TMI Blog2023 (10) TMI 258X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 31/03/2015, the assessee had also provided copy of company master data, copy of Form 16A issued for interest paid on loan received as well as the source of the lending company. The assessee had provided loan confirmation, Certificate of incorporation and PAN Number, copy of the ITR, balance sheet and P L Account, Bank Statement of Creditor etc. as evidence for identity, creditworthiness and genuineness of the creditor. The assessee is not required to prove the source of the investment. In this case, the assessee has proved the identity of parties and genuineness of the transaction, which are being transaction through bank. The capacity of the lender cannot be doubted since there was no allegation that the assessee has rooted its own money through the investors. Further in the absence of any finding regarding cash deposited in the banks account of the creditor prior to disbursement of loan and no adverse finding regarding the identity and existence of the creditor and since all the loans were interest bearing loans and related interest income is duly reflected in the ITR of the creditor companies, in our opinion, CIT(A) has committed no error in deleting the addition. Accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... invalid and bad in law. 2. The brief facts of the case are that the assessee filed its return declaring total income of Rs. 11,62,680/- and book profit u/s 115JB of the Act at Rs. 51,35,675/-. The assessment order came to be passed on 11/10/2017 u/s 143(3) of the Act by computing the income of the assessee as under:- Total income declared 11,62,675/- Add: Disallowance under Rule 8D(2)(iii) 5,85,304/- Add: Disallowance under Rule 8D(2)(ii) 77,08,149/- Add: addition u/s 68 of the I.T, Act, 1961 as discussed in Para 5 to 5.20 above. 9,90,00,000/- Total Taxable Income 10,84,56,128/- 3. As against the above said addition, the assessee preferred an appeal before the Ld. CIT(A), and the Ld. CIT(A), vide order dated 27/10/2021, deleted the addition made u/s Section 68 of the Act at Rs. 9,90,00,000/- and restricted the disallowance u/s 14A of the Act read with Rule 8D(2)(ii) ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Revenue are devoid of merits. 7. We have heard both the parties and perused the material available on record. The assessee is a Non Banking Financial Corporation ( NBFC for short) and one of the holding Companies of UFLEX Ltd. during the year under consideration, the assessee had received loans from following parties:- S. No. Name of the Party Cheque Details Amount (i) M/s Paramic Goods Pvt. Ltd., 8/1, Princip Street, 3rd Floor, Kolkata Cheque No. 145273 dated 17.7.2014 of HDFC Bank Rs. 4,90,00,000 (ii) M/s Jellotic Supply Pvt. Ltd. 10A, Hospital Road, Kolkata- 700072 Cheque No. 000131 dated 26.3.2015 of HDFC Bank Rs. 2,40,00,000 (iii) M/s Sankhuwala Commercial Pvt. Ltd., 6/3, Madan Street, Kolkata-700072 Cheque No. 000037 dated 20.2.2015 of HDFC Bank Cheque No. 000040 dated 28.3.2015 of HDFC Bank Rs. 2,00,00,000 Rs. 55,00,000 (iv) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceived credit of Rs. 5,00,00,000/- on 17.07.2014 from Sungrace Buildwell Pvt Ltd, which also happens to be a group company of the Uflex Group. Since the credits were received from the group companies, AO noted that merely by routing the money through bank account, the credit cannot be considered genuine even though the taxes are paid by the creditors. In the written submission before me, the Ld. AR has vehemently submitted that the identity of the creditor is duly proved by the Income Tax Assessment records registration with the ROC and capacity is established by the net worth as on 31.03.2015 at Rs. 59,03,58,074/-. It was also stated that the income returned by the said creditor in A.Y. 2014-15, 2015-16 and 2016-17 was Rs. 3,91,15,840/-, Rs. 3,26,60,420/- and Rs. 3,08,27,300/-, respectively. and hence in view of the various decisions of Hon'ble Courts, identity and capacity of the creditor and genuineness of the transaction was clearly proved and thus no addition was called for. The evidences furnished before the AO as well as before me have been carefully considered. Admittedly, the AO has stated that immediate source of loan given to the appellant was the loans recei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amie Goods Pvt Ltd. The appellant has shown unsecured loan of Rs. 5,54,00,000/- in the name of this company In this regard, the AO noticed that this company was also registered in Kolkata but later-on on 30.06.2017, it has been