Income Tax Appellate Tribunal - Indore
Smt. Abhadevi Narendra Agrawal, ... vs The Acit, Khandwa on 16 March, 2017
Smt. Abhadevi Agarwal/ I.T.A. No.58/Ind/2015/A.Y.:10-11 Page 1 of 19
आयकरअपीलीयअिधकरण,इदं ौर यायपीठ,इदं ौर
IN THE INCOME TAX APPELLATE TRIBUNAL, INDORE BENCH, INDORE
ीसी.एम.गग , याियकसद यतथा ीओ.पी.मीना, लेखासद यके सम
BEFORE SHRI C.M.GARG, JUDICIAL MEMBER AND SHRI O.P.MEENA, ACCOUNTANT MEMBER
आ.अ.सं./ I.T.A. No.58/Ind/2015
&नधा(रणवष( /Assessment Year: 2010-11
Smt. Abhadevi Narendra ACIT- Ratlam
Agarwal, Chowk Bazar, v.
Burhanpur
अपीलाथ /Appellant यथ /Respondent
था.ले.सं./PAN:ADAPA 0122 A
अपीलाथ क ओरसे/Appellant by Shri S. N. Agarwal CA and
Shri Pankaj Mogra CA
यथ क ओरसे/Respondent by Shri Mohmd. Javed, Sr. (DR)
सुनवाईक तार ख/Date of hearing 15-03-2017
उ घोषणाक तार ख/Date of pronouncement 16-03-2017
आदे श /O R D E R
PER O.P.MEENA, ACCOUNTANT MEMBER
This appeal by the assessee is directed against the order of learned Commissioner of Income tax (Appeals)-II, Indore [in short CIT (A)] dated 30.10-2014 for the Assessment Year 2010-11 on following grounds:
1. The Ld. CIT (A) has erred in confirming the addition of Rs.22,58,779/- being the disallowance of interest on advances given treating it to be non business expenditure 1.1. The Ld. CIT (A) erred in remarking that the assessee was required to produce documentary evidence in the Smt. Abhadevi Agarwal/ I.T.A. No.58/Ind/2015/A.Y.:10-11 Page 2 of 19 form of cash book and bank statement. No such requirement was made and the balance sheet were filed showing the capital of the assessee. The case laws were not considered by simply observing that they are distinguishable on facts.
1.2. The addition of Rs. 22,58,779/- may please be deleted or in the alternative restricted to reasonable figure.
2. The Ld. CIT(A) has erred in maintaining the addition of Rs.6,76,266/- under section 41(1) by observing that confirmation is not filed. The addition is bad-in-law and deserve to be deleted.
3. The Ld. CIT (A) erred in maintaining the disallowance of Rs. 1,83,889/- u/s. 14A . The addition may please be deleted.
1. Ground no. 1 relate to confirmation of disallowance of interest of Rs.22,58,779/-.
1.1. Succinctly, facts as culled out from the orders of lower authorities are that the assessee derives income from trading of soya oil. F.P., tuar, Mustard and cottonseeds. The assessee has filed return of income on 30.09.2010 declaring total income of Rs.73,29,800/-. The AO found that the assessee has advanced interest bearing funds to some of persons from which either no interest is charged or the same is charged at lesser rate whereas the assessee has paid interest @ 12% on loan taken. The AO therefore, worked out disallowance of interest as detailed below: - Smt. Abhadevi Agarwal/ I.T.A. No.58/Ind/2015/A.Y.:10-11 Page 3 of 19
Name of the
Period Amount Interest @ Intt. charged Less Intt.
concern in 12% @ 9% Charged
days
1.Manoj 365 25,00,000 3,00,000 Not Charged 3,00,000
Traders Shri days
Ganganagar 140 75,00,000 3,45,000 Not Charged 3,45,000
days
152 50,00,000 2,49,863 Not Charged 2,49,863
days
88 50,00,000 1,44,660 Not Charged 1,44,660
days
92 50,00,000 1,51,230 Not Charged 1,51,230
days
Total 11,90,953
2.N.M. Exports 323 40,00,000 4,24,770 Not Charged 4,24,770
days
2.N.M. Exports 323 35,00,000 3,71,000 Not Charged 3,71,000
days
3.Nandlal This is the case of 10,88,220 8,16,164 2,72,056
Naresh Kumar less charge of intt.
