DCIT, C-5, LUDHIANA vs. M/S HERO CYCLES LTD., LUDHIANA

आदेश/Order

PER N.K. SAINI, VICE PRESIDENT

The appeal by the Department and the Cross Objection by the Assessee are directed against the order dt. 09/08/2017 of Ld. CIT(A)-2, Ludhiana.

I. Whether on the facts and circumstances of the case and in law, the CIT (A) was right in deleting the disallowance of Rs. 1,95,20,496/- made u/s 14A of the Act without establishing the fact whether own funds were actually used for making

investments while ignoring the fact that the assessee has huge borrowings on which interest expenses were claimed and also ignoring the CBDT circular No. 5 of 2014? II Whether on the facts and circumstances of the case and in law, the CIT (A) was right in deleting the disallowance of Rs. 8,15,40,683/- made on account of excessive commission expenses while ignoring the fact that a clear relation existed between the assessee company and the firm, as a director of the assessee company was also a partner in the firm concerned? III Whether on the fact and circumstances of the case and in law, the CIT (A) was right in deleting the disallowance u/s 36(1)(iii) of the Act on account of advances made to /debit balances of M/s Hero exports and M/s Hero Motors Ltd. on the ground of sufficient own funds while ignoring that the assessee has huge borrowings on which interest expenses were claimed? IV Whether on the fact and circumstances of the case and in law, the CIT (A) was right in deleting the disallowance of interest u/s 36(1)(iii) of the Act on account of Capital Work in Progress on the ground of sufficient own funds while ignoring that the assessee has huge borrowings on which interest expenses were claimed? V Whether on the fact and circumstances of the case and in law, the CIT (A) was right in deleting the disallowance of interest u/s 36(1)(iii) of the Act on account of Share Application Money on the ground of sufficient own funds while ignoring that the assessee has huge borrowings on which interest expenses were claimed? VI Whether on the fact and circumstances of the case and in law, the CIT (A) was right in deleting the disallowance of Consultancy Service Expenses while ignoring that the assessee has not proved with evidence the justification about the consultancy services availed and that the said payment was wholly and exclusively for business purposes?

5,13,80,744/-and LTCG of Rs. 11,57,78,984/- which were claimed exempt under section 10(38) of the Act and that the assessee had investment of Rs. 385,29,95,217/- and Rs. 596,97,35,636/- as on 31/03/2010 and 31/03/2011 respectively, which was not includible in total income. The A.O. also observed that the assessee claimed interest expenditure of Rs. 16,22,73,963/- during the year under consideration. He asked the assessee to explain and submit the details of expenditure relating to the earning of tax free income. The assessee furnished the reply which has been reproduced by the A.O. at page no. 2 to 6 of the assessment order dt. 31/01/2014 for the cost of repetition the same is not reproduced herein. The A.O. after considering the submission of the assessee invoked the provisions of section 14A of the Act read with Rule 8D of the Income Tax Rules 1962. The A.O. worked out the disallowance under section 14A of the Act at Rs. 3,27,74,176/-, the calculations are given at page no. 15 & 16 of the aforesaid assessment order. Subsequently the A.O. rectified the said order and worked out the disallowance of Rs. 1,95,20,496/- vide order dt. 14/02/2017 passed under section 154 of the Act.

5.4 I have considered the observations of the Assessing Officer as made by him in para 3 of the assessment order while making the impugned addition. I have also considered written submissions filed by the assessee company through its learned AR vide letters dated 25.07.2014, 18.08.2014, 21.10.2014, 16.01.2015, 19.05.2016 and 02.08.2017 on the issue under reference. I have further considered various judicial pronouncements relied upon by the learned AR of the assessee company including the orders of the Honourable ITAT, Chandigarh in the case of Assessee Company itself for A.Ys. 2008-09, 2009-10 and 2010-11 as well as other material placed by him on record. On careful consideration of the rival contentions, it has been noticed that the issue under consideration is squarely covered in favor of the assessee company by the orders of the Honourable ITAT, Chandigarh in ITA No. 192/Chd./2013 for the A.Y. 2008-09 dated 29.10.2015, ITA No. 314/Chd./2013 for the A.Y. 2009-10 dated 16.02.2016 and ITA Nos. 720 & 758/Chd./2014 for the A.Y. 2010-11 dated 03.04.2017 in the case of the assessee company itself as the identical addition made by the Assessing Officer in A.Ys. 2008-09, 2009-10 & 2010- 11 was deleted by the Honorable jurisdictional ITAT. As the facts of the case of the assessee company for the year under consideration as far as the addition under consideration is concerned are identical to the facts of the case of the assessee company for the A.Ys. 2008-09, 2009-10 & 2010-11 and there is no material difference in the facts, the ratio of the decisions of Honorable ITAT, Chandigarh for the A.Ys. 2008-09, 2009-10 & 2010-11 is squarely applicable to the case of the assessee company for the year under consideration. So respectfully following the orders of the Honourable ITAT, Chandigarh in the case of the assessee company itself for the A.Ys. 2008-09, 2009-10 and 2010-11 (supra), the addition of Rs.3,27,74,176/- [which was subsequently reduced by the Assessing Officer to Rs. 1,95,20,496/- {Rs.3,27,74,176/- (-) Rs. 1,32,53,680/-} vide order under section 154 of the Act dated 14.02.2017] made by the Assessing Officer in this case on account of disallowance of expenses by invoking provisions of section 14A of the Act on the ground that the assessee company had made investment in shares/mutual funds, the income from which in the form of dividend or long term capital gains is exempt from tax under section 10(38) of the Act is directed to be deleted on the basis of same reasoning and logic as adopted by the Honourable ITAT, Chandigarh in the case of the assessee company itself for the A.Ys. 2008-09, 2009- 10 and 2010-11 while deleting the identical addition in these years. In the result, the grounds No. 1, 2 and 2(b) to 2(1) taken by the assessee company are allowed.

paper book. He accordingly submitted that the Ld. CIT(A) rightly deleted the disallowance made by the A.O. by following the earlier orders of the ITAT in assessee’s own case, therefore there is no merit in the appeal of the Department.