shifted to Delhi. The source of funds in the hands of this company is reserve and surplus of Rs. 53,60,06,074/- which included security premium of Rs. 48,91,50,000/- received from associates companies namely M/s Rubicon Mercantile Pvt Ltd and Meghmala Marketing Put Ltd, which have common directors. The return of income shows income of Rs. 3,90,35,711/- The AO also examined. bank statement of Paramic Goods Pvt. Ltd and noticed that the money received was transferred on the same date to the Uflex Group of companies. Information u/s 133(6) called for was complied with by the creditor. The Ld. ARs before the AO stated that loan taken was a genuine credit looking to the net worth of the creditor as well as profit of the current year at Rs. 3,90,35,711/ Although the AO received confirmation u/s 133(6), but on examination of the bank account, she noticed that before issuing the cheques to the appellant of Rs. 44,00,000/- on 23.02.2015, Rs. 4,50,00,000/- on 25 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hout pointing out anything about the source of loan of Rs. 4,50,00,000/- given to th appellant Modern Info Technology Pvt Ltd is also a group company and amount of Rs. 1,20,00,000/- was part refund of loan given by the appellant in earlier years. Genuineness of these companies has not been in dispute. There is also no allegation that these creditors are entry providers. On perusal of audited financial accounts and bank statement of Paramic Goods Put Ltd for A.Y. 2015-16, I find substantial net worth including fixed assets and a solar power plant through its subsidiary Le Samavist Energy Solutions Pvt Ltd worth Rs. 14.30 Crores. The profit and loss account and bank statement also reflect regular business activities. The creditor has disclosed huge profits in the return of income. The AO Le ACIT Circle-1(2), Kolkata has also completed scrutiny assessment u/s 143(3) on 02.11.2017 on the income of Rs. 3,36,98,680/- after making a disallowance u/s 14A at R 10,38,264/-in the case of creditor for A.Y. 2015-16. Under these circumstances, identity and capacity of Paramic Goods Pvt Ltd as well as genuineness of the loan transaction cannot be doubted. This view gets support from the various d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere interest bearing loans and the related interest income is duly reflected in the ITR of the creditor companies. regarding the creditor company being a shell company on the basis of common Further, the AO's finding directors among group companies and rotation of funds among group companies, is unfounded since there is nothing unusual about common directors among group companies and also nothing unusual about funds flowing from one group concern to another without a gap since the companies in question are into the activity of financing where funds are not kept idle for long. In view of the above, I hold that appellant has duly discharged the onus cast on it within the meaning of section 68 in respect of loan received from Paramic Goods Pvt Ltd and accordingly the addition made on this account is directed to be deleted. b) Jellotic Supply Pvt Ltd. The appellant has shown unsecured loan of Rs. 2,40,00,000/- in the name of this company. In this regard, the AO noticed that this company was also registered in Kolkata and has vide order dated 07.04.2017 been amalgamated with 24 companies. The source of funds in the hands of this company is reserve and surplus of Rs. 55,35, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,40,00,000/- to the appellant on 28.03.2015. Genuineness of this company has not been in dispute, nor is there any allegation that this creditor is an entry provider or that cash was deposited at any time prior to advance of loan to the appellant. On perusal of audited financial accounts and bank statement of Jellotic Supply Pvt Ltd for A.Y. 2015-16, I find substantial net worth of Rs. 60.85 Crore. The profit and loss account and bank statement also reflect regular business activities. Further, the appellant has paid interest @ 10% on the loan amount to the creditor and has deducted TDS thereon. The said interest income is duly disclosed in the ITR of the creditor. The current company master data from the website of MCA shows the company status as amalgamated . The creditor has disclosed huge profits in the return of income. Further, regarding the AO's observation of common directors among various companies, it is an admitted fact that all the companies under consideration, except Orbital Contractors and Financiers Pvt. Ltd are group companies of the Uflex Group and the said companies are