4.Raghunath Agro tech Pvt. Ltd. 22,58,779
Gross Total
1.1.1. In view of above, the AO disallowed the interest of Rs.
22,58,779/- by observing that the assessee has diverted interest bearing funds for advancing the same without interest or on lesser side.
1.2. Being, aggrieved the assessee filed an appeal before the ld. CIT (A). However, ld. CIT(A) confirmed the action of the AO by observing that the assessee has failed to controvert the findings of the AO. The contention of the assessee that it had sufficient interest-free funds available out of which interest-free funds advances were given was not found acceptable.
1.3. Being, aggrieved the assessee filed this appeal before the Tribunal. The Ld. A.R. submitted that the observation of the AO Smt. Abhadevi Agarwal/ I.T.A. No.58/Ind/2015/A.Y.:10-11 Page 4 of 19 is not correct on the facts of the case. The Ld. A.R. submitted a table demonstrating that the assessee has substantial interest- free funds of Rs. 16,88,97,140/- (consisting of capital of Rs. 10,69,90,175/- and loans and without interest of Rs. 2,00,00,000/-) as against the interest free loans given Rs. 5,75,00,000/-. The Ld. A.R. has filed a table depicting the details of funds utilization of interest-free funds and interest bearing funds, which is supported by the copy of balance sheet appearing at page No 29 to 34 of Paper Book. According to which funds of Rs. Rs. 34,70,17,015/- out of interest bearing funds of Rs. 23,26,98,883/- have been utilized for business purpose in fixed assets, sundry debtors, cash and bank balances, etc. From the above facts and data, the Ld. A.R. contended that the assessee has not diverted its interest bearing funds for non-business purposes. Therefore, there was no question of diversion of interest bearing funds by the assessee. Thus, the disallowance as made by the AO is totally wrong. The Ld. A.R. further submitted that above facts of the case shows that advances to above persons as mentioned in assessment order from whom interest was not charged was given out of interest-free funds available with it.
Smt. Abhadevi Agarwal/ I.T.A. No.58/Ind/2015/A.Y.:10-11 Page 5 of 191.3.1. The Ld. A.R. place reliance on the judgement of Hon`ble Bombay High Court in the case of CIT vs. Reliance Utilities & Power Ltd. (2009) 313 ITR 340(Bom) wherein it was held that if there are fund available both interest free and interest bearing, then a presumption would arise that investment were out of interest free funds generated or available with the assessee. If the interest-free funds were sufficient to meet the investment no disallowance of interest paid on borrowed funds would be necessary. Once such presumption is established claim of interest was allowable.
1.3.2. The Ld. A.R. further placed reliance on following judgement in the case of CIT vs. Hero Cycles Ltd. (2010) 323 ITR 518 (P&H) wherein it was held that no disallowance out of interest payment is permissible if AO does not establish nexus between the expenditure incurred and income generated. The Ld. A.R. submitted that in the present case the AO has failed to establish that the assessee had diverted interest bearing funds for non business purposes or advanced the same without interest. When the assessee has utilized the interest bearing funds for business purpose and justified the same , then no disallowance of interest can be made.
Smt. Abhadevi Agarwal/ I.T.A. No.58/Ind/2015/A.Y.:10-11 Page 6 of 191.3.3. The Ld. A.R. further cited decision in the case of Narendra Industries (I TA No. 644/IND/2015) dated 28.2.2017 (copy filed paper book page no.-50-54) and others as per his written submissions.
1.4. On the other hand, the Ld. D.R. relying on the orders of lower authorities submitted that the assessee is not able to substantiate that interest free advances were given out of interest-free funds available with the assessee, hence, finding of the AO/Ld. CIT(A) may be upheld.
