9911796707
TMI Blog2019 (12) TMI 1036X X X X Extracts X X X X X X X X Extracts X X X X ..... equire to be disallowed for the purpose of section 14A of the Income Tax Act read with Rule 8D of Income Tax Rules. 3. Facts on all vital points are common. Therefore, for facility of reference we take up the facts from the Asstt.Year 2014-15. There is no dispute with regard to the fact that in all these three assessment years, the assessee had dividend income which is exempt from tax. The assessee itself has allocated a sum of Rs. 1,00,000/- for the Asstt.Year 2012-13, Rs. 1,20,000/- for the Asstt.Year 2013-14 and Rs. 2,35,000/- for the Asstt.Year 2014-15 attributable to earning of exempt income. In other words, assessee itself added back this much of amount towards expenditure require to be disallowed under section 14A. This allocation was not found to be sufficient by the AO. He accordingly made additions of Rs. 97,57,920/-, Rs. 63,72,000/- and Rs. 79,05,000/- in the Asstt.years 2012-13 to 2014-15 respectively in addition to amount already disallowed by the assessee itself. This working has been made with help of Rule 8D. Dissatisfied with the disallowance, the assessee carried the matter in appeal before the ld.CIT(A). In the Asstt.Year 2013-14 and 2014-15. The ld.CIT(A) after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if an assessee has earned exempt income then the expenses attributable to earning of such exempt income would require to be disallowed under section 14A of the Act. It is also not in dispute that if the expenditure are not identifiable viz. interest expenditure and the funds are mixed funds, then such expenditure are to be worked out with help of Rule 8D. The AO in all these years formed an opinion that funds of the assessee are mixed, and therefore, the disallowance is to be worked out on the basis of Rule 8D. He computed the disallowance in each assessment year under Rule 8D. The case of the assessee, on the other hand is that interest on specific loan/charges to be excluded, taxable investment to be excluded, only net interest income is to be considered for the purpose of working out the disallowance. At the time of hearing, the ld.counsel for the assessee relied upon the judgment of Hon'ble Gujarat High Court in the case of Nirma Credit & Chemical Ltd., 85 taxmann.com 72 (Guj). In order to buttress his contention, the assessee has submitted that it had sufficient interest free funds to carry out investment, hence no borrowed funds were utilized. The assessee also pointed out t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... there has been a decrease in borrowings by Rs. 99,01,352/- with no increase in investments. As on 31.3.2007 there has been a substantial increase in borrowed funds by 47,76,37,580 /- and whereas the investments merely increased by 4, 75,48,314/-. The said increase in borrowings was for paying off the liabilities towards ONGC amounting to Rs. 45,39,90,000/-. Also, during AY 07-08, your office has verified the fact that the ONGC payments were made out of borrowed funds. Your office also allowed the benefit of exclusion of interest paid on ONGC liability while working out disallowance u/s 14 A r.w.r 8D in AY 07-08, AY 08-09, AY 09-10 andAY10-ll. Thus, it is very clear that the incremental investment amounting to Rs. 4,75,48,314/- have been made out of interest free own funds of the Appellant As on 31.3.2008 borrowed funds have decreased by 91,36,000/- and the investments increased by 1,94,72,995/-. Thus, the incremental investments have clearly not been totally funded out of the borrowings but from own funds. As on 31.3.2009 borrowed funds have increased by Rs. 9,45,23,000 and the investments have decreased by Rs. 1,34,000/-. As on 31.3.2011 borrowed funds have increas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany, if the interest-free funds were sufficient to meet the investment and accordingly there ought not be any disallowance u/s. 14A of the interest paid on the borrowings. Consequently, the ITAT rightly held that where there are both interest free and borrowed funds then there was no basis for deeming that the assessee had used borrowed funds for investment in tax free securities. Copy of decision is enclosed as Annexure 4(d)." 6. Identical note has been filed in other two assessment years, whereby the assessee has quantified the investment upto the end of the accounting years in those years. For example, in the Asstt.Year 2012-13, the total amount of share capital and reserve available with the assessee was Rs. 10419.10 lakhs, and he cost of investment made was Rs. 2634.60 lakhs. In the Asstt.Year 2013-14, again total funds in the shape of share capital and reserves were of Rs. 10829.53 lakhs and cost of investment made was Rs. 2444.60 lakhs. It was submitted by the assessee that two persons looked after these investments, which were for the purpose of acquiring the management, control etc. Hence, part salary of these two persons Mr.Rasesh Shah, and Mr.Nilesh Mistry were allo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee by the decision of Special Bench of the Tribunal in the case of Vireet Investment, 165 ITD 27 (SB). From the Asstt.Year 2008-09 to 2010-11, the issue has been decided in favour of the assessee by the ITAT. It is also covered by the decision of Hon'ble Bombay high Court rendered in the case of Reliance Industries Ltd., 102 taxmann.com 142 (Bom). The ITAT has considered this aspect in the case of Gujarat Flurochemicals Ltd. and other appeals. This order of the ITAT has been upheld by the Hon'ble Gujarat High Court. ITAT has followed order of the Special Bench in the case of Vireet Investment (supra). In brief, the outcome of this order is that the disallowance under section 14A is not required to be added back in the book profit under section 115JB of the Act. Therefore, we allow ground no.2 of the assessee's appeal (ITA No.675/Ahd/2016 - Asstt.Yar 2012-13) and rejected ground no.2 and 3 of the Revenue's appeal in the Asstt.Year 2013-14 and 2014-15. 