From the perusal of the balance sheet and other documents f i led in the Paper Book, we see that the total investment in shares and mutual funds as on 31.3.2007 was of Rs.3,83,82,47,226/- while the investment as on 31.3.2008 is of Rs.4,64,37,73,922. Therefore, there was an increase of around Rs.80 crores in the investment during the year . While reserves and own funds of the assessee company as on 31.3.2008 are amounting to Rs.6,24,18,74,854/- . From these figures, it is quite clear that own funds and reserves of the assessee are more than sufficient to cover the investment made during the year. In such a scenario, it can be very conveniently presumed that all the investment have been made out of own funds. For this purpose, reliance is placed on the judgment of Hon'ble Jurisdictional High Court in the case of Bright Enterpr ises Pvt . Ltd. Vs. CIT in ITA No.624 of 2013 (O&M) dated 24.7.2015, whereby it has been held as under :

“16. As we noted ear l ier , 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.”

The aforesaid order has been followed by the ITAT in the Assessment Year’s i.e 2009-10 and 2010-11, we, therefore do not see any valid ground to interfere with the findings of the Ld. CIT(A) who rightly deleted the disallowance made by the A.O. by following the earlier orders of the ITAT in assessee’s own case for the A.Y’s 2008-09 to 2010-11.

"a) Commission Paid to M/s. Munjal Sales Corporation (MSC).

(i) Term on which Commission is Paid. (ii) Please justify the services rendered by MSC to M/s. Hero Cycles Ltd. (iii) Please provide the qualification of the employees of MSC & their nature of job. (iv) There is a heavy payment of Salaries to the Directors. Therefore, why not the Commission being paid be considered excessive? (v) What is the substantial interest of the assessee in Munjal Sales Corporation." 11.1 In response the assessee submitted as under:

i) The assessee company has paid the commission to M/s. Munjal Sales Corporation @1% on the total turnover of cycles and cycle parts in India other than the direct turnover, turnover for exports and turnover to the Government departments. In this regard it is submitted as under:- This firm is acting as a sole selling agent of assessee company on the terms and conditions duly approved by the Company Law Board, Ministry of Corporate Affairs from time to time u/s 294AA of the Companies Act. The rate of commission of 1% on the specified turnover is continuing since last many years .......... There is no change in any of the term & conditions of the commission paid to M/s. Munjal Sales Corporation in this year as compared to earlier years. The terms & conditions are consistent ............. Also no change in any of the terms of the proposed agreement as was filed before the Ministry of Corporate Affairs was recommended which was duly approved, after their satisfaction about the percentage of commission to be paid to M/s. Munjal Sales Corporation. There is no change in the rate of commission paid to M/s. Munjal Sales Corporation. The quantum of commission depends upon the volume of the turnover. ii) Regarding justification of services render by M/s. Munjal Sales Corporation it is submitted that this firm is acting as a sole selling agent of Assessee Company in respect of bi-cycles products since 1962. M/s. Munjal Sales Corporation had also acted as a sole selling agent for bi- cycles products of other companies i.e. M/s. Highway Cycle Industries Ltd, M/s. Rockman Cycle Industries Ltd and M/s. Majestic Auto Ltd. These companies had discontinued their cycle products; therefore no commission is being paid to M/s. Munjal Sales Corporation ........................... iii) A statement indicating the name & qualification of employees of M/s. Munjal Sales Corporation, as desired, is enclosed. All the employees of M/s. Munjal Sales Corporation are experienced employees having complete knowledge about marketing & dealers of cycle trade. We would like to point out that while most of the employees are well educated i.e. graduate/post graduate and MBAs, it is the not the education level of the executives but their relationship with the dealers which matters in the cycle trade and most of the employees of sole selling agents are with the firm since decades having goodwill with the dealers, which is apparent from the increase of total turnover of cycles and cycle parts of the company as compared to earlier years ......... iv) The remuneration paid to the directors of the company is in respect of many folds of working of the company of which one of them is sales. The total turnover of the company for the year under consideration is Rs. 2065 crores as compared to 1729 crores of last years. The total strength of the employees is more than 4000 approximately and having a network of about 3000 Cycle & other dealers & more than 1000 vendors. It is humbly submitted that it is not practically possible for directors to manage all the business processes in the present business environment. It is a delegated responsibility. The directors / top management are basically

for administrative work and decisions. Moreover the orders booking at the dealer's level cannot be micro managed; at best it can be managed by a team of motivated touring staff.

v) The assessee company itself does not have any interest in M/s. Munjal Sales Corporation as per provisions of Income Tax Act. Some of the directors are partners in M/s. Munjal Sales Corporation. Partners of MSC are holding shares in Assessee Company as under. The shareholders / directors of M/s. Hero Cycles Ltd are regular & separate income tax assessees and paying taxes at maximum rate."

