Income Tax Appellate Tribunal - Chandigarh
Acit, Circle, Panchkula vs M/S Janak Global Resources Pvt. Ltd., ... on 16 October, 2018
आयकर अपील य अ धकरण,च डीगढ़ यायपीठ "ए", च डीगढ़ IN THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH BENCH 'A', CHANDIGARH ी संजय गग , याय क सद य एवं ीमती अ नपणा ू ग#ता ु , लेखा सद य BEFORE: SHRI SANJAY GARG, JM & SMT. ANNAPURNA GUPTA, AM आयकर अपील सं./ ITA No. 470/Chd/2018 नधा रण वष / Assessment Year : 2014-15 The A.C.I.T., बनाम M/s Janak Global Panchkula Circle, Resources Pvt. Ltd., Panchkula. Plot No.315, Indl-
Area, PH-1, Panchkula.
थायी लेखा सं./PAN NO: AACCJ4466C
अपीलाथ /Appellant यथ /Respondent
नधा रती क ओर से/Assessee by : Shri Manoj Kumar
,Ms.Chanderkanta Sr.DR
राज व क ओर से/ Revenue by : Shri Parikshit Aggarwal, CA
सनवाई
ु क तार"ख/Date of Hearing : 06.07.2018/16.10.18
उदघोषणा क तार"ख/Date of Pronouncement : 16 .10.2018
आदे श/Order
PER ANNA PURNA GUPTA, A M:
Th i s a p p e a l h a s b e e n p r e f e r re d by t h e R e v e n u e a ga i n s t t h e o r d e r o f l e a rn e d C o m mi s s i o ne r o f I nc o m e Ta x ( A p p e a l s) , P a n c h k u l a ( h er ei n a f t e r r e f er r e d t o a s C I T( A p pe a l s ) d a t e d 2 1 . 2 . 2 0 1 8 r e l a ti n g t o a s se s s m e nt y e a r 2 0 14 - 1 5 .
2. G r o u n d N o. 1 r a i se d b y t h e R e v e nue r e a d s as u n d er:
"1. Whether on the facts and circumstances of the case the Ld. CIT(A) has erred in allowing the appeal of the assessee and deleting the disallowance of Rs.18,44,482/-u/s 36(l)(iii) which is not correct because the assessee has given interest free advances of Rs.3,55,00,000/- to Shivaks Impex Limited, sister concern which is for non business purposes."2 ITA No.470/Chd/2018
A.Y. 2014-15
3. Brief f ac t s r el ev a n t to the i ss u e are that duri ng assessment proceedi ngs, the Assessi ng Offi cer noted that the assessee had gi ven i nterest free advance of Rs.3,55,00,000/- to Shi vaks I mpe x Ltd., a si ster concern. On the other hand, the assessee had pai d i nterest of Rs.33,40,780/- on l oan rai sed from banks but had not charged any i nterest on the l oans advanced to M/s Shi vaks I mpe x Ltd. The Assessi ng Offi cer asked the assessee as to why i nterest e xpenses shoul d not be di sal l o wed u/s 36( l ) ( i i i ) of the I ncome Ta x Act, 1961 ( i n short 't he Act') and add ed to the ta xabl e i ncome. The assessee fi l e d i ts repl y, whi ch i s reproduced in para 2 of the assessment order. Bri efl y p ut the assessee contended that the i mpugned advances were busi ness advances and therefore no di sal l o wance, of i nterest pai d on funds uti l i zed i f any for maki ng the advances, was warranted. The assessee al so contended al ternatel y that it had uti l i zed i ts o wn i nterest free funds for maki ng the advances and therefore al so no di sal l o wance of i nterest u/s.36( 1) ( i i i ) was warranted. After consi deri n g the repl y fi l e d by the assess ee, the AO re jected the same and on the basi s of reasons recorded i n para 2.1 of the assessment order i nterest amounti ng to Rs.18,44,482/- was di sal l o wed a nd added to the i ncome of the assessee. Th e AO hel d that the assessee had fail ed to prove busi ness e xi genc y for maki ng the advances, and therefore, as per the deci si on of the Juri sdi cti onal Hi gh Court i n the case of Abhi shek Industri es Ltd., reported i n 286 I TR 1 and of the Ape x court in the case of S.A. Bui l ders, 3 ITA No.470/Chd/2018 A.Y. 2014-15 reported i n 288 I TR 1, the di s al l o wance of i nterest was warranted .
4. Duri ng appel l ate proceedi ngs the assessee contended that i t had suffi ci ent o wn funds for maki ng the i nvestment and, therefore, no di sal l o wance u/s.36( 1) ( i i i ) of the Act warranted. Rel i ance was pl aced on a number of deci si ons of the Hon'bl e Juri sdi cti onal Hi gh Court i n thi s regard and al so on deci si ons of the I TA T Chandi garh Bench. The Ld.CI T( Appeal s) on appreci ati ng the contenti on of the assessee del eted the di sal l o wance made fol lo wi ng the deci si on of the H on'bl e Juri sdi cti onal i n the case of CI T Vs. Ma x I ndi a Ltd. in I TA No.210/Chd/2013 and CI T vs. Stock Kapsons Associ ates, 381 I TR 204 ( P&H) . The rel evant fi ndi ngs of the CI T( A) at para 5.2 of the order i s as under:
" 5.2 I have gone through the f acts of the case and wr itte n submiss ion f iled by the appe llan t. It is noted f rom the balance shee t f rom A.Y.2013-14 & A.Y.2014-15 respectively that appe llan t's share capital, f ree reserves and interes t f ree current l iabil itie s f ar exceeded the adv ance of Rs.3.55 Crores g iven to the s is ter concern Shiv aks Impex Ltd. during Assess ment Ye ar 2013-14. The average f ree f unds av ailable in the A.Y.2013-14 are Rs.1560 lacs and in A.Y.2014-15 are Rs.1491 lacs. Thus the appe llan t has de mons trated the av ailab il ity of enough surplus f unds f or making interes t f ree advance to the s is ter concern. The Hon'ble jurisdic tio nal H igh Court has held in the cas e of CIT vs Max India L td. IT A No.210/Chd/2013 dated 08.03.2017 that if an assessee establishes that its interest free funds were equal to or more than the interest bearing funds it would be open to it to contend that presumption arises that investments have been made out of the same. Similarly reliance placed by the appellant on CIT vs. Kapsons Associates, 381 ITR 204(P&H) is also found to be supporting the 4 ITA No.470/Chd/2018 A.Y. 2014-15 facts of its case. Therefore, no portion of the interest paid on borrowed funds is required to be disallowed in the case of the appellant and addition made on this account for both the years under appeal are ordered to be deleted. This ground of appeal is allowed."
