Income Tax Appellate Tribunal - Chandigarh
Kissan Fats Ltd., Bathinda vs Dcit, Ludhiana on 5 December, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL
DIVISION BENCH, CHANDIGARH
BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER
AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER
ITA No.779/Chd/2016
(Assessment Year : 2010-11)
M/s Kissan Fats Ltd., Vs. The D.C.I.T.,
Hazi Rattan Link Road, Central Circle-I,
Bathinda. Ludhiana.
PAN: AAHFG2637C
(Appellant) (Respondent)
Appellant by : Shri Sudhir Sehgal
Respondent by : Shri Manjit Singh, DR
Date of hearing : 15.11.2016
Date of Pronouncement : 28.11.2016
O R D E R
PER ANNAPURNA GUPTA, A.M. :
This appeal has been filed by the assessee against the order of learned Commissioner of Income Tax (Appeals)-5, Ludhiana dated 18.3.2016 for assessment year 2010-11.
2. The assessee has raised following grounds of appeal :
"1. On the facts & in the circumstances of the case and in the law, the learned Commissioner of Income Tax (Appeals) has erred in upholding the disallowance of Rs. 4,94,811/- under section 36(l)(iii) of the Income Tax Act on the amount invested for 2 purchase of shares by holding that investment in shares is not the business of the assessee whereas in the similar facts he has allowed expenditure disallowed by the AO against investment made in the shares amounting to Rs. 1.127 Crore under section 14A of the Income Tax Act following the judgments of Hon'ble jurisdictional High Court of Punjab & Haryana, Chandigarh.
2. That the appellant craves permission to elucidate, add, amend, modify, delete any ground or grounds of appeal before the disposal in the interest of substantial justice."
3. The only issue in the present appeal relates to disallowance of a sum of Rs.4,94,811/- made by applying the provisions of section 36(1)(iii) of the Income Tax Act, 1961 (in short 'the Act').
4. Briefly stated, during the course of assessment proceedings for the impugned year, it was found that the assessee had given advance of Rs.1.05 crores during the year for purchase of shares on different dates. The Assessing Officer held the advance to be apparently non- business in nature and further relying on the judgment of Punjab & Haryana High Court in the case of CIT Vs. Abhishek Industries Limited, 286 ITR 1 (P&H), disallowed the interest attributable to the same @ 12% per annum amounting in all to Rs.4,94,811/-, under section 36(1)(iii) of the Act.
5. Before the learned CIT (Appeals), the assessee stated that it had sufficient own funds and, therefore, 3 presumption under law was that the investment should be treated as made out of own funds. The assessee relied on the judgment of I.T.A.T., Chandigarh Bench in the case of BCL Industries & Infrastructure Ltd. Vs. DCIT in I TA No.1002/Chd/2013 dated 13.1.2016, wherein relying upon the decision of the Punjab & Haryana High Court in the case of Bright Enterprises Pvt. Ltd. Vs. CIT in ITA No.624 of 2013 (O&M) dated 24.7.2015 and CIT Vs. Kapsons Associates, ITA No.354 of 2013 (O&M) dated 4.8.2015, disallowance under section 36(1)(iii) was deleted for the reason that the assessee had sufficient own funds to make the same. The Ld. CIT (Appeals) rejected the assessee's contention and upheld the disallowance made for the reason that the advances made were for non-business purpose and interest liability, therefore, could not be said to be for the business of the assessee.
6. Before us, the Ld. counsel for the assessee reiterated the contentions made before the learned CIT (Appeals) and stated that the assessee had sufficient own funds to make the impugned investments/advance. Ld. counsel for the assessee drew our attention to the Balance Sheet of the assessee relating to the impugned year and drew our attention to page no.9 of the same,and pointed out that as on 31.3.2010 the Shareholders Funds available with the assessee, which included Share Capital and Reserves & Surplus, amounted in all to approximately Rs.20.88 crores. Ld.Counsel for the assessee stated that 4 this was more than sufficient to make the impugned investment of Rs.1.05 crores. Thereafter relying on the proposition laid down by the Jurisdictional High Court in the case of Bright Enterprises Pvt. Ltd. (supra), that where enough own funds are available for making the investment the presumption is that the same had been made out of the own funds, the learned counsel for the assessee stated that the same applies in the present case also. The Ld. counsel for the assessee therefore stated that there was no reason to make disallowance of any interest under section 36(1)(iii) of the Act. Ld. counsel for the assessee also relied on the following judgments of I.T.A.T., Chandigarh Bench wherein the aforestated judgment of the Jurisdictional High Court was followed and in identical circumstances disallowances made under section 36(1)(iii) of the Act was deleted :
i) ACIT Vs. Deepak Builders, ITA No.1000/Chd/2013 dt.26-02-2016 ii) DCIT Vs. Deep Malhotra ITA No.661/Chd/2015 dt.15-03-2016
