Income Tax Appellate Tribunal - Agra
M/S. Ashoka Auto Sales Ltd, Agra vs Acit 4(1), Agra on 20 March, 2018
IN THE INCOME-TAX APPELLATE TRIBUNAL,
AGRA BENCH, AGRA
Before: Shri A.D. Jain, Judicial Member And
Shri Dr. Mitha Lal Meena, Accountant Member
I.T.A No. 144/Agra/2014
(A.Y. 2008-09)
ACIT 4(1), Vs M/s Ashoka Auto Sales Ltd.,
Agra 12/146, Kanpur Road,
Agra
PAN AABCA 3711 C
(Appellant) (Respondent)
Appellantby Shri Waseem Arshad, Sr DR
Respondentby Shri SC Gupta, CA
Date of Hearing 12.03.2018
Date of Pronouncement 20.03.2018
ORDER
DR. MITHA LAL MEENA, A.M. This appeal by the assessee is directed against the order of the ld. CIT(A)-II, Agra, dated 09.12.2013 wherein the assessee has taken the following effective grounds of appeal:
"1. That the Ld. Commissioner of Income-tax (Appeals) has erred inlaw and on facts in deleting the addition of Rs.31,00,953/- made by AO u/s 36(1)(iii) of the Act, without properly appreciating the facts of the case that the assessee had utilized borrowed funds for earning business income as well as for purposes other than the business. Hence, the assessee failed to I.T.A. 144/Agra/2014 2 discharge its onus to prove the no part of the borrowed funds have been utilized for the purposes other than the business.
2. That the Ld. Commissioner of Income Tax (Appeals) has erred in law and on facts in deleting the addition of Rs.5,81,408/- u/s 14A made by the AO as returned income without properly appreciating the facts of the case that the AO has no discretion to quantify the amount incurred in earning the exempt income except to follow the provisions of Rule 8D."
2. The facts on record are that the AO in this year has also considered the same advance which was given to its sister concern, M/s ASB Health Care (P) Ltd. during the A.Y.2006-07 and closing balance of the same during the year under consideration as on 31.03.2008 at Rs.3,01,34,498/-. In the impugned order, the AO has also given reference to the A.Y.2006-07 and A.Y.2007-08 to arrive at the conclusion that interest-bearing fund has been diverted for non- business purposes and made disallowances of Rs.31,00,953/- out of interest paid by the assessee. Further the AO has mentioned that the assessee has made investment, on which it has earned exempt income but no expenditure has been debited on account of earning the said exempt income. Therefore, vide show cause notice dated 24.11.2010, he asked the assessee to explain as to why necessary disallowance u/s 14A read with Rule 8D should not be made I.T.A. 144/Agra/2014 3 amounting to Rs.Rs.5,81,408/- and accordingly made the addition of the same amount being not satisfied with the reply of the assessee.
3. In appeal, the ld. CIT(A) has deletedthe addition of Rs.31,00,953/- made by the AO u/s 36(1)(iii) and partlydeleting the addition of Rs.5,81,408/- made u/s 14Aof the Act, by holding as under:
"5.2 During the year consideration, as I have found from the impugned assessment order dated 23.12.2010, the AO in this year also considered the same advance which was given to the sister concern, M/s ASB Health Care (P) Ltd. during the A.Y.2006-07 and closing balance of this advance during the year under consideration as on 31.03.2008 is Rs.3,01,34,498/-. In this impugned order, the AO has also given reference to the A.Y.2006-07 and A.Y.2007-08 to arrive at the conclusion that interest-bearing fund has been diverted for non-business purposes. Therefore, after considering the explanation of the assessee and placing reliance on the decision of Punjab and Haryana High Court in the case of CIT vs Abhishek Industries Ltd. (286) ITR 1, the AO held that implicit is the fact that borrowed funds have also been utilized for earning business income and the purposes other than the business and therefore, in view of the AO, the assessee failed to discharge its onus to prove that no part of the borrowed funds have been utilized for the purpose other than the business and hence, by pointing out that it is now judicially settled that where the utilization for non business purposes is made out of composite fund of borrowings and other funds, it cannot be presumed that such utilization was made out of the former or the latter. Accordingly, the AO held that it is clearly established that the assessee is not entitled for full allowance of interest as claimed by it u/s 36(1)(iii) and he made the calculation of interest to be disallowed because of diversion of the funds to the sister concern for non business purposes amounting to Rs.31,00,953/-.