5. Aggri eved by th e same the Rev enue has come up i n appeal before us.
6. Duri ng the course of heari ng before us, the Ld. DR contended that the proposi ti on l ai d do wn by th e Hon'bl e Juri sdi cti onal Hi gh Court i n the deci si on rel i ed u pon by he CI T( Appeal s) whi l e del eti ng the di sal l o wance was no l onger good l a w. I t was poi nted out that the Hon'bl e Juri sdi cti onal Hi gh Court i n vari ous deci si ons had l ai d do wn that where the assessee coul d demonstrate su ffi ci enc y of o wn f unds, the presumpti on that woul d ari se was that i t had used its o wn funds for the purpose of maki ng i nterest free non busi ness advances, cal l i ng for no di sal l o wance of i nterest u/s. 36( 1) ( i i i ) of the Act. The Ld. DR poi nted out that thi s presumpti on the or y had no w bee n overrul ed by t he Hon'bl e Ape x Court i n i ts deci si on i n group of cases wi th the l ead case bei ng Ma xo pp I nvestment Ltd. Vs. CI T ( 201 8) 402 I TR 640 ( SC) , wherei n i n the conte xt of secti on 14A th e deci si on of the Hon'bl e Juri sdi cti onal Hi gh Court i n the case of Avon C ycl es Ltd. Vs. CI T i n I TA No.277 of 2013 was al so under consi derati on. The Ld. DR poi nted out from the order of the Hon'bl e Ape x Court that in the sai d case the Hon'ble Juri sdi cti onal Hi gh Court had uphel d the di sal l o wance of i nterest u/s 14A where mi xed funds were depl o yed by the assessee, and th i s proposi ti on w as affi rmed by t he Hon'bl e 5 ITA No.470/Chd/2018 A.Y. 2014-15 Ape x Court al so i n the aforementi oned appeal before i t. Our attenti on was dra wn to para 42 of the order of the Hon'bl e Ape x Court i n thi s regard as under:
40. Civil Appeal No. 1423 of 2015 is filed by M/s. Avon Cycles Limited, Ludhiana, wherein the AO had invoked section 14A of the Act read with Rule 8D of the Rules and apportioned the expenditure. The CIT(A) had set aside the disallowance, which view was upturned by the ITAT in the following words:
"...Admittedly the assessee had paid total interest of Rs.2.92 crores out of which interest paid on term loan raised for specific purpose totals to Rs.1.70 crores and balance interest paid by the assessee is Rs.1.21 crores. The funds utilized by the assessee being mixed funds and in view of the provisions of Rule 8D(2)(ii) of the Income Tax Rules the disallowance is confirmed at Rs.10,49,851/-, we find no merit in the ad hoc disallowance made by the CIT (Appeals) Rs.5,00,000/-. Consequently, ground of appeal raised by the Revenue is partly allowed and ground raised by the assessee in cross-objection is allowed..." -
Taking note of the aforesaid finding of fact, the High Court has dismissed the appeal of the assessee observing as under:
"In the present case, after examining the balance-sheet of the assessee, a finding of fact has been recorded that the funds utilized by the assessee being mixed funds, therefore, the interest paid by the assessee is also an interest on the investments made. Such being a finding of fact, we do not find that any substantial question of law arises for consideration of this Court.
After going through the records and applying the principle of apportionment, which is held to be applicable in such cases, we do not find any merit in Civil Appeal No. 1423 of 2015, which is accordingly dismissed."
The Ld. DR stat ed that i t was cl earl y evi dent f rom the above order of t he Hon'bl e Ape x Court that the p resumpti on 6 ITA No.470/Chd/2018 A.Y. 2014-15 theor y l ai d do wn by the Hon'bl e J uri sdi cti onal Hi gh Court i n vari ous deci si ons, no w stood o verrul ed and w here mixed funds were depl o yed by the assessee, di sal l o wance of i nterest on proporti onate basi s was to be made to the e xtent of i nterest free non busi ness advances made by the assessee. I n sum and substance, the Ld. DR contended that the mi xed funds theor y had been confi rmed to be the La w of the Land as opposed to t he presumpti on theor y l ai d do wn by the Hon'bl e Juri sdi cti onal Hi gh Court.