7. The learned D.R., on the other hand, countered by saying that reliance placed by the Ld. counsel for the assessee on the decision of the Jurisdictional High Court in the case of Bright Enterprises Pvt. Ltd. (supra) was misplaced and did not apply to the facts of the present case. The Ld. DR pointed out that even in the case of Bright Enterprises Pvt. Ltd. (supra) the High Court had first held that the advance met the criteria of commercial 5 expediency and it was established by the Court that the advance made was for the purpose of business of the assessee. The Ld. DR stated that it was only thereafter that the proposition of enough own funds to make the impugned advances was applied by the High Court and the disallowance made under section 36(1)(iii) was deleted. The Ld. DR pointed out that it is evident, therefore, that for applying the proposition laid down by the Jurisdictional High Court, that where there are enough own funds the presumption is that the investments have been made out of the same, it is essential to establish commercial expediency for making the advance/investment in the first place. The Ld. DR stated that in the absence of the same in the present case, the proposition laid down in Bright Enterprises Pvt. Ltd. (supra) by the Jurisdictional High Court, could not be followed and thus, reliance placed by the learned counsel for the assessee on various judgments as stated above, was misplaced. The learned counsel for the assessee countered by pointing out that the decision rendered by the I.T.A.T., Chandigarh Bench in the case of M/s Deepak Builders (supra), had categorically held that the proposition laid in the case of Abhishek Industries Limited (supra), which was relied upon by the Assessing Officer in the present case while making disallowance under section 36(1)(iii) of the Act, had been overruled by the Hon'ble Supreme Court in Hero Cycles Ltd. Vs. CIT (Central,) Ludhiana, Civil Appeal No.514 of 2008 dated 5.11.2015 and the proposition 6 relating to sufficiency of funds was upheld for deleting the disallowance of interest.
8. We have heard the contentions of both the parties, perused the orders of authorities below as also the documents produced before us. The undisputed facts in the present case are that during the impugned assessment year, the assessee had claimed interest expenditure amounting to Rs.481.38 crores and had made interest free advances for making investment in shares amounting to Rs.1.05 crores. It is also an undisputed fact that the Interest free funds available with the assesse in the form of Share Capital and Free Reserves amounted to Rs.20.88 crores as at the end of the year. Further, the business purpose for making the aforestated advances was not established either before the lower authorities or even before us. Therefore, the only question which remains to be answered before us is whether in the cases where there are sufficient own interest free funds of the assessee to make advances/investments without charging any interest, could the same be attributed to having been made out of the interest free own funds. Going forward from here, if the answer to the same is in the affirmative, could it also be held that no disallowance of interest under section 36(1)(iii) of the Act can be made in the said circumstances.
9. We find that this issue stands settled in view of the decision of the Jurisdictional High Court in the case 7 of Bright Enterprises Pvt. Ltd. (supra) wherein at para 16 of the order it was categorically held that where the funds/reserves were sufficient to cover interest free advances, the presumption that would arise was that the investments were made out of interest free funds generated or available with the company. Para 16 of the order is reproduced hereunder :
"16. As we noted earlier, the funds/reserves of the appellant were sufficient to cover the interest free advances made by it of Rs.10.29 crores to its sister company. We are entirely in agreement with the judgment of the Bombay High Court in Commissioner of Income Tax vs. Reliance Utilities & Power Ltd., (2009) 313 ITR 340, para-10, that if there are interest free funds available a presumption would arise that investment would be out of the interest free funds generated or available with the company if the interest free funds were sufficient to meet the investment."
10. A perusal of the above para reveals that while upholding the above proposition the High Court relied upon the judgment of the Bombay High Court in the case of CIT Vs. Reliance Utility & Power Limited (2009) 313 ITR 340 (Bom).The Bombay High Court ,in the said case, at para 10 of its order relied on the judgment of the Hon'ble Supreme Court in the case of East India Pharmaceutical Works Vs. CIT. (1997) 224 ITR 627 (SC),and held that if there are sufficient interest free funds available to the assessee to meet its investment and at the same time the assessee has raised a loan, it can be presumed that the investments were from the 8 interest free funds available. Para 10 of the order of the Bombay High Court is reproduced hereunder :
"10. If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd. (supra) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. (supra) where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcomber's case (supra) the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the overdraft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the CIT(A) and Tribunal."9
11. In view of the same, we find merit in the contention of the assessee that in view of the sufficient interest free own funds available with the asessee, the investments in the present case are to be presumed to have been made out of the same.
12. Further once it has been held that the investments have been made by utilizing the own interest free funds of the assessee, it automatically means that for the purpose of making the investments, no interest expenditure has been incurred by the assessee. When no interest expenditure have been incurred by the assessee, issue of allowance of the same under section 36(1)(iii) of the Act does not arise at all, since section 36(1)(iii) of the Act deals with the circumstances or the conditions subject to which interest expenditure are to be allowed. Section 36 (1)(iii) of the Act reads as follows :
"36. (1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28--
(i);
[(ia);] [(ib)
(ii)
(iii) the amount of the interest paid in respect of capital borrowed for the purposes of the business or profession :"
13. It is evident from the same that the above section deals only with allowability of claim of interest expenditure, for which the incurring of such expenditure 10 or claim of such expenditure has to be first established.