11.2 The A.O. was not satisfied from the aforesaid reply of the assessee, he again asked the assessee to furnish the details vide letter dt. 09/01/2014 which read as under:

"To The Managing Director, M/s. Hero Cycles Ltd., Hero Nagar, G.T. Road, Ludhiana. Sir, **************

Kindly refer to the above. 2. During the course of assessment proceedings for the A.Y, 2011-12 under the I.T. Act 1961, it is seen that M/s. Hero Cycles Ltd.: (HCL): has paid Commission amounts to Rs. 11,58,57,377/- to Sole Selling Agents during the F.Y. 2010-11. To examine the same vide Note Sheet Entry dated 24/10/2013 the following queries were raised:-

a) Commission paid to M/s. Munjal Sales Corporation (MSC)

i) Terms on which Commission is paid.

ii) Please justify the services rendered by MSC to M/s. Hero Cycle

Ltd. iii) Please provide the qualification of the employees of MSC & their nature of job. iv) There is a heavy payment of salaries to the Directors. Therefore, why not the Commission being paid be considered excessive. v) What is the substantial interest of the assessee in M/s. Munjal Sales Corporation.

11.3 The A.O. also asked the assessee to submit the reply to the following queries:

a) From the Selling Expenses as per Annexure XVII of the Annual Report 2009-10, it is seen that HCL has paid Sales Promotion of Rs. 11,22,55,232/- and Advertisement & Publicity ofRs. 36,68,85,360/-. In view of the same please justify the payment of Commission to M/s. Munjal Sales Corporation, when Selling Expenses are being incurred by HCL. b) Commission paid by the assessee to M/s. Munjal Sales Corporation appear to be disproportionate to the expenses appearing in the P & L account of M/s. Munjal Sales Corporation. Hence, it appear that assessee is paying disproportionately huge Commission to MSC. Please justify. c) From the copy of Agreement as submitted on pages 413-414, it is seen that on 25.04.2007, agreement of 26.06.2002 was reviewed. Please provide the detailed working on the basis of which the agreement was reviewed? Further the agreement was to be reviewed in 2012, was it reviewed? The working details of same to be submitted. d) The payments of Commission by assesses to MSC appear to be diversion of profits to the family concerns. In view of the noting on previous Note Sheets please justify as to why the said expenses of Commission be allowed to M/s. Hero Cycles Ltd.

11.4 In response the assessee submitted as under:

"With reference to your honour's queries raised vide letter dated 09.01.2014 pertaining to reply submitted on 21.11.2013 it is submitted as under:- Query (a)- Payment of commission to M/s Munjal sales Corporation, when selling expenses are being incurred By HCL 1. The selling expenses incurred by the company and commission paid to MSC has altogether different purpose. The selling expenses mainly comprises of advertisement and publicity, sales promotion, packing material and trade discounts in addition to the commission paid to the SSA.

The purpose of advertisement and publicity is as under: - Brand Building - Creating awareness about new launches - Creating awareness about the product range of the company - Activities of the company to boost the trade

The expenses on sales promotion are done:

To boost the otherwise sluggish market, - To arrange dealer conference to make them aware the line of company activities - To arrest the declining trend of sales in lean period - To counter the competitors strategies

Query (b)-Commission paid to M/s Munjal sales Corporation appear to be disproportionate to expenses appearing in the P&L account of firm.

It is felt that origin of this query lies merely in the fact that both the assessees are related concerns. In case it would not have been there query itself would lost much of its sheen it is a commercial transactions which is based on win - win situation whereby both the parties make their buck without considering who is what ......................... Query (c)-Detailed working on the basis on which the agreement dated 26.6.2002 reviewed. Further the agreement was to be reviewed in 2012, was it reviewed? Working Details of same is to be submitted. MSC is working as the SSA of the company for more than five decades. The both concerns are hand to glove without any dispute during this period. Above all the customer also value the relationship and commitment of both the concerns which very important in the existing business scenario. The terms and conditions of appointment are the over the years without much change and renewal was done on just and fair basis. Query (d) -Payment of commission to M/s Munjal sales Corporation appears to be diversion of profits to the family concerns. It is wrong to allege that there is diversion of profit when there is no motive behind it. Generally these types of practices are resorted to when any of the concern generate profits at the loss of Revenue. In fact the assessee end up in paying higher taxes based on the following grounds: - Tax rate applicable to assessee is 30% - Tax rate applicable to MSC is 30% Service tax on commission is 10.30% There is no change in the rate of commission paid to M/s. Munjal Sales Corporation. The quantum of commission depends upon the volume of the turnover……..” 11.5 The A.O. was also not satisfied from the aforesaid reply of the assessee, he again asked the assessee to furnish the justification of the commission expenses. The assessee vide reply dt. 23/01/2004 submitted as under:

“With reference to your honour's letter dated 17.1.2014 regarding commission paid to M/s. Munjal Sales Corporation, it is submitted as under: - 1. The rate of commission of 1% on the specified turnover is continuing since last many years & it had always been accepted while framing the assessment of M/s. Hero Cycles Ltd framed u/s 143(3) and also in the case of M/s. Munjal Sales Corporation which is being assessed with DCTT, Circle V Ludhiana.

There is no change in the rate of commission paid to M/s. Munjal Sales Corporation. The quantum of commission depends upon the volume of the turnover ..................................

As already submitted, that the assessee company itself does not have any interest in M/s Munjal Sales Corporation. Some of the directors are partners of M/s. Munjal Sales Corporation. All the Partners of M/s. Munjal Sales Corporation are regular income tax assessee. Even the shareholders / directors of M/s. Hero Cycles Ltd are also regular & separate income tax assessee. As per history of this case as already explained the commission paid is reasonable and for legitimate business needs of the company…….. 5. As already submitted, that the assessee company itself does not have any interest in M/s Munjal Sales Corporation. Some of the directors are partners of M/s. Munjal Sales Corporation. All the Partners of M/s. Munjal Sales Corporation are regular income tax assessee. Even the shareholders / directors of M/s. Hero Cycles Ltd are also regular & separate income tax assessee. Even otherwise there is no loss to Revenue as the MSC is taxable at same rate. The company has also additionally paid service tax on the amount of commission @ 10.3% which comes to Rs. 10818958/-. Therefore otherwise also in no way the company or MSC or directors/partners have been benefitted by payment of low taxes due to their relation with the firm MSC.