mostly engaged in investment and financing operations. There is nothing unusual about the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order dated 07.04.2017 been amalgamated with 24 companies. The source of funds in the hands of this company is reserve and surplus of Rs. 55,65,91,371/- which included security premium of Rs. 49,23,00,000/- received from associate companies namely M/s Achinta Vincom Pvt. Ltd and Godhuli Merchants Pvt. Ltd both of which have common directors with the appellant. The return of income shows income of Rs. 4,60,11,704/-. The AO also examined bank statement of Sankhuwala Commercial Pvt. Ltd and noticed that the money received by it was transferred on the same date to the assessee. Information u/s 133(6) called for was complied with by the creditor. The Ld. ARS before the AO stated that loan taken was a genuine credit looking to the net worth of the creditor as well as profit of the current year at Rs. 4,60,11,704/-. Although the AO received confirmation u/s 133(6), but on examination of the bank account, she noticed that before issuing the loan cheques to the appellant, the said company received credit from Utech Developers Ltd and AKC Retailors Ltd which also happen to be group companies of the Uflex Group. Since the credits were received from the group companies, AO noted that merely by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... disclosed huge profits in the return of income. Further, regarding the AO's observation of common directors among various companies, it is an admitted fact that all the companies under consideration, except Orbital Contractors and Financiers Pvt. Ltd are group companies of the Uflex Group and the said companies are mostly engaged in investment and financing operations. There is nothing unusual about the operations of these companies and also nothing unusual about common directors being there among various companies since these companies belong to the same group. The case laws cited by the AO have also been fully distinguished by the appellant, particularly the decision of the jurisdictional High Court in the case of Bikram Singh (Supra), in which case the loans were taken from various individuals whose identity/PAN/addresses/confirmations/sources (capacity) were not provided in most cases and also cash was deposited in the bank accounts of creditors before issuance of cheques for loans, whereas in the instant case of the appellant all necessary documentation, such as loan confirmations, certificate of incorporation, PAN number, copy of ITRS filed, balance sheet and P L account, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he net worth of the creditor On examination of the bank account it is noticed that before issuing the cheque of Rs. 5,00,000/- to the appellant the said company received credit of Rs. 2,00,00,000/- on 30.04.2014 from Utech Developers Ltd, which happens to be a group company of the Uflex Group. Since the credits were indirectly received from the group companies by the appellant, AO noted that merely by routing the money through bank account, the credit cannot be considered genuine even though the taxes are paid by the creditors. In the written submission before me, the Ld. AR has vehemently submitted that the identity of the creditor is duly proved by the Income Tax Assessment records registration with the ROC and capacity is established by the net worth as on 31.03.2015 at Rs. 34.05 Crore. It was also stated that the income returned in A.Y. 2014-15 and 2015-16 was Rs. 2,46,96,540/- and Rs. 37,845/- respectively, and hence in view of the various decisions of Hon'ble Courts, identity and capacity of the creditor and genuineness of the transaction was clearly proved and thus no addition was called for. The evidences furnished before the AO as well as before me have been car ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers Pvt. Ltd as well as genuineness of the loan transaction cannot be doubted. In view of the above, I hold that appellant has duly discharged the onus cast on it within the meaning of section 68 in respect of loan received from M/s Orbital Contractors and Financiers Pvt and accordingly the addition made on this account is directed to be deleted. 11.1. In view of the above, Ground No. 6 and 7 stand allowed. 