevant evidences to demonstrate that these properties were used as guest houses for the purpose of business during the year under consideration. During the course of appellate proceedings before us, we have also not found any relevant material produced by the assessee which demonstrate that assessee has used all the properties as a guest houses for the purpose of the business during the year under consideration. Under these circumstances, we are inclined with the decision of ld. CIT(A), therefore, this ground of appeal of the assessee is dismissed. ITA N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . He has further stated that as per provisions of section 80IA(12) when any undertaking of an Indian company which is entitled to deduction under this section is transferred before expiry of the period specified in this section to another company then clause (b) the provisions of this section shall apply to the amalgamated company as they would have applied to the amalgamating company if the amalgamation had not taken place. He has further stated that in this case it is not clear whether the amalgamating company i.e. Shanti Processing Ltd. was eligible for claiming u/s. 80IA or not in the first place. In view of the same, the claim of the assessee was disallowed. 24. Aggrieved assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has allowed the claim of the assessee. Relevant part of the decision of the ld. CIT(A) is reproduced as under:- I have carefully considered the assessment order and the submission filed by the appellant. The assessee company is an amalgamated company wherein Shanti Processor Ltd was merged with the assessee company wef 01/04/2005 as per the order of Hon'ble High Court of Gujarat dated 31/03/2006. The power plant was instal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fulfilled all the conditions. As stated above, the plant machinery valuing ₹ 7,11,23,416/- were installed in the factory of erstwhile Shanti Processor Ltd. which was transferred to Chiripal Industries Ltd. on amalgamation by the order of Gujarat High Court. The power plant was originally installed by the erstwhile owner during financial year 2005-06. The original cost of the said plant which included coal handling system, boilers, steam turbine and electrical fittings was of ₹ 7,11,23,416/-. This value represents the cost to the previous owner mainly incurred during FY 2004-05 the installation of which was during FY 2005-06. As per the provisions of section 80IA(12) when any undertaking of an Indian Company which is entitled to deduction under this section is transferred before the expiry of the period specified in this section to another Indian Company then as per clause (b) the provision of this section shall apply to the amalgamated Company as they would have applied to the amalgamating Company if the amalgamation had not taken place. The crucial point is that the provisions of subsection (12) would only apply if the amalgamating Company was eligible for claiming ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ars machinery was purchased by Shanti processor Ltd which was already used. Therefore, new machinery ' purchased by Shanti Processors Ltd cannot be termed as old machinery since due to scheme of amalgamation; appellant is legally entitled to claim deduction. Therefore, on amalgamation, the appellant became entitled to all the benefits which were available to the amalgamating company namely Shanti Processors Ltd. It is also noted that similar claim was made by the appellant in the assessment year 2009-10, which was first year of its claim and the same was allowed meaning thereby the A.O. was satisfied that the appellant had fulfilled all the conditions. There is no change in facts and therefore, it is not proper to again revisit the eligibility of claim more so when there is no change in facts. The decision relied upon by the A.R. in the cases of Dynemic Products Ltd as well as that of Income Tax Officer v/s. Last Peak Data Pvt. Ltd. ITA no. 154 155/Kol/2013(supra), wherein it is held as under: Amalgamation of another company with assessee- Admittedly, amalgamating company LP Ltd. was enjoying STP unit status- Thus there is no question of the assessee having been form ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssions available to amalgamated company and other provisions, for your honours kind perusal as under: A. Definition of amalgamation : According to section 2(1B) of the Income-tax Act, 1961 (hereinafter referred to as the Act), amalgamation in relation to companies means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that:- a. All the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of amalgamation. b. All the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of amalgamation. Shareholders holding not less than 3/4th in value of the shares in amalgamating company or companies (other than shares held there is immediately before the amalgamation or by a nominee fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bove facts and circumstances that the assessing officer has disallowed the claim of the assessee on presumption basis that addition of ₹ 71,12,34,167- was old plant and machinery without bringing on record evidence to substantiate that specified machinery was purchased by Shanti processor Ltd and the assessing officer has also failed to disproved the material fact that similar claim was allowed to the assessee in the assessment year 2009-10 on fulfilling of all the conditions. In the light of the above facts, legal findings and elaborated findings of the Ld.CIT(A) as supra in this order we do not find any error in the decision of the Ld.CIT(A),therefore the appeal of the revenue is dismissed. ITA No. 1425/Ahd/2016 filed by assessee 26. The assessee has raised following grounds of appeal:- 1. The Ld. CIT Appeals 1 Ahmedabad has erred in law and on facts in passing appellate order dated 29/03/2016 for A.Y. 2012-13 in the case of appellant by confirming disallowance made by the A.O. 2. The Ld. CIT Appeals erred in law and on facts in confirming disallowance of ₹ 16,43,045/- on account of preliminary expenses. 