7. The Ld. counse l for assessee, on the other hand, vehementl y opposed thi s contenti on of the Ld. DR. The Ld. counsel for asse ssee poi nted out that the deci si o n rendered i n the case of Avon C ycl es Ltd. ( supra) was on a different set of facts and the proposi ti on l ai d do wn therei n was to be read i n the conte xt of the facts rel ating to i t. I t was contended that before the Hon'bl e Supreme Court the onl y fact before the Hon'bl e Cour t was that there were mi xed fund s avai l abl e wi th the assesse e and i n the l i g ht of thi s l i mi te d fact, the Hon'bl e Supreme Court uphel d the di sal l o wance of i nterest u/s 14A of the Act after hol di ng in the l ead case i.e. Ma xopp I nvestment Ltd. ( supra) that the apporti onment rul e was to be appl i ed for the purpose of maki ng di sa l l o wance of e xpenses i ncurre d i n rel ati on to earni ng e xempt i ncome,as per secti on 14A of the Act. The c ontenti on of the Ld. counsel for assessee was that i t was nei ther submi tted to the court that suffi ci ent o wn i nterest free funds were avai l abl e, nor were any argu ments made rai si ng the presu mpti on that 7 ITA No.470/Chd/2018 A.Y. 2014-15 woul d ari se i n s uch case. I t was poi nted out tha t even th e questi on before the Hon'bl e Court was not rel ati ng to the correctness of the presumpti on theor y and therefore, al so the di sal l o wance u/s 14A was not deal t wi th by the Hon'bl e Supreme Court in thi s conte xt. It was contended therefore, that the deci si on rendered i n the case of Avon C ycles Ltd. ( supra) had to be read i n the restri cted sense, of meani ng that where the fact si tuati on reveal ed the l i mi ted fact of mi xed funds avai l abl e wi th the assessee, di sal l o wance u/s 14A was warranted. The Ld. coun sel for assessee thereafter contended that in fact the Hon'ble Ape x Court, i n the case of Hero C ycl es Pvt. Ltd. Vs. CI T, 37 9 I TR 347( SC) , h ad uphel d the presumpti on theor y of uti l i zati on of o wn i nterest free funds for maki ng non busi ness ad vances where suf fi ci enc y of such funds i s adequatel y demonstrated. I t was poi nted out that the Hon'bl e Supreme Court i n the sai d case ,on the i ssue of di sal l o wance of i nterest u/s 36( 1) ( i i i ) on advances made to di rectors had hel d that where the assessee had suffi ci ent surpl uses i t coul d have uti l i zed those funds for gi vi ng advances to i ts di rectors.
8. The Ld. counsel for assessee st ated that i t i s c l earl y evi dent from the above that the Hon'bl e Ape x Court had uphel d the proposi ti on that where suffi ci ent o wn i nterest free funds are avai l abl e no di s al l o wance of i nt erest u/s 36( 1) ( i i i ) of the Act was warrant ed. Our attenti o n was al so dra wn to vari ous deci si ons of the Hon'bl e Juri sdi cti onal Hi gh 8 ITA No.470/Chd/2018 A.Y. 2014-15 Court whi ch had al so uphel d the presumpti on theor y as under:
"1. Br igh t En ter pr ises P. L td. vs. C IT , ( 2016) 381 IT R 107 ( P&H )
2. C IT vs. Kapson s Assoc iates, ( 20 15) 381 IT R 204 (P&H )
3. Gurd as G ar g vs. C IT , IT A No. 413/2014 d ated
16. 7. 2015 ( P&H ),
4. Pr. C IT vs. M/s. M al ho tr a Book D e po t, IT A No. 31 of 2017 d ated 23. 0 2. 2017 ( P&H )
5. Pr. C IT vs. M/s. Hol y F ai th In ter n ation al Pv t. L td . , IT A No. 87 of 2017 d ated 24. 07. 20 17 ( P&H )
6. T riden t Inf otech Cor por ation L td . vs. CIT & Anr, ( 2016) 385 IT R 335 ( P&H )
7. C IT vs. Max Ind i a L td. , ( 2017) 398 IT R 209 ( P&H ) "
9. We have careful ly consi dered the contenti ons of both the parti es and have al so gone through vari ous case l a ws referred to before us. The i ssue to be adjudi cated,as narro wed do wn f rom the argume nts made before us by both the parti es, is whether in rel ati on to di sal l o wance of i nterest made u/s.36( 1) ( i i i ) of the Act, the proposi ti on l ai d do wn by the Hon'bl e Juri sdi cti onal Hi gh Court i n a number of deci si ons, that where the assessee had suffi ci ent o wn i nterest free fun ds al ong wi th i nt erest beari ng fun ds and had made or advance d sums for non busi ness purpos es wi thout chargi ng any i nterest, the presumpti on that woul d ari se i s that the i nvestment had been made out of i nterest free funds generated or avai l abl e wi th the assessee, i s sti l l a good l a w i n the l i ght of th e deci si on of the Hon'bl e Ape x Co urt i n the case of Hero C ycl es Ltd. ( supra) .
9 ITA No.470/Chd/2018
A.Y. 2014-15
10. We are i n agree ment wi th the c ontenti on of the Ld. counsel for assessee. Undoubtedl y, proposi ti on of la w l ai d do wn by courts have to be read i n the conte xt of the facts before them and the i ssue deal t wi th by them. Rel i ance shoul d not be pl aced on a deci si on wi thout di scu ssing ho w the factual si tuati on fi ts i n wi th the factual si tuati on of the deci si on on whi ch rel i ance i s pl aced. The Hon'bl e Hi gh Court of Bomba y i n the case of CI T vs Sudhi r, 214 I TR 154 ( Bom) has observed that a case i s an authori t y for what it actual l y deci des and not what ma y come to fol l o w from some observati on whi ch ma y fi nd pl ace therei n. The Ho n'bl e Hi gh court observed as under:
"It is well-settled that the ratio of a decision alone is binding, because a case is only an authority for what it actually decides and not what may come to follow from some observations which find place therein. The ratio of the decision has to be distinguished from propositions assumed by the Court to be correct for the purpose of disposing of the particular case, because it is the ratio and not the propositions which are relevant and binding. It is, therefore, not proper to regard every word, clause or sentence occurring in a judgment of the Court as containing a full exposition of the law.