The Board of Directors has approved the rate of commission as per past without giving any further increase. It is difficult to forecast the turnover of the company for the next five years particularly when there is a keen competition and many new models were introduced with Chinese origin with much less rates.

Commission of one percent is as per past working and based on earlier approved agreement keeping in view the commercial expediency & the market trend ...........................

11.6 It was further submitted as under:

"During the year, the assessee company had paid commission to M/s. Munjal Sales Corporation at the same rate as of earlier years at Rs. 115857377/- which included amount of service tax at Rs. 10818958/-. ... There is no change in the rate of commission paid to M/s. Munjal Sales Corporation. The quantum of commission depends upon the volume of the turnover.

The rate of commission of 1% on the specified turnover is continuing since last many years & it had always been accepted while framing the assessment of M/s. Hero Cycles Ltd framed u/s 143(3) and also in the case of M/s. Munjal Sales Corporation which is being assessed withACIT, Circle VLudhiana....

The nature of services rendered by sole selling agent cannot be measured in terms of market value which is not a commercial in nature....

It should be borne in mind that there is no evasion of tax through such so called diversion of profit by excessive payment of commission to associate concern as assessee has also paid additional service tax on commission and also such commission has been taxed in hands of M/s Munjal sales Corporation. There is no difference in tax rate. The provisions of income tax should not be applied in a manner which may cause hardship on bonafide cases.

11.7 The A.O. however was not satisfied from the submission of the assessee and made the addition of Rs. 8,15,40,683/- by observing as under:

The query regarding the justification or working as to how the figure of 1% of Commission paid to MSC by the assessee as still not been answered. The assessee in it reply has nearly taken the plea that the rate of Commission of 1% is the same as of the earlier years.

The assessee were asked to substantiate the services of the employees with details which was leading to the increase in Sales of the assessee Company. The assessee in its reply has only stated that the employees of the MSC keep on visiting the dealers to maintained their relation in connection with the business dealings. The assessee has not responded to the main query.

Also regarding the rationale of Commission being paid to the MSC inspite of payment of heavy salaries to the Directors of the Company. The reply of the assessee is that it is not possible for directors to manage all the business processes in the present business environment. The directors/ top management are basically for administrative work and decisions. Moreover the orders booking at the dealer's level cannot be micro managed, at best it can be managed by a team of motivated touring staff. This reply also does not answer the pointed query.

Regarding the next query of payment of Commission to MSC when Marketing Expenses of more than Rs. 48 Crores are being incurred by the assessee, the reply of the assessee does not justify the same but states that the above expenditure is for Brand Building.

Regarding the next query that the Primary Services being rendered by MSC could well have been done by other entity at far more competitive rates as no special service or core skill was being brought by MSC, the assessee has not replied to the query but has submitted that the services being rendered by M/s. Munjal Sales Corporation to M/s. Hero Cycles Ltd. is as per agreement and submission made by the Ministry of Corporate Affairs which has been already approved. This does not answer the question.

Regarding the next query of Commission paid to M/s. Munjal Sales Corporation appearing to be disproportionate to expenses appearing in the P & L Account of firm. The assessee merely repeats that the said Commission is being paid as the Board of factors has approved the rate of Commission. The reply no where clarifies as to why Commission Expense are being paid for the past 6 years. Commission of Rs. 10.50 Crores has been paid to MSC for F.Y. 2010-11 when the total expenses of the MSC are about Rs. 2 Crores.

Regarding the query that the payment of Commission to M/s. Munjal Sales Corporation appeared to be diversion of profits to the family concerns, the assessee has not directly responded in its letter but has stated that the expenses has been incurred by Lhe assessee in its character as a trader wholly and exclusively for the purpose of business. Thus as discussed in this para the assessee has not been able to suitably justify the payment of abnormally high Commission expenses to its group concern M/s. Munjal Sales Corporation.

To appreciate the issue the P & L Account of M/s. Munjal Sales Corporation for the year ended 31.03.2011 is summarized as under:-

Particulars Amount (Rs.) Particulars Amount (Rs.) 21055319 By Commission 105038419 Salary Expenses, By Interest 16517005 General Administrative By Dividend Income 65001575 Expenses and Financial By Rent Income 17500 Expenses 1535054219 By Profit on Sale of Inv. and fixed assets Net Profit 1702230476 1455446 By amount written back

Thus from the above it is seen that though the Commission Income being earned by MSC is Rs. 10,50,38,419/-(Net of Service Tax) from the assessee and MSC is also having other income, the total expenses of MSC stand at Rs. 2,10,55,319/-. From the above Profit and Loss statement it is to be noted that the assessee has incurred huge profits on sale of investments and fixed assets. The expenses incurred for the same are also included in the total expenses of MSC.

Thus the issue being raised again and again regarding the justification of Commission expenses being paid by the assessee to MSC leads clearly to the conclusion that the Commission expenses are highly exorbitant and unjustifiable. Therefore, the claim of the assessee that the whole of said expenses are to be allowed is rejected. The assessee in the Annexure XIX' to the tax Audit Report states that the Net Profit/Turnover of the assessee Company is 11.60%. Accordingly, the approximation of the justifiable amount of expenses to be paid by the assessee Company to the MSC are calculated by providing a Net Margin of 11.60% over the expenses of Rs. 2,10,55,319/- incurred by MSC which comes to = 2,10,55,319/- x 111.6% = 2,34,97,736/-.