9. It is found that the A.O. called for information u/s 136(6) of the Act from all 4 creditors and the A.O. received confirmation from M/s Paramic Good Pvt. Ltd., M/s Jellotic Supply Pvt. Ltd. and M/s Sankhuwala Commercial Pvt. Ltd. The Ld. A.O. also examined the bank statement of the Investor Companies and noticed that the money received by it was transferred on the same date to the assessee. Apart from the same, necessary documentation such as loan confirmation, certificate of incorporation, PAN Number, Copy of ITR, Balance Sheet and P L Accounts, Bank statement of creditors etc. were also provided as evidence of identity, creditworthiness and genuineness of the creditor. There is no finding of any cash deposited in the bank account of the creditors prior to disbur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rule 8D reads as follows:- (iii) An amount equal to one-half per cent of the average of the value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year. 5.2 It is an undisputed fact that at least a part of the income from investment cannot form part of total income Le. their income is exempt. Going by a plain reading of Rule SD(2)(iii) the investment made in promotee companies cannot be excluded while computing the disallowance. 5.3. The contention of the assessee that the purpose of investment is not to earn dividend income but to have controlling interest in the respective investee companies and the dividend income incidentally arising cannot be accepted because section 14A is applicable on all exempted income and in case of indirect expenses the method of calculation of disallowance has been provided in Rule 8D. Neither in section 14A nor in Rule 8D any such exclusion of investments in promotee companies has been provided. 5.4 The origin of Rule 8D lies in the history of how the issue was being dealt with by various I.T. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 569955593 1103906914 Average Investment 551953457 0.5% of Average Investments 2759767 Total expenditures as per P L A/c 590554 Less: Expenses disallowed by assessee itself 18250 Add: Deduction u/s 35D 13000 Allowable expenses claimed by assessee 585304 Disallowable amount u/s 14A read with Rule 8D2 (iii) 585304 Opening balance of total assets 582505056 Closing balance of total assets 599606059 1182111115 Average assets 591055557 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Rs. 97,83,810/-, I hold that AO was satisfied that the disallowance u/s 14A r.w.r 8D was certainly called for and accordingly had rightly invoked the provisions of section 14A.From the facts stated above, it emerges that the appellant had used at least part borrowed funds for earning dividend income. The Hon'ble High Court in the case of Avon Cycles Lal Vs CIT (2015) 53 taxmann.com 297 (P H) Jaffirmed in (2018) 91 taxmann.com 154 (SC) has held that the disallowance out of interest u/s 14A is certainly warranted when mixed funds including interest bearing funds are used for earning exempt income. However, on careful consideration of the submissions of the Ld. AR and the decisions relied upon, I am of the considered view that only the investments made in companies resulting into exempt income during the year under consideration should be considered for the purposes of disallowance u/s 14A r.w.r. 8D, relying upon the decision of Hon'ble Jurisdictional ITAT in the case of ACIT Vs Vireet Investment Put Ltd (2017) 58 ITR (Trib) 313 (Del) (SB) which is binding on me. This view is further supported by the decisions of the jurisdictional High Court in the case of ACB India Ltd Vs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Del/2013, A.Y. 2009-10, the statutory deduction of Rs. 13,000/- claimed u/s 35D cannot also be considered for disallowance. Accordingly the AO is directed to exclude statutory expenses as discussed above and deduction u/s 35D from the total non-interest expenses claimed in P L account and then re- compute the disallowance u/s 14A. Thus appellant succeeds partly in respect of Ground no. 2, 4 5. 10. Ground no. 3 pertains to the addition of disallowance made u/s 14A to the book profit computed u/s 115JB. The AO has taken this action keeping in view the specific provisions given in Clause (f) of Explanation-1 to section 115JB and decision of Hon'ble Delhi High Court in the case of CIT(C)-2 Vs Goetze (India) M/s Ltd, ITA No. 1179/2010. In this regard, the Ld. AR has furnished a detailed submission stating that the Hon'ble ITAT Special Bench after considering the decision of Hon'ble Delhi High Court in the case of Goetze (India) Ltd and subsequent decision in the case of Bhushan Steel Ltd, ITA No. 593 of 2015 has decided the issue of addition of disallowance u/s 14A to the book profit u/s 115JB in the favour of assessee in the case of ACIT Vs Vireet Investment Pvt Ltd ..... X X X X Extracts X X X X X X X X Extracts X X X X
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