1.5. We have heard the rival submissions of both the parties and have perused the material available on record. We find that the ld. A.O. has failed to establish that interest free advances to above stated parties were out of interest bearing funds. It is the contention of the assessee that it had sufficient non-interest bearing funds to the tune of Rs.16.88 crores as per balance sheet as on 31.03.2010 as against interest bearing funds at Rs.23.26 crores. Hence, interest-free funds of Rs. 16.88 crores have been utilised for giving interest-free advances of Rs. 5.75 crores to aforesaid above parties on which no interest was charged or less interest was charged. Thus interest-free advance were given out of interest-free funds available with the assessee during the year Smt. Abhadevi Agarwal/ I.T.A. No.58/Ind/2015/A.Y.:10-11 Page 7 of 19 for which sufficient interest-free funds were available. Therefore, we are of the view that the Ld. A.O. has failed to establish that interest free advances to above stated four parties were out of interest bearing funds. We find that the AO has not been able to establish the nexus between interest bearing funds utilized for non business purpose as held in above quoted decision of Hon`ble Supreme Court. The ld. A. R. has placed reliance in the case of CIT vs. Reliance Utilities & Power Ltd. (2009) 313 ITR 340 (Bom)/ 178 Taxman 135 (Bom) wherein it was held that if there was 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 funds generated or available with the company, if the interest free funds were sufficient to meet the investments. In the present case, the sufficient interest free funds were available at the disposal of the assessee. Therefore, presumption would go in favour of the assessee that the interest free funds were given out of interest free funds available at the disposal of the assessee as per balance sheet of the assessee. We further rely on the decision of Hon`ble Punjab & Haryana High Court in the case of CIT vs. Hero Cycles Ltd. (2010) 323 ITR 518(P&H) wherein it was held that no disallowance out of Smt. Abhadevi Agarwal/ I.T.A. No.58/Ind/2015/A.Y.:10-11 Page 8 of 19 interest payment is permissible if AO does not establish nexus between the expenditure incurred and income generated. Therefore, by applying the ratio as laid down by the Hon'ble Bombay High Court in in the case of CIT vs. Reliance Utilities & Power Ltd. (2009) 178 Taxman 135 (Bom) and the decision of CIT vs. Hero Cycles Ltd. (2010) 323 ITR 518 (P&H) and other judgements as cited above and decision in the case of M/s Narendra Industries ITA No. 644/IND/2015 dated 28.2.2017 of I.T.A.T., Indore, we are of the considered opinion that no disallowance of interest is warranted in this case. In view of these facts and circumstances, the disallowance of interest of Rs. 22,58,779/- made by the AO is deleted. Accordingly ground no. 1 of appeal is therefore, allowed.
2. Ground No. 2 relates to maintaining addition of Rs. 6,76,266 u/s 41(1) of the Act.
2.1 Briefly stated the facts of the case are that the AO noticed that there is a one creditor M/s Mahima Porsepun in whose case an amount of Rs. 6,76,266/-was outstanding for last three years. Therefore, the AO treated the same trading liability as cessation of liability within the meaning of Section 41(1) of the Act and added the same the total income.
Smt. Abhadevi Agarwal/ I.T.A. No.58/Ind/2015/A.Y.:10-11 Page 9 of 192.2 Being aggrieved the assessee filed appeal before the CIT(A) who upheld the addition by observing that the liability remain outstanding for long time of three years. There has been no transaction with the party under consideration. The assessee has also not filed any confirmation from the said party. Therefore, the CIT(A) opined that liability as on date does not exist hence, the addition made u/s 41(1) was confirmed.