Thus the excess amount of Commission paid of Rs. 8,15,40,683/- (Rs. 10,50,38,419/- - Rs. 2,34,97,736/-) is disallowed and added back to the total income of the assessee as being the expenditure not wholly and exclusively for the purposes of business and is added back to the total income of the assessee.

12 Being aggrieved the assessee carried the matter to the Ld. CIT(A) and furnished the written submissions dt. 25/07/2014, 19/05/2016 and 02/08/2017 which had been incorporated by the Ld. CIT(A) in para 6.1 at page no. 67 to 87 of the impugned order, for the cost of repetition, the same are not reproduced herein. The Ld. CIT(A) forwarded the written submissions of the assessee to the A.O. for his report. In response the A.O. furnished the report vide letter dt. 06/02/2015 which has been reproduced in para 6.2 of the impugned order for the cost of repetition, the same is not reproduced herein.

12.1 The Ld. CIT(A) asked the counter comments of the assessee against the report of the A.O. In response the assessee submitted vided letter dt. 19/05/2016 as under:

Issue -2 - Disallowance o f commission expense to Munjal Sales Corporation - Gr.No.3 (Refer appeal notes pages 33 to 46) The AO has not contradicted any of the facts mentioned in appeal notes at pages 33 to 46. The A. O. has simply repeated the issue mentioned in the body of assessment order. The issue is covered by the decision of your honour's predecessor in A. Y. 2010-11. The observation of the AO in his remand report that the M/s. Munjal Sales Corp. and Hero Cycles Ltd. are not strictly 'related' as per provisions of section 40A(2), therefore the decision of Apex Court may not be applied. If it is considered so, then the disallowance cannot be made on the ground being "excessive expenditure" claimed by the assessee company. Regarding allow-ability of the reasonable expenses based on commercial expediency for the purpose of business, the expenditure is fully allowable. As further confirmed by the Hon'ble Supreme Court in assessee's case reported in (2016) 236 Taxman 447 no businessman be compelled to maximize his profit and that the income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. It is further held that the revenue cannot be justifiably claim to put itself in arm chair of businessman or in a position of Board of Directors and assume role to decide how much is reasonable expenditure having regard to circumstances of case.

12.2 The Ld. CIT(A) after considering the submissions of the assessee, remand report of the A.O. and counter comments of the assessee deleted the addition by observing in para 6.4 of the impugned order as under:

6.4 I have considered the observations of the Assessing Officer as made by him in para 3 of the assessment order while making the impugned addition. I have also considered written submissions filed by the assessee company through its learned AR vide letters dated 25.07.2014, 18.08.2014, 21.10.2014, 16.01.2015, 19.05.2016 and 02.08.2017 on the issue under reference. I have further considered various judicial pronouncements relied upon by the learned AR of the assessee company including the orders of the Honourable ITAT, Chandigarh in the case of Assessee Company itself for A.Y. 2010-11 as well as other material placed by him on record. On careful consideration of the rival contentions, it has been noticed that the issue under consideration is squarely covered in favor of the assessee company by order of my learned predecessor in office in Appeal No. 54/IT/CIT(A)-2/2013-14 dated 09.06.2014 for the A.Y. 2010-12 and by the order of

the Honourable ITAT, Chandigarh in ITA No. 758/Chd./2014 for the A.Y. 2010-11 dated 03.04.2017 in the case of the assessee company itself as the identical addition made by the Assessing Officer in A.Y. 2010-11 was deleted by the learned CIT(A)-2, Ludhiana and Honorable jurisdictional ITAT. As the facts of the case of the assessee company for the year under consideration as far as the addition under consideration is concerned are identical to the facts of the case of the assessee company for the A.Y. 2010-11 and there is no material difference in the facts, the ratio of the decisions of the learned CIT(A)-2, Ludhiana and Honorable ITAT, Chandigarh for the A.Y. 2010-11 is squarely applicable to the case of the assessee company for the year under consideration. So respectfully following the orders of the learned CIT(A)-2, Ludhiana and Honourable ITAT, Chandigarh in the case of the assessee company itself for the A.Y. 2010-11 (supra), the addition of Rs.8,15,40,683/- in this case on account of disallowance out of commission paid by the assessee company to M/s Munjal Sales Corporation on the ground that the commission paid is excessive is directed to be deleted on the basis of same reasoning and logic as adopted by the learned CIT(A)-2, Ludhiana and Honourable ITAT, Chandigarh in the case of the assessee company itself for the A.Y. 2010-11 while deleting the identical addition in A.Y. 2010-11. In the result, the grounds No. 3 and 3(b) to 3(d) taken by the assessee company are allowed 13. Now the Department is in appeal.

been field to the Ministry of Corporate Affairs on its reappointment as sole selling agent on 29.3.2007 which the Ministry had approved on old commission rate of 1% of turnover . The Ld. CIT (Appeals) has also given a finding that the Board of Di rectors had also approved the said rate. The Ld. CIT (Appeals) has further pointed out that this rate of commission has always been accepted by the Department in the past . The Ld. CIT (Appeals) has also pointed out the fact that both the assessee and Munjal Sales Corporation had been paying taxes at the same rate and that Munjal Sales Corporation was not a person covered u/s 40(A) of the Act . Al l these facts have not been cont rover ted by the Ld. DR before us. In view of the above facts, we find no infirmity in the order of the Ld. CIT (Appeals) holding that the payment of commission was not excessive since it was approved by the Ministry of Corporate Affairs and by the Board Resolution and even accepted by the Revenue in the past years and had been paid at the same rate since 1962. The fact that Munjal Sales Corporation had been paying tax at the same rate as the assessee, the transaction was revenue neutral transact ion and since Munjal Sales Corporation was not related person as per sect ion 40(A) (2) of the Act , there was no case for making any disallowance at al l , as held by the Hon'ble Apex Court in the case of Glaxo Smithkline Asia (P) Ltd. (supra) .