Judgments of the Courts should not be construed as statutes. They must be read as a whole and observations made therein should be considered in the light of the facts and circumstances of that case and the questions before the Court. A decision of the Court takes its colour from the questions involved in the case in which it is rendered."
I n the case of CI T vs Sun Engi neeri ng Works Pvt. Ltd. 198 I TR 297( SC) , the Hon'bl e Su preme Court obs erved that Judgements must be read as a whol e and observati ons i n judgements sho ul d be consi der ed i n the conte xt i n whi ch 10 ITA No.470/Chd/2018 A.Y. 2014-15 the y are made a nd i n the l i ght of the questi on that were before the court:
" It is ne ither des i r abl e nor per miss ibl e to p ick ou t a wo rd or a sen tence f rom the judge men t of the Supre me Cour t d ivorced f ro m the con tex t of the ques tion under cons ider ation an d tre at i t to be th e co mpl e te l a w d ecl ared by the cour t. T he judge men t mus t b e re ad as a wh ol e an d the observ ation f ro m the judge men t h ave to be cons idered in the l igh t of the ques tions wh ich we re bef ore th e cour t. A dec is ion of the Supre me Cour t takes i ts colour f ro m the ques tio n invol ved in th e c ase in wh ich it is rendered and wh il e appl ying th e dec is ion to a l ater c ase, cour ts mus t c aref ul l y tr y to ascer tain the true pr inc ipl e l aid do wn b y the dec is io n. "
11. The Hon'bl e ape x court i n the c ase of Goodyear I ndi a Ltd & Ors vs S tate of Har yana & Another and State of Maharashtra & A nother reported i n 188 I TR 402( 1 991) have hel d that a deci si on on a questi o n that has not b een argued cannot be treated as a precedent. The Hon'bl e Kerala Hi gh Court i n the cas e of CI T vs K. Ra makri shnan ( 1993) 202 I TR 997 hel d that a precedent i s an authori t y onl y for what i t actual l y deci des and not for what ma y remotel y or even l ogi cal l y fol l o w from i t.
Havi ng sai d so we fi nd that i n the case of Avon Cycl es Ltd. ( supra) the i ssue was rel ati ng to di sal lo wance of e xpendi ture u/s 14A of the Act . The Hon'bl e A pe x Court deal i ng wi th the bunch of cases rel ati ng to sai d issue, took up the case of Ma xopp I nvestment Ltd. ( supra) as the l ead case and procee ded to ans wer the questi on wh i ch arose under vari ous ci rcumstances before them that whether the 11 ITA No.470/Chd/2018 A.Y. 2014-15 i nvestment made i n shares and stocks for the purpose of retai ni ng the control over the company or as stock-i n-trade and from whi ch e xempt i ncome by wa y of di vi dend was generated woul d attract the provi si ons of secti on 14A of the Act, cal l i ng for di sal l o wance of e xpendi ture i ncurred in rel ati on to earni ng the sai d di vi dend i ncome and the questi on arose for the reason th at i t was the co ntenti on of the assessee, w hi ch had been uphel d by var i ous Hi gh Courts, that the domi nant purpose for maki ng the i nvestment in the shares not bei ng earni ng of di vi dend i ncome, i t cal l ed for no di sal l o wa nce of e xpendi tu re u/s 14A of the Act. Ans weri ng thi s que sti on the Hon'bl e Supreme Court hel d that the domi nant purpose test was i rrelevant and the fact remai ni ng that the e xempt i ncome had been earned whi ch was attri butabl e to the di vi dend i ncome had to be di sal l o wed and coul d not be treated as busi ness e xpendi ture. The Hon'bl e Ape x Co urt reaffi rmed th e theor y of apporti onment of e xpendi ture b et ween ta xabl e and non ta xabl e i ncome lai d do wn by i t i n the case of CI T Vs. Wal fort Share & Stock Brokers Pvt. Ltd., 326 I TR 1. After hol di ng so, the Hon'bl e Ape x Court deal t wi th the appeal fi l ed i n the case of Avon C y cl es Ltd. ( supra) and taki ng not e that the fact i n that case was that the funds uti l i zed by the assessee were mi xed funds, the Hon'bl e Ape x Court hel d that the pri nci pl e of apporti onment was to be appl i ed and, therefore, di smi ssed the a ppeal of the ass essee. The same i s evi dent from a bare readi ng i n the case of Ma xopp I nvestment Ltd. ( supra) and more speci fi cal l y para 42 of the sai d order 12 ITA No.470/Chd/2018 A.Y. 2014-15 wherei n the case of Avon C ycl es Ltd. ( supra) has been deal t wi th and whi ch i s reproduced agai n hereunder:
41. Civil Appeal No. 1423 of 2015 is filed by M/s. Avon Cycles Limited, Ludhiana, wherein the AO had invoked section 14A of the Act read with Rule 8D of the Rules and apportioned the expenditure. The CIT(A) had set aside the disallowance, which view was upturned by the ITAT in the following words:
"...Admittedly the assessee had paid total interest of Rs.2.92 crores out of which interest paid on term loan raised for specific purpose totals to Rs.1.70 crores and balance interest paid by the assessee is Rs.1.21 crores. The funds utilized by the assessee being mixed funds and in view of the provisions of Rule 8D(2)(ii) of the Income Tax Rules the disallowance is confirmed at Rs.10,49,851/-, we find no merit in the ad hoc disallowance made by the CIT (Appeals) Rs.5,00,000/-. Consequently, ground of appeal raised by the Revenue is partly allowed and ground raised by the assessee in cross-objection is allowed..."