2.3 Being aggrieved the assessee filed this appeal before the Tribunal. The Ld. AR of the assessee submitted that the AO involved that the provision of Section 41(1) of the Act merely on the ground that balance was outstanding for more than three years whereas Section 41(1) of the Act provides that the addition u/s 41(1) of the Act can be made only if the trading liability ceased to exist. In support of his contention the Ld. AR also relied in the case of Dr. Pallab Ghosh v/s ITO in ITA No. 659/Kol/2013, Unison Hotels Ltd v/s ACIT ITA No. 2113/Del/2012, CIT v/s Southern Roadways Ltd. 282 ITR 379 , New Commercial Mills Co. Ltd. v/s Dy. CIT (2001) 73 TTJ (Ahd) 893, CIT v/s Sugauli Sugar Works (P) LTD. (1999) 152 CTR (SC) 46; (1999) 236 ITR 518 (SC):
((1999) 102 TAXMAN 713 (SC), Shri Vardhman Overseas Ltd. v/s Assistant Commissioner of Income Tax (2008) 24 SOT 393 (Del), Smt. Abhadevi Agarwal/ I.T.A. No.58/Ind/2015/A.Y.:10-11 Page 10 of 19 Wilson & Co v/s ACIT 121 TTJ 258. Therefore, it was claimed that the provision of Section 41(1) of the Act are attracted only when the assessee has written off the liability in the books of accounts by unilateral act. Since in the case of assessee, liability has not been written off in the books of accounts hence, provision of Section 41(1) are no applicable. Further the limitation period prescribed in the Act for sundry creditor for filing a suit only. It has no relevance so far as cessation of liabilities are concerned. Thus, there is no reason for invoking of provision of Section 41(1) of the Act. It was also pointed out by the AR that the said liability has been settled during the year 2015 and as such therefore, there was no cessation of liabilities. Accordingly, the addition was made by the AO deserve to be deleted. 2.4 The Ld. DR supported the orders of the lower authorities.
2.5 We have considered the facts, rival submissions and perused the material available on record. We find that the provision of Section 41(1)(a) provides that where the assessee had obtained, whether in case in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation Smt. Abhadevi Agarwal/ I.T.A. No.58/Ind/2015/A.Y.:10-11 Page 11 of 19 thereof, the amount obtained by him shall be deemed to be profits chargeable to tax. Thus, the Section contemplates that by obtaining any benefit by an amount either in cash or in any other manner whatsoever, whether benefit by way of remission or cessation and it should be of a particular amount obtained by him. Thus, obtaining benefit by virtue of remission or cessation is sine-quo-non for the application of Section unless such liability is written off in books of accounts by unilateral act of the assessee.
We find that the liability of Rs. 6,76,266/- in respect of Mahima Porsepun was outstanding for more than three years, but the same has not been written off in the books of accounts by the assessee. Therefore, there was no basis by treating the said amount as remission or cessation of a trading liability of the assessee when it was not unilateral written off by the assessee. We find that the AO has made this addition merely on the basis of expiry of limitation to file the suit by creditor, where he cannot who come up with a proceedings for enforcement of debt. However, we find that this amount was subsequently settled by the assessee in the succeeding years therefore, the assessee has not derived or obtained any benefit in respect of such trading liability. Therefore, the addition made on the basis of Smt. Abhadevi Agarwal/ I.T.A. No.58/Ind/2015/A.Y.:10-11 Page 12 of 19 presumption cannot be sustained in the eyes of law. The Ld. AR has relied in the case of CIT v/s Southern Roadways Ltd. 282 ITR 379 wherein the decision of the Apex Court in the case of CIT v/s Sugauli Sugar Works (P) Ltd., (1999) 152 CTR (SC) 46: (1999) 236 ITR 518(SC) was considered and it was held that the principle that expiry of period of limitation prescribed under the Limitation Act, could not extinguish the debt but it would only prevent the creditor from enforcing the debt, has been well settled. If that principle is applied it is clear that some entry in the books of accounts of the debtor made unilaterally without any act on the part of the creditor will not enable the debtor to say that the liability has come to an end. Apart from that, that will not by itself confer any benefit on the debtor as contemplated by the Section. The other decision as relied by the Ld. AR has mentioned above are also supports his view. Therefore, we are of the considered opinion that the provision of Section 41(1)(a) of the Act can only be invoked when the assessee has written off the liability in its books of accounts by unilateral act. Since, the assessee has not written off the aforesaid amount in its books of accounts and the payment has been settled in the subsequent year, therefore, the addition so made by the AO, is not Smt. Abhadevi Agarwal/ I.T.A. No.58/Ind/2015/A.Y.:10-11 Page 13 of 19 sustainable in the law. Accordingly, the same is deleted. This grounds of appeal is therefore allowed.