8. Now we take up ground nos.3 to 5 of the Revenue's appeal in the Asstt.Year 2012-13 along with ground no.4 of the Revenue's appeal in the Asstt.Year 2013-14 and 2014-15. 9. Grievance of the Revenue in all these grounds of appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of advances given'to Quick Flight Ltd. It is also noticed that if the business of subsidiary company is not revived, then the appellant will lose entire investment therein in the form of share capital (Rs. 2 crores) and advances (Rs. 22.78 crores) as on 31.03.2012 also. In view of these facts, the claim of appellant that the advances given to Quick Flight Ltd. were on account of business expediency and for commercial consideration is found to be acceptable. 6.4.1. It is also noticed that under the similar facts and circumstances of the case, the interest expenditure has been held to be an allowable expenditure u/s. 36(l)(iii) of the Act by the Hon'ble Supreme Court in the following cases:- (a) S.A. Builders Ltd. 288 ITR 1 (SC) (b) Hero Cycles (P) Ltd. Vs. CIT, 2015 - TIOL - 280 - SC - IT, order dated 05.11.2015. In view of the above facts and also the decisions of Hon'ble Supreme Court, thus I hold that the interest expenditure incurred by the appellant on borrowed funds utilized for giving advances to sister concern on account of commercial expediency has to be allowed u/s. 36(l)(iii) of the Act and accordingly the Assessing Officer is directed to delet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be for non business purposes." 17. So far as this disallowance is concerned, the relevant material facts are like this. During the course of the assessment proceedings, the Assessing Officer noted that the assessee has incurred expenditure of Rs. 12,99,483 on UK and USA visit undertaken by Ms Y R Amin. It was stated by the assessee that this visit was undertaken to understand opportunities available in expanding and diversifying in the markets. It was also stated that Ms Amin had visited various manufacturing plants and interacted with key personnel, technology professionals and consultants et. The Assessing Officer was, however, not convinced with these explanations. He was of the view that "no tangible ad reliable evidence was filed to prove that the foreign visit of Ms Y R Amin was for any business purpose". The expense was thus disallowed. In appeal, learned CIT(A) held that "in the present case, the details of visit were furnished but the same are not supported by the vouchers and other documentary evidences which could show that assessee actually carried out certain business activity during the course of visit" but "considering the submissions made, the entire visit cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irector was carried out and then this conclusion was drawn. There is no such material on record in this case. Once the CIT(A) came to the conclusion that the trip was for some business purposes, it was not open to him to deny any part of deduction for these expenses- particularly when there is no material to hold that the visit was for personal purposes. In view of these discussions, as also bearing in mind entirety of the case, we uphold the grievance of the assessee and direct the Assessing Officer to delete the impugned disallowance of Rs. 9,74,612." There is no disparity on facts. Therefore, respectfully following the order of the Tribunal, we delete the disallowance in this year also." 17. A perusal of order of the ld.CIT(A) would indicate that the ld.CIT(A) has not recorded any independent finding except following the order of its predecessor. Therefore, following the order of the ITAT in the Asstt.Year 2011-12, we delete the disallowance of Rs. 10,09,380/-. This ground of appeal is allowed. 18. Ground no.5: In this ground of appeal, grievance of the assessee is that the ld.CIT(A) has erred in confirming the disallowance of bad debts of Rs. 171.91 lakhs. 19. As observed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or to ask the assessee to show whether debts have actually been become bad or not. The moment debts have been written off in the books, it is to be allowed without expecting the assessee to demonstrate whether debts have actually become bad or not. A reliance can be made to the decision of Hon'ble Supreme Court in the case of TRF Ltd. 230 CTR 14 (SC). It is altogether irrelevant, whether QFL actually paid tax or not. If a liability has ceased, then it will be added back in the taxable income of the QFL. Now, if that concern was suffering huge loss, then that cannot be the reason to disallow claim of the assessee. If this type of logic is being accepted, then every business organization was required to show profit only. This is a misplaced notion at the end of the ld.CIT(A) for rejecting the claim of the assessee. We allow this ground of appeal, and delete disallowance of bad debts. In the other words, claim of bad debt at Rs. 170.91 lakhs is allowed. 