5.3 After examining the facts of the case as it was before the Hon'ble ITAT, Agra in Assessment Year 2006-07, I find that the same facts are present with respect to the advances given to the sister concern M/s ASB Health Care (P) Ltd. in the assessment year under consideration also, with a slight increase in the amount of advance only. However, the purpose for giving of the advance and the source of giving of the advance remains to be same as it was during the year AY 2006-07. After examining these facts, the Hon'ble ITAT, Agra arrived to the conclusion during the Assessment Year 2006-07 that the assessee has advanced the money for the purpose of its business as a measure of commercial expediency and therefore, after following the decision of the Hon'ble I.T.A. 144/Agra/2014 4 Supreme Court in case of S.A. Builders vs CIT(A) (Supra), addition made by the AO in A.Y.2006-07 u/s 36(1)(iii) of the Act has been deleted. Respectfully following the decision of the Hon'ble ITAT, Agra in this year also, the addition made by the A.O u/s 36(1)(iii) at Rs.31,00,953/- cannot be sustained as the facts of the case during Assessment Year 2006-07. Therefore, I delete the addition of Rs.31,00,953/- and accordingly ground number 1 is allowed."
"6.7 In present case, the AO has given detailed reasoning for invoking the provisions of section 14A and applying Rule 8D as discussed by him in para no.3 of the assessment order. Therefore, I do not find any legal infirmity in invoking the provisions of section 14A read with Rule 8D by the Assessing Officer. Now, the question to be decided is about determining the amount of disallowance as per Rule 8D on the basis of the facts of the case as I have already discussed. Before applying the facts of the case on Rule 8D, I have further relied upon the decision of Hon'ble ITAT Kolkata Bench 'A' in which, the computation of the amount of expenditure in relation to the income not includible in total income as per Rule 8D has been analyzed. As per this decision, the Hon'ble Tribunal has mentioned that this Rule has three sub parts. The first sub part i.e. (i) deals with the amount of expenditure directly relating to the income which does not form part of the total income. In the present case, no amount of investment made in shares has been found as made out of the interest bearing loan and hence, no such expenditure on account of payment of interest can be taken in this part and therefore, the AO has also taken the amount in this part as 'nil1. The second sub part (ii) provides for computation in respect of expenditure incurred by the assessee by way of interest during the previous year which is not directly attributable to any particular income or receipts. In this part, as per the decision of the Hon'ble Kolkata Bench, it will have to be shown by the AO that the said interest is not directly attributable to any particular income or receipts. Similar to the case REI Agro Ltd., vs DY. Commissioner of Income-tax (supra), the assessee in the instant appeal had substantial capital and interest free fund and there is no finding of the AO that the assessee had used the borrowed fund for purchase of shares and since the share capital and reserve and surplus of the assessee is more than the amount of investment, it can be very well concluded that investment in shares has not been made out of borrowed funds but out of own funds. I have already discussed earlier; the Hon'ble Tribunal has also held in case of the assessee under appeal for earlier year A.Y.2006-07 that no expenditure has been incurred by the assessee on payment of interest on the fund invested in shares. The AO has not even brought any evidence on record showing that borrowed funds were jointly being used for the purpose of business as well as for making investment in shares. Therefore, the second sub part 8D(2) will not apply in this case. In respect to the third part i.e. Rule 8D(2)(iii), the disallowances is the amount equal to ½ per cent of the average of the value of the investment, income from which shall not form part of the total income, therefore, in I.T.A. 144/Agra/2014 5 this sub part what is disallowed is ½ per cent of average value of investment. Therefore, after holding that no disallowance is to be made on account of expenses incurred for earning of exempted income under first two sub parts of Rule 8D, the Hon'ble ITAT Kolkata Bench has held that the disallowances under section 14A read with Rule 8D is to be made in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to the income which does not form part of the total income and under such circumstances, the computation of the disallowances u/s 14A read with rule 8D(2)(iii) which was the issue in the case of REI Agro Ltd (supra) , this matter was restored to the file for the AO for re-computation because the AO in that case had not identified those investments of the assessee on which dividend could 'have been received by him. Therefore, it was very clear from this judgments that under the above circumstances, where the assessee has claimed that no expenses has been incurred in relation to earning of exempted income and also the AO has not brought any evidence on record that borrowed fund had been utilized for the purpose of making investment in shares for earning of dividend, no disallowances u/s 14A read with Rule 8D(2)(i) &
(ii) can be made but the disallowance is to be made as per 8D(2)(iii) which has to be computed at ½ per cent of average value of the investment of the company.