Taking note of the aforesaid finding of fact, the High Court has dismissed the appeal of the assessee observing as under:
"In the present case, after examining the balance-sheet of the assessee, a finding of fact has been recorded that the funds utilized by the assessee being mixed funds, therefore, the interest paid by the assessee is also an interest on the investments made. Such being a finding of fact, we do not find that any substantial question of law arises for consideration of this Court.
After going through the records and applying the principle of apportionment, which is held to be applicable in such cases, we do not find any merit in Civil Appeal No. 1423 of 2015, which is accordingly dismissed."
12. I t i s evi dent from the above that the i ssue before the Hon'bl e Ape x Court was not whether the presumpti on theor y woul d appl y or not where there are mi xed funds and the assessee had d emonstrated avai l abi l i t y of suffi ci ent o wn 13 ITA No.470/Chd/2018 A.Y. 2014-15 funds for maki n g the i nvestmen ts . No di scussi on on thi s aspect has al so been done by th e Hon'bl e Ape x Court and merel y noti ng th at the assessee had uti l i zed mi x ed funds, the Hon'bl e A pe x Court hel d that the p ri nci pl e of apporti onment woul d appl y. Wi thout any di scussi on or del i berati on on the presumpti on theor y, the propositi on l ai d do wn i n the case of Avon C ycl es Ltd. ( supra) by the Hon'bl e Ape x Court has to be restri cted to the e xtent of the i ssue before the Hon'bl e Ape x Court and facts before i t and not be yond that. An d on that basi s t he deci si on of th e Hon'bl e Supreme Court i n the case of Avon C ycl es Ltd. ( supra) can be read onl y to the e xtent of uphol di ng the pri nci pl e of apporti onment of e xpenses i ncu rred i n the cont e xt of the l i mi ted fact of mi xed funds ava i l abl e wi th assessee and no further. The pro posi ti on l ai d do w n cannot be stre tched even l ogi cal l y to address the fact si tuati on where suffici ent o wn i nterest free funds are avai l abl e wi th assessee, whi ch fact was not there before the Hon'bl e Ape x court i n the case of Avon C ycl es ( supra) , and to negate the presumpti on that the o wn funds were used for maki ng the i nvestment, whi ch was nei ther the que sti on rai sed be fore the ape x court and therefore not addressed by i t al so.
13. Goi ng further fr om here we fi nd that the presu mpti on theoor y was uphel d by the Hon'bl e Supreme Court i n the case of Hero C ycl es Pvt. Ltd. ( supra) wherei n on the i ssue of di sal l o wance of e xpendi ture u/s.36( 1) ( i i i ) of the Act on i nterest free advance made to Di rectors, the Hon'ble Ape x 14 ITA No.470/Chd/2018 A.Y. 2014-15 Court hel d that i n vi e w of the fi ndi ngs of fact that the assessee had su ffi ci ent credi t bal ance i n i ts ban k account for maki ng the i mpugned advances and had suffi ci ent o wn i nterest free funds, the assessee company coul d i n any case uti l i ze those funds for gi vi ng advances to i ts Di rectors. Th e fi ndi ngs of the Hon'bl e Ape x Court at para 16 of thi s order to thi s effect are as under:
"16. Insof ar as the l o ans to d ir ec tors are concerned, it cou l d no t be d is pu te d by the Revenue th at the assesse e h ad a cred i t b al ance in the b ank accoun t wh en the s aid adv ance of Rs. 34 l akhs was g iven. Re mark abl y, as observed b y the C IT ( A) in h is order, the co mp any h ad reserve/s ur pl us to the tun e of al mos t Rs. 15 c rores and, th eref ore, the asses see co mp an y coul d i n an y c ase, u til i se those f unds f or g iv ing adv ance to its d irec tors. "
14. I t i s evi dent from the above that the Hon'bl e Ape x Court had i n ver y cl e ar terms hel d t hat where suffi ci ent o wn i nterest free funds are avai l abl e wi th the assessee, the presumpti on ari ses that the as sessee had uti l i sed those funds for the purpose of maki ng i nterest free non busi ness advances. Thus i n ver y cl ear terms the Hon'bl e Ape x Court i n the case of Hero C ycl es Pvt. Ltd. ( supra) have uphel d he presumpti on theor y.
15. Consi deri ng both the judgments of the Hon'bl e Ape x Court and readi ng and i nterpreti ng them i n the l i ght of facts and the i ssue bef ore the Hon'bl e A pe x Court we fi n d that the judgments compl i ment each other. I n the case of Avon C ycl es Ltd. ( supra) the Hon'bl e Ape x Court hel d that i n the 15 ITA No.470/Chd/2018 A.Y. 2014-15 fact si tuati on where mi xed funds are uti l i zed by the assessee, the di sal l o wance of i nterest to the e xtent the funds are uti l i zed for the purpose of non busi ness advance i s warranted. Goi ng for ward from there, the presumpti on theor y woul d come i nto operati on i f i n the case of mi xed funds, the ass essee i s abl e to demonstrate/ establ i sh avai l abi l i t y of i nterest free funds equal to or more than i nterest free non busi ness a dvances/i nvestments thus rai si ng the pres umpti on that th e same have bee n made out of the i nterest free funds of the assessee.