22. Ground No.6: In this ground, grievance of the assessee is that the ld.CIT(A) has erred in not granting set off brought forward business loss against income from house property. The ld.counsel for the assessee submitted that this i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Coordinate Bench Bangalore in ITA No. 1546/Bang/2008 dated 09.12.2011in the case of Nandi Steels vs. ACIT adjudicated similar issue of claiming set off of brought forward business loss against income from capital gain. Special bench has extensively discussed various judgment which mostly includes the judgment referred and relied by the assessee. Special Bench decided the issue favour of the Revenue by holding that brought forward business loss can be set off only against the business income of the assessee. In holding so Coordinate bench observed as follows:- (a) The impugned order of the Tribunal allowed the appeal of the respondentassessee on the issue of set off of brought forward business losses against deemed short term capital gains arising on sale of building, plant and machinery This was by following the decision of its Co-ordinate Bench in Digital Electronics Ltd. v/s. Additional Commissioner of Income Tax 49 SOT 65. In Digital Electronics Ltd. (supra) the Tribunal held that under Section 72 of the Act, the loss under the head 'profits and gains of business or profession' can be carried forward and the same can be set off against profits of any business or prof ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... question entirely depends on the interpretation to be given to the term "of any business or profession carried on by the assessee and assessable for that assessment year" for determination of the issue. It is not in dispute that the land, building and bore well sold by the assessee were used by the assessee for its business purposes. It is also not disputed that these assets were fixed assets of the assessee. The only argument of the assessee has been that they have direct nexus with the business carried on by the assessee and therefore, are business assets and any gains from the sale of such assets would also have the character of business income. We are unable to agree with this contention of the assessee that the assets sold by the assessee were business assets. Undisputedly, they were capital assets and the capital receipts are not taxable nor are the capital payments deductible from the income of the assessee. The capital is to be used for the purpose of carrying on the business of the assessee and it shall remain in the business of the assesee till it is either converted into stock-in-trade or is disposed off. The income earned by the assessee by carrying on the business by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rence is answered in favour of revenue. 11. The case is now to be posted before the Division Bench to give effect to the order of the special Bench and also to give effect to the order of the Division Bench on the grounds of appeal nos. 1 to 4 decided by it while making the reference to the Hon'ble President for the Constitution of a Special Bench. 31. From going through the above discussion as well as the judgment in favour of both the parties we find that in the judgment favouring assessee it was observed that the net income shown under the head house property/income from other sources/capital gain has a direct nexus with the regular business activity carried on by the assessee and it was the idle funds/stock in trade/business asset which were merely exploited to fetch some income in the interest of business whereas the Special Bench Bangalore in Nandi Steel (supra) has clearly held that brought forward business loss can be set off only against business income. 32. In order to appreciate the facts in the instance appeal we will first like to go through the provision of section 72(1) of the Act which reads as under:- " 72 (1) Where for any assessment year, the net resu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has no income under any other heads, meaning thereby that after setting off the business loss other than the speculation loss, assessee can set off the business against other heads of income in accordance with provision u/s. 71 and still if there remain unabsorbed business loss then the same can be carry forward to subsequent years for not more than eight assessment years and can be set off against the "profit and gains if any of any business or profession carry on by him". In our view this particular phrase the "profit and gains, if any, of any business or profession" refers to the third head of income i.e. "Profit and gains of business or profession". 