6.8 From the above decision, it is very clear that even if no disallowance under section 14A read with Rule 8D can be made on account of interest paid on borrowed -funds, disallowance is to be made as per the third part
(iii) of sub rule (2) of Rule 8D. For this purpose, average value of investment is to be computed as average of investment appearing in the balance sheet of the assessee on the first day and last day of the previous year. On perusal of the balance sheet of the assessee for the year under consideration, I have found that the amount of investment made by the assessee (appellant) in shares is Rs.59,12,000/- as on 31.03.2007 as well as on 31.03.2008. Therefore, I find that the AO has correctly taken the value of average investment at Rs.59/12,000/- in the assessment order. Therefore, even if there is no finding that any expenditure was increased by the assessee (appellant) on payment of interest on the fund utilized for the purchase of shares, as per the computation made by Rule 8D(2)(iii), the amount of Rs.29,560/- is certainly held to be incurred for earning of exempt income as envisaged in provisions of section 14A because of investment made by the assessee (appellant) in shares and hence, the amount of Rs.29,560/- is to be disallowed as per Rule 8D(2)(iii) read with section 14A by following the decision of Hon'ble Kolkata Bench 'A' in the case of REI Agro Ltd, vs Deputy Commissioner of Income tax, Central Circle-XXVII, Kolkata (Supra) and hence, I confirm the addition u/s 14A read with Rule 8D to the extent of Rs.29,560/- out of the total amount of Rs.6,10,968/- made by the AO and accordingly, ground number 3 is partly allowed."
I.T.A. 144/Agra/2014 6
4. Ld. DR has supported the order of the ld. AO. He submitted that the ld. CIT(A) was not justified in deleting the addition of Rs.31,00,953/- made by the AO u/s 36(1)(iii) of the Act, without properly appreciating the facts of the case that the assessee had utilized borrowed funds for earning business income as well as for purposes other than the business. Hence, the assessee failed to discharge its onus to prove the no part of the borrowed funds have been utilized for the purpose other than the business. He placed reliance on the order of the Hon'ble Calcutta High Court in the case of M/s Dhanuka& Sons vs. CIT, Central-I, in ITA No. 633 of 2004 (Cal) held as under:
"In the case before us, there is no dispute that part of the income of the assessee from its business is from dividend which is exempt from tax whereas the assessee was unable to produce any material before the authorities below showing the source from which such shares were acquired. Mr. Khaitan strenuously contended before us that for the last few years before the relevant previous year, no new share has been acquired and thus, the loan that was taken and for which the interest is payable by the assessee was not for acquisition of those old shares and, therefore, the authorities below erred in law in giving benefit of proportionate deduction.
In our opinion, the mere fact that those shares were old ones and not acquired recently is immaterial. It is for the assessee to show the source of acquisition of those shares by production of materials that those were acquired from the funds available in the hands of the assessee at the relevant point of time without taking benefit of any loan. If those shares were purchased from the amount taken in loan, even for instance, five or ten years ago, it is for the assessee to show by the production of documentary evidence that such loaned amount had already been paid back and for the relevant Assessment Year, no interest is payable by the I.T.A. 144/Agra/2014 7 assessee for acquiring those old shares. In the absence of any such materials placed by the assessee, in our opinion, the authorities below rightly held that proportionate amount should be disallowed having regard to the total income and the income from the exempt source. In the absence of any material disclosing the source of acquisition of shares which is within the special knowledge of the assessee, the assessing authority took a most reasonable approach in assessment."
5. The ld. counsel for the assessee filed paper book I and II comprising of submissions made before the AO, CIT(A), case laws and statement of accounts. The relevant part is reproduced hereunder:
"1) Assessee company Company is engaged in trading of Tata diesel vehicles, spare parts and servicing and repairing and also leasing of vehicles. In the process of expansion & better accessibility, assessee-company choice to have showroom at developed commercial area at Sanjay Place, Agra. For the purpose it has advanced progressive payments totaling Rs.3,01,34,498/- for the purchase of showroom over a period of time to M/S ASB Health Care P Ltd., which includes Rs. 6,200/- paid during the year under consideration.
However, learned Assessing Officer has considered it as interest free loan and disallowed interest Rs.31,00,953/- U/S 36(l)(iii) on a genuine business advance for purchase of showroom drawing the inference that interest needs to be capitalized till the assets has been put to use. While there is no borrowing for acquiring the assets. The ld. CIT (A) examined issue in details and deleted the addition for the reason discussed in the order. In fact, there was no disallowance of interest till A.Y.2005-06 and issue was first time cropped in the A.Y.2006-07 and ordered by the ITAT in favour of the assessee by ITAT, Agra in ITA No.40/Agr/2011 dated 25-11-2011 (Page No.81 to 92 of paper book) after examining in detail, which has become final after rejection of departmental appeal by 1 Hon'ble Allahabad High Court (Page No. 93 to 94 of paper book). Assessee relies thereon.