Since the facts for the year under consideration are similar to the facts involved in the A.Y. 2010-11, so respectfully following the aforesaid referred to order dt. 03/04/2017 in ITA No. 720/Chd/2014 in assessee’s own case, we are of the view that the Ld. CIT(A) was fully justified in deleting the addition made by the A.O. by following the earlier order of the ITAT. We do not see any merit in this ground of the departmental appeal.

During the course of the Assessment Proceedings the details regarding the Debtors as standing in the Balance Sheet of the Assessee as on 31.3.2011 were called for. Copy of accounts of the main Debtors were also examined. Out of the said debit accounts it was seen that Debtor by the name of M/s Hero Exports was having a debit balance of Rs. 37,554,527/- as on 31.03.2011 and M/s. Hero Motors Ltd. was

having a debit balance of 32,737,039/- as on 31.03.2011. Copy of Accounts of the same is placed on record. The detailed analysis of both the accounts, the show causes issued to the assessee on the issue , the replies of the assessee to the same and the findings and conclusions about both the debit accounts has been discussed in the following Paras:-

(I) Debit Balance of M/s Hero Exports:-

From the copy of the account of M/s Hero Exports in the Books of M/s Hero Cycle's Limited , it is seen that there is a net opening debit balance of Rs. 16,77,59,780/- as on 01.04.2010 and a net closing debit balance of Rs. 3,75,54,527/- as on 31.3.2011. It was observed that though there were regular transactions between the two entities but throughout the year, neither the balance has been squared off nor the debit balance has been turned into credit balance for any of the 365 days in the year. The payments received by the assessee i.e. M/s Hero Cycles Limited from M/s Hero Exports during the year, in the said account are proportionately too small to the amount outstanding as on any of the dates on which the payments were received. For instance the first payment of Rs. 2 Crores in the account is received on 19.05.2010 whereas the outstanding balance on the date after this payment was Rs. 21,40,98,124/-. A similar trend is seen throughout the year that proportionately less payments are received vis a vis the balance outstanding as on the date of receipt of payment.

Accordingly, there was reason to believe that the debit amount of M/s Hero Exports was also in the nature of providing an Interest Free Advance, given to M/s Hero Exports by M/s Hero Cycles Limited, during the F.Y. 2010-11 The submissions of the assessee were called for on the issue .Thereafter, a Show Cause was issued vide Note Sheet Entries dated 23.01.2014. that as to why not the Debit balance of M/s Hero Exports and M/s Hero Motors in the Books of the Assessee may not be considered in the nature of Interest Free Advance.

The Assessee has submitted its reply on 29.01.2014 stating that:

"Statement of Customer & vendor account of M/s. Hero Exports consolidated is enclosed. In this regard, it is submitted as under:-

i) The Main Units of Assessee Company is supplying Cycles & Cycle Parts to M/s. Hero Exports, G.T. Road, Ludhiana, who is the major buyer of Cycles and Cycle Parts of Assessee Company for exports. M/s. Hero Exports is also supplying imported cycle components etc. to the assessee company....

ii) M/s.Hero Exports is also supplying imported cycle components etc. to the assessee company for which the balance payable as on 31.03.2010 by the assessee company to this firm is at Rs. 56572391/- & Security A/c at Rs. 2500000/-. iv) Further, on analyzing the consolidated statement of account it is evident that the net opening balance outstanding was at Rs. 16.77 Cr. The assessee company has sold the products to M/s. Hero Exports worth Rs. 49.23 crores against which the firm has also made payments from time to time. The net closing balance after adjustments on a/c of vendor account is at 3.75 Crore.

v) Even otherwise in the export business standard normal recovery period from foreign buyers ranges from 90 to 180 days. As explained above, the assessee company is bulk supplier to M/s. Hero exports. This party is exporting all the products under brand name of Hero.... vii) The company has always been receiving the payments from M/s Hero exports in due course but on account of various reasons mainly such as worldwide slowdown of markets and losses due to volatile foreign exchange markets on account of falling dollar price in terms of rupee, the financial position of the party tightened. Such ups & downs are normal in commercial fields. The funds has made the payment to assessee company as and when funds available, keeping in view their priorities...."

The above reply of the assessee has been considered. The assessee has stated that it has made sales to M/s Hero Exports. This is a fact but the main question as how substantial Debit Balance is allowed not to be paid remains unanswered. In view of the above findings and the submissions of the assessee we have to also take into consideration the following points as to why the said Debit Balance of M/s. Hero Exports is to be treated as Interest Free Advance.

M/s Hero Exports and M/s Hero Cycles Limited are a part of the Hero Group.

This fact has been stated in the Annual Report 2010-11 of M/s Hero Cycles Limited, at Page 55 Para 6: " 4. Enterprises over which Key Management Personnel & their relatives are able to exercise significant influence

a)... b) Firms : - Hero Exports"

Thus; we see that because all the above entities i.e. M/s Hero Cycles Limited and M/s Hero Exports, are a part of the large Hero Group such beneficial arrangement has been made so as to divert the Interest Bearing Funds of the Assessee for the Business Ventures of M/s Hero Exports. Therefore it further strengthens the contention that, the said Debtor M/s Hero Exports has utilized the Interest Bearing Funds of the Assessee for its own business purpose. Accordingly these advances shown as Debit Balances by the assessee are in the nature of interest free loans granted for non business purposes.