16. I n vi e w of the above, we hol d that the deci si on of the Hon'bl e Ape x Court i n the case of Avon C ycl es Ltd. ( supra) does not di spl ace the presumpti on theor y whi ch has been uphel d by the Ho n'bl e Ape x Court i n the case of H ero C ycl es Pvt. Ltd. ( supra) and the same sti l l hol ds. I n vie w of the above, si nce the Ld.CI T( Appeal s) , we fi nd, has a l l owed the assessee's appeal del eti ng the di sal l o wance of i nterest made on fi ndi ng that it had suffi ci ent o wn i nterest free funds for maki ng the i nves tment, whi ch fac t has not been co ntroverted by the Revenue, we see no reason to i nterfere i n t he order of the Ld.CI T( Appeal s) and the ground rai sed by the Revenue, therefore, i s di smi ssed.
17. The Ld. counse l for assessee had al so rai sed the contenti on before us that the advance made was for busi ness purpose. In thi s regard, the Ld. counsel for assessee contended that t he advance was made to Shi vaks I mpe x Ltd. whi ch was a step do wn subsi di ar y of the assessee company. 16 ITA No.470/Chd/2018
A.Y. 2014-15 The Ld. counsel for assessee stated that the assessee had i nvested i n a wh ol l y o wned subsi di ar y whi ch i n tu rn was the hol di ng company of Shi vaks I mpe x Ltd. and whi ch made Shi vaks I mpe x Ltd. a step do wn subsi di ar y of th e assessee company, meani ng thereby that the assessee had a i ndi rect i nterest and control over the Shi vaks I mpe x Ltd.. The Ld. counsel for asse ssee further stat ed that the adva nces made to Shi vaks I mpe x Ltd., who was i n the same l i ne of busi ness as was the asses see, was uti l i zed for the purpose p urchasi ng ra w materi al .I n thi s regard our attenti on was dra wn to the copy of bank account of Shi vaks I mpe x Ltd. refl ecting the deposi t of advance made by the a ssessee of Rs.3.55 crores i n the same and the uti l i zati on of the same for the purpose of rel easi ng a l etter of credi t i ssued i n the regul ar course of i ts busi ness. The L d. counsel for assessee, therefore, stated that the advance had been made for the purpose busi ness of Shi vaks I mpe x Ltd. whi ch bei ng a step do wn subsi di ar y of the assessee, i t was contended that the assessee company woul d have been severel y i mpacted i f the sai d advance woul d not have been made. Our attenti on was dra wn to the fol l o wi ng documents pl aced i n the paper book fi l ed on 06-07- 18, to substanti ate i ts aforesai d contenti on:
( i ) copy of l edger account of Shi vaks I mpe x Ltd. in the books of appel l ant for Assessment Year 2013-
14. 17 ITA No.470/Chd/2018
A.Y. 2014-15
(ii) Copy of Ledger account of Shi vaks I mpe x Ltd. i n the books of a ppel l ant for Assessment Year 2014-
15.
(iii) Copy of rel evant Bank statements of Shi vaks I mpe x Ltd.
( i v) Sharehol der l i st of vari ous Group Compani es."
18. The Ld. DR, on t he other hand, r el i ed upon the or der of the Assessi ng Offi cer re jecti ng thi s contenti on of the assessee and stated that no busi ness e xi genc y for maki ng the advance had been establ i shed by the assessee.
19. After consi deri ng the ri val submi ssi ons we hol d that commerci al e xpedi enc y of the sai d advance had been adequatel y establ i shed by the assessee. The facts rel ati ng to the i mpugned tra nsacti on have no t been controvert ed by the Revenue. That Shi vaks I mpex Ltd. was a step do wn subsi di ar y of the assessee company, has not been di sputed by the Revenue. The fact that the assessee, i ts subsi di ar y and Shi vaks I mpe x Ltd. were al l i n the same l i ne of busi ness has al so not been di sputed by the Revenue. I t i s also not di sputed that the advance made has been uti l i zed for the purpose of maki ng purchases. I t i s evi dent that h ad the sai d advance not bee n made i t woul d have seri ousl y affected the busi ness of Shi vaks I mpe x Ltd., whi ch i n turn woul d have affected the assessee al so si nce the val ue of i ts investment i n i ts subsi di ar y woul d have been affected on acco unt of the poor resul ts sho wn by Shi vaks Impe x Ltd.. Ther efore, the 18 ITA No.470/Chd/2018 A.Y. 2014-15 commerci al e xpedi enc y of the ad vance has been establ i shed and for thi s reas on al so, no di sal l o wance u/s 36( 1) ( i i i ) of the Act coul d have been made.
20. I n vi e w of the a bove we hol d th at on account o f the avai l abi l i t y of suffi ci ent o wn funds and on account of the advances havi ng been made for busi ness purpose ,no di sal l o wance of i nterest pertai ni ng to funds uti l i zed for maki ng the same was warranted. We therefore uphol d the order of the CI T( A) del eti ng the di sal l o wance of i nterest u/s 36( 1) ( i i i ) of the Act, amounti ng to Rs.18,44,482/-.
21. Ground of appeal No.1 rai sed by the Revenue is therefore di smi ssed.
22. Ground No.2 raised by the Revenue reads as under:
"1. Whether on the facts and circumstances of the case the Ld. CIT(A) has erred in allowing the appeal of the assessee and deleting the disallowance of Rs. 25,43,299/- u/s 14A which is not correct because the assessee had made investments, to the tune of Rs. 5,23,00,000/- and on the other side, assessee has shown outstanding secured loan from Banks on which the assessee has claimed interest expenses of Rs. 1,13,06,258/-."