(b) This position has been accepted by the Deptt. and so no disallowance has been made in subsequent assessment year 2009-10 and thereafter.
I.T.A. 144/Agra/2014 8
2) Assessee company has invested Rs.56.12 lacs in the shares of other companies, which are, Very old. Paid up capital & Free reserves of the assessee company at the close of the year were Rs.17.53 crore. Assessee claimed that no expenditure was incurred for earning the dividend. However, Learned AO has disallowed deemed interest expenditure Rs.6.10,968/- U/s 14A under rule 8D ignoring the fact about sufficient availability of own funds with the company for the purpose of investment in the shares. Moreover, Learned AO has wrongly calculated addition u/s 14A, as total assets of the company as on 31.03.2008 were Rs.56,17,79,311/- and not Rs.3,66,92,065/- as considered in the order, resulting wrong calculation of addition on this count. Learned CIT(A) reduced addition to Rs.29,560/- against Rs.6,10,968/- by the learned AO.
(a) There was no disallowance of interest till AY 2005-06 and issue was first time cropped in the AY 2006-07 and ordered by the ITAT in favour of the assessee by vide ITA No. 40/Agr/2011 dated 25.11.2011 (Page No.81 to 92) which has become final after rejection of departmental appeal by Hon'ble Allahabad High Court (Page No. 93 to 94 of paper book). Assessee rely thereon.
(c) This position has been accepted by the Deptt. and so, no disallowance has been made in subsequent assessment year 2009-10 and thereafter."
6. The counsel for the assessee submitted that in fact, there was no disallowance on this issue till A.Y.2005-06. For the first time, it was cropped in the A.Y.2006-07 and it was decided in favour of assessee by ITAT, Agra in ITA No.40/Agr/2011 dated 25-11-2011, relying on the decision of hon'ble Supreme Court in the case of SA Builders Ltd. vs CIT(A) 288 ITR 1 (PBP.81 to 92) held that the assesse has advanced money for the purpose of its business as a measure of commercial I.T.A. 144/Agra/2014 9 expediency. The Hon'ble Allahabad High Court rejected the revenue appeal(PBP-94) and this position has been accepted by the Department in subsequent assessment year 2009-10 and thereafteras evident from the assessment order passed for AY 2009-10(ABP, Page-
39). The ld DR has notcontroverted this fact.
7. As regards to the issue of 14A, the counsel relied on the order of the CIT(A). The written submission of the ld AR read as under:
"Disallowance of interest u/s 14A read with Rule 8D:
Section 14A was introduced in the Income Tax Act, 1961 by the Finance Act, 2001 with retrospective effect from 1st April 1962. It is hereby confirmed that, no disallowance prior to assessment year 2006-07 was made in the case on this count. As all the investments are old i.e. prior to A.Y.2006-07, impliedly position is clear that no interest bearing funds were ever used for making the investment in the shares. Even for the assessment year 2006-07, Hon'ble ITAT, Agra bench has deleted the addition as per copy of order on the record in the case. As submitted earlier also, appellant company has not incurred any expenditure in relation to the income not includable in total income calling disallowance u/s 14A read with rule 8D. Company's paid up capital and free reserve as on 31s1 March, 2008 were Rs.1753 Lacs, while the investment in shares were barely Rs.59.12 lacs only (0.32%). All the investments are very old and balance sheet of relevant years are not readily available. No new investment was made by the company during the year under consideration. As per last available balance sheet, as on 31st March, 1999, there was no outstanding CC limit with bank, while appellant's investment in shares were i.e. Rs.59.12 Lacs and free reserve and capital of the company were Rs.428.71 lacs, which clearly depict sufficient availability of own funds, even 10 years back also. Rule 8D prescribe methodology to be adopted only when provision of section 14A of the Income Tax are applicable. In the case, there is no nexus between tax free income and expenditure relating thereto. In the audit report u/s 44AB, no such case is reported by Tax Auditor in Form 3CD. Thus, appreciating the facts and material on record, no addition invoking provisions contained in section 14A read with rule 8D, should be sustained.I.T.A. 144/Agra/2014 10
It may be further added that there is no change in the investments part of the appellant during fie subsequent assessment years 2009-10 and 2010-
11. Your learned predecessor in the assessment A.Y.2009-10 has deleted the disallowance made by Learned Assessing Officer on this count. This decision has been accepted by the Revenue and no further appeal is made before ITA T. Moreover, in the assessment year 2010-11, no addition is made by the learned Assessing Officer u/s 14A on this count, when investment continued same a Rs.59.12 Lacs. Copy or orders are being attached for ready reference.