3. Ground no. 3 relates to disallowance of Rs. 1,83,889/- made u/s 14A of the Act.
3.1. Facts apropos of this ground are that the assessee has invested the capital in the form of share capital for which he is earning his share income from the firm and has shown share of profit of Rs. 36,647/- from Shree Krishna Commercial Co. and profit of Rs. 35,16,810/- from Shree Venkateshwar Cotton Co. and profit of Rs. 21,61,009/- from Chhaganlal Kishanlal and Co. This share income from the firms does not form the part of income chargeable to tax. Therefore, the AO referred the provision of Section 14A asking to show cause as to why disallowance u/s 14A should not be made. However, the assessee has replied that there was no income which is not chargeable to tax in the case of assessee. Therefore, no disallowance u/s 14A are required. However, the AO applied to the decision in the case of Daga Capital Investment Company and observed that disallowance u/s 14A is called for irrespective of fact, whether the assessee has exempted income during the year or not. According to the AO, the Sub-Rule (iii) of Rule 8D says that if no Smt. Abhadevi Agarwal/ I.T.A. No.58/Ind/2015/A.Y.:10-11 Page 14 of 19 expenditure is incurred, the disallowance @ 0.5% is to be made on average investment. Accordingly, the AO calculated the disallowance of Rs. 1,83,889/- by 0.5 % of average investment made in the various firms at Rs. 3,67,77,862/- (Rs. 4,58,464/- from Krishna Commercial Co., Rs. 2,49,62,860/- from Chhagnlal Kishanlal & Co. and Rs. 1,12,56,538/- from Sheri Venkateshwar Cotton Co.). Accordingly, the AO made disallowance at Rs. 1,83,889/- u/s 14A read with Rule 8D.
3.2. Being aggrieved the assessee has filed this appeal before the CIT(A). However, the CIT(A) observed that the appellant had contended that since there was no exempt income earned from partnership firm and it was not required to incur any expenditure, the disallowance is not justified. The contention of the appellant has not been found sustainable for the reason that the AO has only invoked Sub-Rule (iii) of Rule 8D of IT Rules 1962 which are not subject to earning of any income and incurring of any expenditure. Accordingly, the action of the AO was upheld.
3.3. Being aggrieved the assessee has filed this appeal before the Tribunal. The Ld. AR submitted that the assessee has not claimed any expenses in her computation of income to earn her Smt. Abhadevi Agarwal/ I.T.A. No.58/Ind/2015/A.Y.:10-11 Page 15 of 19 exempt income hence the AO was totally wrong in disallowing an amount of Rs. 1,83,889/- u/s 14A of the Act. The AO referred the decision of I.T.A.T. Bombay Bench, in the case of Daga Capital Management 119 TTJ 289 for disallowing the above expenses however, the Section 14A provides that disallowance can be made in respect of expenditure incurred in relation to exempt income whereas the assessee has not incurred any expenditure in relation to exempt income. The AR also cited the some decision of the Hon'ble Punjab & Haryana High Court to contend that Rule 8D cannot be blindly applied where no expenditure was incurred to earn exempt income.
3.4. On the other hand, the Ld. DR drew our attention to the paper book page no. 25 which is profit and loss account of the proprietory concern of the assessee, wherein the assessee, has debited interest expenditure of Rs. 1,66,83,160/- and Rs. 6,53,550/- has bank charges. Therefore, the Ld. DR contended that the assessee has incurred expenditure in relation to earning exempt income and therefore, it cannot be said that no expenditure on account of administrative and handling etc. has been incurred by the assessee who have earned exempt income. The DR has also submitted that the assessee has invested in her Smt. Abhadevi Agarwal/ I.T.A. No.58/Ind/2015/A.Y.:10-11 Page 16 of 19 own funds towards the capital of the aforesaid three firms. Therefore, the disallowance under Rule 8D(iii) can be correctly made. Hence, the findings of the AO and the CIT(A) may be upheld.