35. Further intention of the statute in this provision of section 72 is very clearly as it allows the set off of business loss against other heads of income in accordance with section 71 of the Act for the year in which the business loss has been incurred and it is only for the remaining unabsorbed business loss which needs to be set off against the business income in eight subsequent years. In the case of assessee we find that the rented warehouses are not used for the business purposes and they are being consistently used for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... paper book while taking cognizance of the finding of the AO. These details have been noticed on page no.32 also while dealing with assessee's submissions. They read as under: Name No of Preference shares Purchase Price per share Sales price per share Sales Value Indexed Cost Indexed Loss Sierra Investments Ltd. 3,00,000 100 80 2,40,00,000 4,90,62,500 (2,50,62,500) Nirayu Private Ltd. 5,00,000 100 100 5,00,00,000 7,56,26,20-1 (2,56,26,204) Sale price was determined based on valuation report given by independent chartered accountants (refer page: 219-235 of paper book) 25. The ld.AO on an analysis of the evidence disallowed this claim by assigning two reasons viz. (a) this transaction is a speculative transaction, and therefore, it is to be treated as speculation loss, which could not be set off the long term capital gain on sale of land, (b) it is a colourable device for the purpose of reducing payment of capital gain tax on sale of land. Dissatisfied with the action of the AO, the assessee carried the matter in appeal. The ld.CIT(A) did not approve the stand taken by the AO. In other words, CIT(A) has held that it is a genuine loss on sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4,89,00,000 4,90,62,500 (1,62,500) Nirayu Private Ltd. 5,00,000 100 118 59,90,00,000 7,56,26,204 (1,66,26,204) 27. Thereafter, after taking into consideration fair market value of the shares on the date of sale at Rs. 163/- per share, in the case of Sierra Investments Ltd. and Rs. 118/- in the case of Nirayu P.Ltd., the ld.CIT(A) has worked out the fair market value of the shares, and directed the AO to work out the capital loss, if any. 28. While impugning the action of the CIT(A), the ld.counsel for the assessee has raised three fold submissions. He firstly contended that as far as treatment given to the transaction by the AO as speculated transaction is concerned, this view was not confirmed by the ld.CIT(A). The ld.CIT(A) has accepted that it is a genuine investment made by the assessee which has given rise to capital gain/loss to the assessee. This part of the ld.CIT(A) order has not been challenged by the Revenue in its appeal. Similarly, the ld.CIT(A) did not uphold conclusion of the AO that this transaction is a colourable transaction, and this finding has also not been challenged by the Revenue. Therefore, according to him the only issue remains to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... comment rather it is merely a reflection of the approach followed by the independent valuer to its end user. Valuation report cannot be rejected based on general disclaimer. - The valuer has relied on financial statements audited by Statutory Auditors of the company and hence information provided is reliable. This is general practice followed by the valuers 6. Further, CIT(A) while calculating fair market value of shares has added unpaid dividend to face value of preference shares. Rebuttal: Valuer has valued based on recpgnised valuation guidelines prescribed by Rule 10 of Schedule III to Wealth Tax Act. Valuation rules factors in whether shares are cumulative or non-cumulative and also non-payment of dividend. Rule has been omitted only for the reason that shares were no longer taxable assets for the purpose of Wealth Tax Act. (Tl'(A) has adopted adhoc basis of valuation. Valuation carried out based on prescribed guidelines, that too by the government, ought to be considered by the CIT(A). CIT(A) is not an expert and cannot work out valuation on his own. 7. CIT(A) has erred in stating that the Appellant has accrued right to receive dividend (Pg 64 Para 4.3.6 and pag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eserves. There was no sufficient reserves & surplus in the hands of Nirayu for the purpose of declaration of dividend as alleged by CIT(A) 8. In view of above, the learned CIT(A) erred in treating the sale price of the preference shares of Sierra Investments Limited and Nirayu Private Limited sold by the Appellant as sham." 29. On the other hand, the ld.DR relied on the orders of the Revenue authorities. 30. We have duly considered rival submissions and gone through the record carefully. Hon'ble Gujarat High Court in the case of CIT Vs. Gauranginiben S. Shodhan, 45 taxmann.com 356 (Guj) has observed that section 48 of the Income Tax Act talks about expression "full value of the consideration received". This full value of consideration received cannot be replaced by fair market value with the aid of external evidence viz. DVO's report. The Hon'ble High Court has considered circumstances in which the full sale consideration should be replaced. In that a reference to section 50C wherein it has been provided that if a capital asset being land or building, and or both are transferred and consideration received or accruing as a result of such transfer, is less than the value adopte ..... X X X X Extracts X X X X X X X X Extracts X X X X
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