As submitted, it is categorically held by various courts that disallowance under Rule 8D of S.14A cannot be made unless there was evidence to show that interest hearing funds had been invested in tax free investment and the nexus is established by the department. Section 14A could not be applied on mere assumption. Recently Hon'ble HIGH COURT OF PUNJAB AND HARYANA in case of Commissioner of Income tax, Jalandhar-1 vs Deepak Mittal [2013] 38 taxmann.com 83) held that when assessee claims that he had not made any expenditure on earning such income, the Assessing Officer in terms of sub section (2) of section 14A was to proceed further to collect such material or evidence to determine expenditure, if any, incurred by the the assessee but the Assessing Officer instead relying on rule 8D of the Rules applied as a formula, which was clearly a wrong application introduced as a substitute for sub-section (2) of section 14A and thus, was not permissible in law. In view of foregoing submission, it is prated to direct to delete the addition made u/s 14A of the /.Tax Act to the income of the assessee company.
8. We heard both the parties and perused the material on record. We find that in the A.Y.2006-07, the very same issue of commercial expediency was decided in favour of assessee by ITAT, Agra in ITA No.40/Agr/2011 dated 25-11-2011, relying on the decision of hon'ble Supreme Court in the case of SA Builders Ltd. vs CIT(A) 288 ITR 1 (PBP.81 to 92) holding that the assesse has advanced money for the purpose of its business as a measure of commercial expediency. Thereafter, the Hon'ble Allahabad High Court rejected the revenue appeal (PBP-94) and this position has been accepted by the I.T.A. 144/Agra/2014 11 Department in subsequent assessment year 2009-10. This fact has not been controverted by the ld DR.
9. It is seen that the ld CIT(A) has followed the decision of the ITAT, Agra (supra) in the assessee own case where it was held thatthe assessee has advanced the money for the purpose of its business as a measure of commercial expediency and accordingly, the addition made by the AO in A.Y.2006-07 u/s 36(1)(iii) of the Act has been deleted.Thus, the finding of the CIT(A) in deletingthe addition made by the A.O u/s 36(1)(iii) of Rs.31,00,953/-, holding that the same cannot be sustained on the facts of the caseis justified. The order of the CIT(A) on this issue is confirmed.
10. As regards tothe issue of 14A, we find that the assessee company has invested Rs.56.12 lacs in the shares of other companies, which are, very old; that thePaid-up capital & Free reserves of the assessee company at the end of the financial year were Rs.17.53 crore and that the assessee claimed that no expenditure was incurred for earning the dividend. However, the AO has disallowed deemed interest expenditure of Rs.6.10,968/- U/s 14A of the Act under rule 8D ignoring the fact about sufficient availability of own funds with the company for the purpose of investment in the shares. The Ld. CIT(A) I.T.A. 144/Agra/2014 12 noted that AO has wrongly calculated addition u/s 14A, as total assets of the company as on 31.03.2008 were Rs.56,17,79,311/- as against Rs.3,66,92,065/- as considered in the assessment order which resulted in to wrong calculation of addition on this count. Accordingly, the ld. CIT(A) reduced the addition to Rs.29,560/- as against Rs.6,10,968/- made by the AO.The ld. DR. has not disputed the said calculation.
11. We, therefore, find no infirmity in the order of the ld. CIT(A) on this issue. The order of the ld. CIT(A) is confirmed and the ground of appeal is rejected.
12. In the result, the appeal of the revenue is dismissed.
Order pronounced in the open court on 20/03/2018.
Sd/- Sd/-
(A.D. Jain) (Dr. Mitha Lal Meena)
Judicial member Accountant Member
Dated 20/03/2018
Aks/-DOC
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
I.T.A. 144/Agra/2014 13
Date
1. Draft dictated (DNS) 14.03.2018 PS
2. Draft placed before author 20.03.2018 PS
3. Draft proposed & placed before the second member JM/AM
4. Draft discussed/approved by Second Member. JM/AM
5. Approved Draft comes to the Sr.PS/PS PS/PS
6. Kept for pronouncement on PS
7. File sent to the Bench Clerk PS
8. Date on which file goes to the AR
9. Date on which file goes to the Head Clerk.
10. Date of dispatch of Order.