23. The above ground relates to disallowance made of expenses relating to exempt income earned by the assessee as per the provisions of Section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962.
24. Briefly stated the impugned disallowance was made by the Assessing Officer in relation to the investments made by the assessee in the shares of sister concern M/s. KVS International Pvt. Ltd. of Rs.5,23,00,000/-. The Assessing Officer relying upon various judgments made a disallowance of Rs.25,43,299/- u/s.14A of the Act.
19 ITA No.470/Chd/2018
A.Y. 2014-15
25. Ld. CIT(A) deleted the disallowance made on finding that no exempt income had been earned by the assessee from the impugned investments made. Relevant findings of the Ld. CIT(A) at paragraph 6.2 of our order deleting the said disallowance is as under:
"6.2 I have gone through the facts of the case and written submission filed by the appellant. As no exempt income has been earned during the year on the impugned investments made in shares of sister concern in the earlier year and there is no claim of any other exempt income in the computation of income, therefore placing reliance on the ratio of CIT vs. M/s Lakhani Marketing Inc. [2014] 272 CTR 265 (P&H) and jurisdictional ITAT Chandigarh decision in the case of Swami Automobiles (P) Ltd. ITA No.74/Chd/2015 dated 10.02.2016, it is held that no disallowance u/s 40A read with rule 8D of the Income tax Rules was warranted in this case . Therefore addition of Rs.25,43,299/- made by the AO on this account for A.Y.2014-15 is ordered to be deleted. This ground of appeal is allowed."
26. During the course of hearing before us, Ld. DR, though relied upon the order of the Assessing Officer, was unable to controvert the factual and the legal findings of the Ld. CIT(A), we therefore see no reason to differ with the Ld. CIT(A) deleing the disallowance made u/s.14A in the light of the admitted fact that no exempt income was earned by the assessee during the impugned year from the impugned investments made.
Our decision is forfeited by the order of the Hon'ble Apex Court in the case of Commissioner of Income Tax,(Central),1 vs Chettinad Logistics (P) Ltd dated 2nd July 2018,.reported in 257 Taxman 2, in which the Hon'ble apex court has, we find, dismissed on merits the SLP filed by the Revenue against order of the Hon'ble Madras High Court holding that where no exempt income was earned no disallowance u/s 14A was warranted. The Hon'ble High Court had in its order, reported in 248 Taxman 55, held as under:
20 ITA No.470/Chd/2018
A.Y. 2014-15 "6.The record shows that during the course of arguments before the Tribunal, the Assessee advanced a submission, to the effect, that in cases, where, investments are made in sister concern(s), out of interest free funds, for strategic purposes, the provisions of Section 14 A of the Act, could not be invoked. In support of this submission, the Assessee relied upon the judgment of the Tribunal in the case of: Rane Holdings Ltd., Vs. ACIT, passed in ITA No.115/Mds/2015, dated 06.01.2016.
7. It is, in this background, that the Tribunal remanded the matter to the Assessing Officer, so as to reach a conclusion as to whether investments had been actually made, in sister concerns of the Assessee, out of interest free funds, albeit, for strategic purposes.
8. According to us, this exercise, in the given facts which emerge from the record, was clearly unnecessary, as the CIT(A) had returned the finding of fact that no dividend had been earned in the relevant assessment year, with which, we are concerned, in the present appeal.
9. In our opinion Section 14 A of the Act, can only be triggered, if, the Assessee seeks to square off expenditure against income which does not form part of the total income under the Act.
9.1. The legislature, in order to do away with the pernicious practice adopted by the Assessees', to claim expenditure, against income exempt from tax, introduced the said provision.
10. In the instant case, there is no dispute that no income i.e., dividend, which did not form part of total income of the Assessee was earned in the relevant assessment year.
10.1. Therefore, to our minds, the addition made by the Assessing Officer by relying upon Section 14 A of the Act, was completely contrary to the provisions of the said Section.
10.2. Mr.Senthil Kumar, who appears for the Revenue, submitted that the Revenue could disallow the expenditure even in such a circumstance by taking recourse to Rule 8D.
10.3. According to us, Rule 8D, only provides for a method to determine the amount of expenditure incurred in relation to income, which does not form part of the total income of the Assessee.21 ITA No.470/Chd/2018
A.Y. 2014-15 10.4. Rule 8 D, in our view, cannot go beyond what is provided in Section 14 A of the Act.
11. Furthermore, we may note that a similar argument was sought to be advanced by the Revenue in the matter concerning, M/s.Redington (India) Limited Vs. The Additional Commissioner of Income Tax, which was, subject matter of T.C.A.No.520 of 2016.
11.1. A Co-ordinate Bench of this Court, vide judgment dated 23.12.2016, rejected the plea of the Revenue advanced in that behalf. 11.2. As a matter of fact, a perusal of the judgment would show that the Revenue had sought to argue that because exempt income could be earned in future years, therefore, recourse could be taken to the provisions of Section 14A of the Act, to disallow expenditure. In other words the stand taken by the Revenue was irrespective of the fact whether or not income was earned in the concerned assessment year expenditure under Section 14A could be disallowed against anticipated income.