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unit, we do not find any change in this facts during the year under consideration, therefore, the disallowance up to this amount is justified on the reason specified in the preceding year in the order of the Ld.CIT(A). Therefore, this ground of the assesse on this issue is partly allowed. Deemed rental Income of ₹ 1,68,000/- 28. This ground of appeal of the assessee is already adjudicated on the identical fact and identical issue in this order in ITA No. 833/Ahd/ therefore, we do not find any new fact and new evidences, therefore, this ground of the assesse is dismissed. ITA No. 1547/Ahd/2016 filed by revenue 29. The revenue has raised following grounds of appeal:- a) That the ld.CIT(A) erred in law and on facts in deleting ₹ 28,97,950/- out of total addition of₹ 29,13,282/- made on account of disallowance u/s 14A of the IT Act. . b) That the ld. CIT(A) erred in law and on facts in deleting the addition of ₹ 2,74,548/- made on account of disallowance of Interest Expenses . c) That the ld. CIT(A) erred in law and on facts in deleting the addition of ₹ 3,31,3 3,001/- made on acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares was much lower than share capital and reserves surplus. The appellant further submits that it had earned interest income of ₹ 10797443/- (including Bank interest ₹ 7656780/-) during the year and the same are reflected under Schedule 19 of Audited Financial Statement. Such interest income was required to be reduced while computing the interest expenses claimed by the appellant. Recently Hon'ble STAT Ahmedabad Bench D Ahmedabad in the case of !TO Vs. Karnavati Petrochem P. Ltd I.T. A. No. 2228/AHD/2012 has held that interest expenses should be netted against interest income. No nexus has been established by the AO between the expenditure incurred by the assessee and the tax free income earned by him (Trade (ITAT Kol) Morgan Stanley (ITAT Mum). Reliance is also placed on OF INCOME TAX vs. CYCLES LTD. (2010) 233 CTR (P H) 74 wherein interest paid was set off from interest income. The appellant further submits that during the course of assessment proceeding, it had clearly stated that, amount was invested out of own funds and non Interest bearing funds. Therefore, the appellant had not used the borrowed funds for making investments and accordingly no part ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3/Ahd/2016 as supra in this odrer, therefore, we do not find any merit on the ground of appeal of the revenue as the disallowance was restricted to the extent of exempt income earned by the assessee After considering the detailed finding and judicial pronouncement as elaborated above, we do not find any merit in this ground of appeal of the revenue , therefore, the same is dismissed. Disallowance of interest expenses of ₹ 2,74,548/- 32. During the course of assessment proceedings, the assessing officer has disallowed a sum of ₹ 2,74,548 out of interest on the ground that assesse had given interest free advances totaling to ₹ 22,87,900/- to three parties on which no interest was charged. In this connection, we have noticed that assessee has explained that the advances were given in the ordinary course of business and the same was not in the nature of loan. In this connection, we have noticed that assessee was having interest free fund in the form of share capital and reserves and surplus to the amount of ₹ 233.93 crores and as the interest free fund enjoyed by the assessee were far in excess of the interest free fund made by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es and therefore interest on borrowed funds cannot be disallowed. It has share capital, Reserve and surplus of ₹ 232,93,95,958/-. As the interest free funds enjoyed by the appellant are far in excess of the interest free advances made by appellant, no disallowance u/s 36(i)(iii) can be made in case of appellant. In this connection the appellant relies on the decision of Torrent Vs. ACIT 73 TTJ 624(Ahd). The entire interest-free funds include owner's own capital, accumulated profits and other interest-free creditors and loans, if total interest-free advances including debit balances of partners do not exceed the total interest-free funds available with the assesses, no interest is disallowable on account of utilisation of funds for non-business purposes. Even the CIT vs. Reliance Utilities Power Ltd. 435 221 has held that Investment of interest bearing funds in sister concerns - Tribunal having recorded a clear finding that the assessee possessed sufficient interest free funds of its own which were generated in the course of the relevant financial year, apart from substantial shareholders fund, presumption stands established that the investments in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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