Hence there is a clear nexus between the Debit Amount of M/s Hero Exports not being received back by the Assessee and the utilization of the corresponding amount by M/s Hero Exports for its own purpose. Therefore, this is the case wherein the Assessee has provided Interest Free Advance, by not recovering the Debit Outstanding Balances not at any single date throughout the Financial Year 2010-11 from M/s Hero Exports. Accordingly, on the basis of the above discussion, the Debit balances in the Books of the Assessee of M/s Hero Exports are treated as Interest Free-Advances. The corresponding Interest on debit balances is disallowed from the Interest Expenses as debited by the Assessee u/s 36(l)(iii) of the Income Tax Act, 1961,

considering that the Assessee has diverted its Interest bearing Funds to M/ s Hero Exports.

(II) Debit Balance of M/s Hero Motors Limited:-

The Assessee has submitted the Balance due from Sundry Debtor of M/s Hero Motors Limited as Rs. 3,27,37,039/- as on 31.3.2011.

The assessee has failed to submit any justifiable reply of the debit balance standing in its books of M/s. Hero Motors Ltd. As mentioned earlier, the show cause to explain as to why not the amount outstanding should be treated as interest free advance was given vide note sheet entry dated 23.01.2014. The assessee vide its submission dated 29.01.2014 has stated as under:-

"i) Regarding balance due from M/ s. Hero Motors, it is submitted that the balance due from this party is on account of supply of C.R. Strips. Consolidated statement of account of this party as per books of C.R. Division has been filed vide letter dated 21.11.2013 at paper book pages 391 to 397.

ii) Accounts of this party with C.R. Division are running accounts with regular supplies and receipt of payments in the normal course. There is not even a single transaction involving any amount advanced by the assessee company to M/s. Hero Motors in this year i.e. all the transactions are on account of supplies made to this firm. None of the entry in the party's account represents loans or advance in the shape of money for which the balance is outstanding from it.

iii) Thus there is only a net balance of Rs. 3.27 crore due from the party as on 31.3.2011, which keeping in view the nature of trade with party as a bulk purchaser is normal in commercial terms. In continuous supply/sales, customers' accounts never get reduced to zero or negative

Thus, the assessee has once again not been able to justify as to why not the debit balances of M/s. Hero Motors Ltd. in the books of the assessee may not be treated as interest free advances. It may be noted that as in the case of M/s Hero Exports, as discussed earlier, M/s Hero Motors Limited is also a part of the larger Hero Group. This fact has been stated in the Annual Report 2010- 11 of M/s Hero Cycles Limited, at Page 55 Para 1: Enterprises in which the company has significant influeh Hero Motors Limited..."

Accordingly on the basis of the above discussion , the corresponding Interest on the debit balances is disallowed from the Interest Expenses as debited by the Assessee u/s 36(l)(iii) of the Income Tax Act 1961, considering that the Assessee has diverted its Interest bearing Funds to M/s Hero Motors Ltd.

{ The computation of the interest to be disallowed u/s 36(l)iii) of the Income Tax Act 1961 has been calculated on the date wise Debit balances as standing in the Books of the Assessee. The rate of Interest has been calculated as below on the basis of

above and taking into consideration the amount of loans outstanding as on 31.03.2011, weighted average interest as paid by the assessee is arrived at as under:-

Average Rate of Interest

Bank Loans 30.12 11.25%

FD &ICDs/MIBOR 112.57 4% to 9% 142.69

Minimum (30.12*11.25+112.57*4)/142.69 5.53 Maximum (30.12* 11.25+112,57*9)/142.69 9.47 15.01

Average Rate of Interest - 5.53%+9.47% = 7.50%} 2

The detailed computation of the Interest on the daily debit balances of M/s Hero Exports and M/s Hero Motors Limited in the Books of the Assessee is calculated @ 7.50% of the amount outstanding and computation of the same is as per Annexure A l and A2 of this Assessment Order respectively. On the basis of the said computation interest corresponding to the Debit balances of M/s Hero Exports amounting to Rs. 1,44,98,637/- (Annexure Al)and interest corresponding to the Debit balances M/s Hero Motors Limited amounting to Rs. 24,54,078/- (Annexure A2) i s disallowed u/s 36(l)(iii) of the Income Tax Act 1961, considering that the Assessee has diverted its Interest bearing Funds to M/s Hero Exports and M/s Hero Motors Limited as Interest Free Advance in the form of Debtor accounts. Accordingly the interest of Rs. 1,69,52,715/- (Rs. 1,44,98,637/- + Rs. 24,54,078/-) is disallowed and added back to the taxable income of the assessee. Penalty proceeding u/s 271(l)(c) is initiated separately for furnishing inaccurate particulars of income as discussed above.

B) Disallowance of Interest u/s 36(l)(iii) on account of Advance to Hero Motor: -

During the course of assessment proceedings assessee vide order sheet entry dated 4.12.2013 asked as to why loan of Rs. 60 Crores (Opening Balance) was granted to M/s. Hero Motors Ltd. on different dates @6% whereas to all other parties it has been granted @12% to 15% and why not the differential rate of interest be added to the taxable income. Assessee vide its reply dated 29.01.2014 has stated that:-

"As per our submissions vide letter dated 16.12.2013 the company has charged interest on this account @ 6%. This a/c has been squared up on 30.6.2010. For this purpose, the assessee company has not made any borrowing. This loan has been given out of own funds arising from internal accruals. Regarding your honour's query that interest charged from the other parties is 12% to 15%, it is submitted that it is the discretion of the assessee company to decide the rate of interest in each case as per terms mutually agreed with the party...."