11.3. Pertinently, the Division Bench in M/s.Redington (India) Limited case has repelled this precise argument.
12. The Division Bench, in our view, quiet correctly held that, the computation of total income, in terms of Section 5 of the Act, is made qua real income and not, vis-a-vis, notional income. 12.1. The Division Bench went on to hold that Section 4 of the Act brings to tax, that income, which is relatable to the assessment year in issue. The Division Bench, thus, held that where no exempt income is earned in the previous year, relevant to the assessment year in issue, provisions of Section 14 A of the Act, read with Rule 8 D could not be invoked. 12.2. While coming to this conclusion, the Division Bench also took note of the aforementioned Circular, issued by the Board. 12.3. The reasoning of the Division Bench is contained in the following part of the judgment:
"4. The admitted position is that no exempt income has been earned by the assessee in the financial year relevant to the assessment year in issue. The order of assessment records a finding of fact to that effect. The issue to be decided thus lies within the short compass of whether a disallowance in terms of s.14A of the Act read with Rule 8D of the Rules 22 ITA No.470/Chd/2018 A.Y. 2014-15 can be contemplated even in a situation where no exempt income has admittedly been earned by the assessee in the relevant financial year.
7. Per contra, Sri T. Ravi kumar appearing on behalf of the revenue drew our attention to the marginal notes of s.14 A pointing out that the provision would apply not only where exempted income is 'included' in the total income, but also where exempt income is 'includable' in total income.
8. He relied upon a Circular issued by the Central Board of Direct taxes in Circular No.5 of 2014 dated 11.2.2014 to the effect that s.14A was intended to cover even those situations whether there is a possibility of exempt income being earned in future. The Circular, at paragraph 4, states that it is not necessary for exempt income to have been included in the income of a particular year for the disallowance to be triggered. According to the Learned Standing Counsel, the provisions of s.14A are made applicable, in terms of sub section (1) thereof to income 'under the act' and not 'of the year' and a disallowance under s.14A r.w. Rule 8D can thus be effected even in a situation where a tax payer has not earned any taxable income in a particular year.
9. We are unable to subscribe to the aforesaid view. The provisions of section 14A were inserted as a response to the judgments of the Supreme Court in Commissioner of Income Tax Vs. Maharashtra Sugar Mills Limited (1971) (82 ITR 452) and Rajasthan State Ware Housing Corporation Vs. Commissioner of Income Tax ((2002) 242 ITR 450) in terms of which, expenditure incurred by an assessee carrying on a composite business giving rise to both taxable as well as non-taxable income, was allowable in entirety without apportionment. It was thus that s.14A was inserted providing that no deduction shall be allowable in respect of expenditure incurred in relation to the earning of income exempt from taxation. As observed by the Supreme Court in the judgment in the case of Commissioner of Income Tax vs. Walfort Share and Stock Brokers (P) Ltd (2010) 326 ITR 1 '.... The mandate of s.14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of an exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income.'
10. The provision this is clearly relatable to the earning of actual income and not notional or anticipated income. The submission of the Department to the effect that s.14A would be attracted even to exempt income 'includable' in total income would entail the assessment of notional income, assumed to be exempt in the future, in the present assessment 23 ITA No.470/Chd/2018 A.Y. 2014-15 year. The computation of total income in terms of s.5 of the Act is on real income and there is no sanction in law for the assessment of admittedly notional income, particularly in the context of effecting a disallowance in connection therewith.
11.The computation of disallowance in terms of Rule 8D is by way of a determination involving direct as well as indirect attribution. Thus, accepting the submission of the Revenue would result in the imposition of an artificial method of computation on notional and assumed income. We believe this would be carrying the artifice too far.
(emphasis is ours)"
13. Mr. Senthil Kumar, seeks to distinguish the judgment in M/s. Redington (India) Limited case based on the fact that Rule 8D had not kicked-in by AY 2007-08, which was the AY being considered in the said case.
14. According to us, this was not the argument, put forth, before the Division Bench. As a matter of fact, the Revenue relied heavily on Rule 8D.
14.1. Mr. Ravi kumar, who appeared for the Revenue, in that matter and who is present in this Court, informs us that he had in fact argued that the Rule was clarificatory in nature and would apply retrospectively, and that, the Division Bench, therefore, discussed the impact of Rule 8D of the Rules.
15. However, it is, our view, as indicated above, independent of the reasoning given in M/s. Redington (India) Limited case that Rule 8D cannot be read in a manner, which takes it beyond the scope and content of the main provision, which is, Section 14 A of the Act. 15.1. Therefore, as adverted to above, Rule 8D, cannot come to the rescue of the Revenue."
SLP filed against the said judgment was dismissed by the apex court both on merits as well as on the ground of delay.
27. In view of the above, we uphold the order of the CIT(A) deleting the disallowance made u/s. 14A of the Act. 24 ITA No.470/Chd/2018
A.Y. 2014-15
28. Ground no.2 raised by the Revenue is dismissed.
29. In t he re s ult , t he a p pe a l of t he Re ve nue is d is m is s e d .
O r d e r p r on o u n c ed i n t h e O p e n Cou r t .
संजय गग अ नपणा
ू ग#ता
ु
(SANJAY GARG ) (ANNAPURNA GUPTA)
याय क सद य/ Judicial Member लेखा सद य/ Accountant Member
*रती./Pkk*
आदे श क त(ल)प अ*े)षत/ Copy of the order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent
3. आयकर आय+त
ु / CIT
4. आयकर आय+त
ु (अपील)/ The CIT(A)
5. )वभागीय त न.ध, आयकर अपील"य आ.धकरण, च0डीगढ़/ DR, ITAT, CHANDIGARH
6. गाड फाईल/ Guard File आदे शानसार ु / By order, सहायक पंजीकार/ Assistant Registrar