Since in the present case, the investments have been presumed to made out of own funds, clearly no interest expenditure has been incurred for making the same and, therefore, no question of allowability/disallowability of the same arises under section 36(1)(iii) of the Act, as has been held by the Jurisdictional High Court in the case of Bright Enterprises Pvt. Ltd. (supra) and the Bombay High Court in the case of Reliance Utility & Power Limited (supra).
14. The argument of the Ld. DR that for the purpose of raising the presumption that own funds were used for making the interest free advances and hence no disallowance under section 36(1)(iii) of the Act is called for, the business purpose/commercial expediency of making the advances is required to be established, is in our opinion incorrect. The Ld. DR has pointed out that in the case of Bright Enterprises Pvt. Ltd. (supra) the High Court had first established that the advance was made for business purpose and had thereafter applied the presumption of utilization of own funds and deleted the interest paid under the provisions of section 36(1)(iii) of the Act. On the contrary, a perusal of the order of the High Court would reveal that in the first place the question of law before it was as under :
"Whether under the facts and circumstances of the case, while arising at the 'chargeable income' u/s 29 considering the 11 provisions of Section 36(l)(iii), the disallowance of interest paid to banks is mandatory on the true and correct interpretation of the words 'for the purpose of business?"
15. For answering the aforestated question, the High Court dealt with business purpose of the advance and held that it was established as a matter of fact that advance was made for business purpose. It further went on to state, at para 16, that in any case, the assessee had surplus funds to make the impugned advance and thereafter agreeing with the decision of the Bombay High Court in the case of Reliance Utility & Power Limited (supra) held that in cases where there are interest free funds available, a presumption would arise that the investment would be made out of interest free funds generated or available with the company. Evidently, the Hon'ble High Court, on this independent/ alternative finding also held the disallowance made u/s 36(1)(iii) to be unwarranted. Even logically as stated above, it follows that where own interest free funds have been used for the purpose of making the advance, no question of incurring any expenditure arises and therefore, the assessee does not fall in the ambit of section 36(1)(iii) of the Act and when the assessee does not fall in the four corners of the provisions of the section at all, the question of establishing commercial expediency does not arise at all. Further, the judgment of the Bombay High Court in the case of Reliance Utility & Power Limited (supra) followed by the Jurisdictional High Court was on the identical 12 issue that where the assessee had own sufficient funds for making the investment/advance no disallowance u/s 36(1)(iii) was warranted. The question of law before the High Court in this case was:
" ( A ) W h e t h e r , o n t h e f a c t s a n d i n t h e c i r c u ms t a n c e s o f t h e c a s e a n d i n l a w, t h e h o n ' b l e T r i b u n a l wa s j u s t i f i e d i n holding th at the assessee comp any h ad suff icient f unds of i t s o wn f o r m a k i n g t h e i n v e s t m e n t s wi t h o u t u s i n g t h e interest- bearing f unds even though the balance-sheet of t h e a s s e s s e e - c o m p a n y h a s n o r e s e r v e o r o wn f u n d s f o r m a k i n g t h e i n v e s t me n t s i n t h e s i s t e r c o n c e r n a n d , t h e r e f o r e , b o r r o we d f u n d s h a v e b e e n u t i l i s e d a n d i n t e r e s t o n t h e s e b o r r o we d f u n d s a r e r i g h t l y d i s a l l o we d b y t h e Assessing Off icer?"
16. In the impugned case the CIT(A) had deleted the disallowance made under section 36(1)(iii) on the basis of availability of sufficient own interest free funds. The ITAT had upheld the order of the CIT(A). The Revenue had challenged the order of the ITAT on the ground that the availability of sufficient own funds was not established. The High, in its order, rejected the contention of the Revenue and thereafter, at para 10, reiterated the proposition laid down by the Supreme Court in East India Pharmaceutical Works Limited vs CIT (1997)224 ITR 627,that if there are funds available both interest free and over draft and loans taken, then presumption would arise that investments would be out of interest free funds. Thereafter the appeal of the Revenue was dismissed.
17. In view of the above, we hold that the disallowance of interest made under section 36(1)(iii) of the Act is uncalled for and unjustified and the order of 13 the CIT (Appeals) is, therefore, set aside. The disallowance made of interest amounting to Rs.4,94,811/- is, therefore, deleted.
18. In the result, the appeal of the assessee is allowed.
Order pronounced in the open court.
Sd/- Sd/-
(BHAVNESH SAINI) (ANNAPURNA GUPTA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : 28 t h November, 2016
*Rati*
Copy to:
1. The Appellant
2. The Respondent
3. The CIT(A)
4. The CIT
5. The DR
Assistant Registrar,
ITAT, Chandigarh