3.5. We have considered the facts, rival submissions and perused the material available on record. We find that the assessee has earned substantial exempt income in the form of share from partnership firm of Rs. 57,14,466/- ( from Shree Krishna Commercial Co. of Rs. 36,647/-, from Shree Venkateshwar Cotton Co. of Rs. 35,16,810/- and from Chhaganlal Kishanlal & Co. of Rs. 21,61,009/-) as against which the assessee had a closing balance of Rs. 5,48,19,993 as on 31.10.2010 in the balance sheet. We further find that the assessee has incurred investment expenditure in her proprietory concern at Rs. 1.66 crores and also bank charges of Rs. 6.53 lakhs besides, and establishment as well as telephone expenses etc. The assessee is a partner in the aforesaid firm. In view of these circumstances, we are of the view that it may be impossible that the assessee had not incurred any expenditure to earn exempt income which is not chargeable to the tax in the case of assessee. This view of our is also supported by the decision in the Smt. Abhadevi Agarwal/ I.T.A. No.58/Ind/2015/A.Y.:10-11 Page 17 of 19 case of Citycorp. Finance (India) Ltd. (2007) 108 ITD 471(Mumbai) wherein it was held as "it is difficult to accept the hypothesis that one can earn substantial dividend income without incurring any expenses, whatsoever, including management or administrative expenses. By same logic it is equally difficult to accept that only expenses involved in earning dividend or on enchasing a few dividend warrants. A company cannot earn dividend without existence and management. Investment decision is very complex in nature. They require substantial market research, day to day analysis of market trends and decisions with regard to acquisition, retention and sale of shares and consequential blocking of funds. It is well known that capital has cost and the element of cost is represented by interest. Besides investment decisions are generally taken in the meetings of board of directors for which administrative expenses are incurred. It is therefore, not correct to say that dividend income can be earned by incurring no or nominal expenditure therefore, all expenses connected with the exempt income have to be disallowed u/s 14A regardless of whether they are direct or indirect, fixed or variable and managerial or financial in accordance with law." Similarly, in the case of ITO v/s M/s Daga Capital Management (P) Ltd. 119 Smt. Abhadevi Agarwal/ I.T.A. No.58/Ind/2015/A.Y.:10-11 Page 18 of 19 TTJ 289 (SB) (Mum) has also held that the disallowance under Rule 8D(iii) have to be made by analyzing the expenditure incurred in relation to exempt income. In the case of Gujrat Gas Finance Service Ltd. v/s ACIT 2008 14 DTR (AHD) (SB) 481 it was held that there is no dispute that there cannot be any doubt, that some expenditure incurred in making of earning of income for dividend in case of maximum accounting the expenditure is not identified as such it directly relates to earning of dividend but that cannot be granted to say that no expenditure is incurred for earning dividend income for that or no expenditure could be related to that income. Therefore, in the light of aforesaid decisions and the provision of Rule 8D(iii) we are of the view that the assessee must have incurred the some expenditure in relation to earn exempt income therefore, the disallowance made by the AO and as confirmed by the CIT(A) are upheld. Hence this ground of appeal is dismissed.
4. In the result, appeal of the assessee stands partly allowed.
5. The order pronounced in the open court on 16.03.2017.
Sd/- Sd/-
(सी.एम.गग)/(C.M. GARG) (ओ.पी.मीना) /(O.P.MEENA)
या यक सद य /JUDICIAL MEMBER लेखा सद य /ACCOUNTANT MEMBER
Smt. Abhadevi Agarwal/ I.T.A. No.58/Ind/2015/A.Y.:10-11 Page 19 of 19
Dated : 16.03.2017.