The reply of the assessee is carefully considered and is found to be untenable. The assessee, as mentioned above has granted loans and charged interest ranging from 12% to 15% on the same. As submitted by the assessee and mentioned above, no notional income is being created or added to the income of the assessee. However, it is to be again reiterated that the assessee has taken interest bearing Secured as well as Unsecured Loans. The interest on the same has been calculated as mentioned earlier @7.50%. Therefore, it is held that the assessee has granted loan at a subsidized rate to M/s. Hero Motors Ltd. because both the companies belong to the larger Hero Group and the said advance to M/s. Hero Motors Ltd. cannot be termed to have been for any business benefit accruing directly to the assessee. Accordingly, the corresponding interest of Rs. 35,26,029/- @1.5% (7.50% - 6%) on day to day basis as per account is disallowed and added back to the taxable income of the assessee computation of which is as below:-

From Date: 01.04.2010 TO 31.3.2011

HERO CYCLES LTD. LUDHIANA

M/S HERO MOTORS - Inter Corporate Deposit A/,C

DATE PARTICULERS DEBIT CREDIT BALANCE Interest NO.OF @7.5% DAYS 01.04.2010 OPENING BALANCE 600,000,000 600,000,000 13 1,602,740 13.04.2010 CHEQUE ISSUED 100,000,000 700,000,000 3 431,507 16.04.2010 CHEQUE ISSUED 100,000,000 800,000,000 3 493,151 19.04.2010 CHEQUE ISSUED 100,000,000 900,000,000 2 369,863 21.04.2010 CHEQUE ISSUED 150,000,000 1,050,000,000 70 15,102,740 1060000000 - 30.06.2010 CHEQUE DEPOSITED 91 18,000,000 LESS INTEREST RECEIVED 14473971 Diff. of Interest 3526029

Accordingly, the corresponding interest of Rs. 35,26,029/- @1.5% (7.50% - 6%) on day to day basis as per account is disallowed and added back to the taxable income ie assessee.

Penalty proceeding u/s 271(l)(c) are initiated separately for furnishing inaccurate particulars of income as discussed above.

C) Disallowance of Interest u/s 36(l)(iii) on WIP:-

The details regarding the Total Capital Work In Process for the F.Y. 2010-11 were called from the assessee vide note sheet entry dated 09.01.2014. No reply to the same was submitted.

The assessee was issued show cause vide Note Sheet Entry dated 23.01.2014 requesting to explain as to why not interest be capitalized on capital WIP. The assessee vide its reply dated 29.01.2014 has submitted as under:-

"The detail of capital work in progress is enclosed. This expenditure is mainly relating to the Main Unit and C.R. Division of the company. It may be here mentioned that assessee company has already capitalized interest on CWIP at Rs. 633211/-. No funds have been borrowed for these purposes nor has any borrowed amount been utilised to acquire the CWIP ...................

Regarding the total expenditure on capital work in progress, it is submitted that this expenditure is only of routine type, towards modifications/replacements in the existing machinery installed worth crores of rupees with a motive for smooth running with improved efficiency in day to day running. Therefore this expenditure is not in the nature of extension of existing machinery etc. The company is not in the process of increasing its production capacity as the existing capacity is sufficient to meet the increased production requirements of it...."

The reply of the assessee is carefully considered and is found to be untenable. As mentioned above, the assessee has substantial amount of secured and unsecured loans in its balance sheet. Entire money in the business has gone into the common kitty. The assessee has not submitted the rationale as to why loans were standing in the balance sheet when as per the assessee own funds were available for investment. It is a matter of fact that interest expense of Rs. 16,22,73,963 /- is being claimed in the Profit and Loss account. Accordingly the amount of interest is Capitalized on Capital Working Progress u/s 36(l)(iii) on account of Building under Construction and is disallowed. Regarding the rate of interest, the same is taken as 7.50% as arrived at earlier. The detailed computation has been placed at Annexure B. The total interest to be Capitalized, as per the computation comes to Rs. 8,35,875/-. The assessee has already Capitalized an amount of Rs. 6,33,212/-. Therefore, the remaining amount of Rs. 2,02,663/- (Rs. 8,35,875/- - Rs. 6,33,212/- = Rs. 2,02,663/-) is disallowed and added back to the taxable income of the assessee.

Penalty proceeding u/s 271(l)(c) is initiated separately for furnishing inaccurate particulars of income as discussed above.

D) Disallowance of Interest u/s 36(l)(iii) on Share Application Money:-

On the details has submitted by the assessee regarding investments it is seen that the assessee has invested certain sum of its money as mentioned below under the head share application money:-

Date Particulars Debit Credit Balance 01.04.2010 Opening Balance 435000000 435000000 App. Money reed. 30.06.2010 335000000 100000000 Back from Ritamay Builders 30.06.2010 Adjusted towards 100000000 0 Share allotment RTGS to M/s. 19.11.2010 50000000 50000000

Hero Motors Cheque No. 02.02.2011 100000000 150000000 070573 issued to M/s. Hero Motors TOTAL 585000000 435000000 150000000

CLOSING BALANCE 150,000,000

The share application money thus advance by the assessee appeared to be in the nature of interest free advances. Therefore, the assessee was asked vide note sheet entry dated 21.01.2014 that as per the details submitted by the assessee on 15.01.2014 (page-1120) share application money as on 31.03.2010 is shown at Rs. 43.50 Crores and as on 31.03.2011 the same was at Rs. 15 Crores. The assessee was requested to submit the ledger account of the same and also to justify as to why not interest u/s 36(l)(iii) be disallowed on the same as the said share application money amount was in the nature of advance for non business purposes. The reply to the above was to be submitted on 23.01.2014. On 23.01.2014 no reply on the issue was submitted by the assessee. Again vide note sheet entry dated 23.01.2014 the assessee was given a show cause as to why not interest u/s 36(1)(iii) be disallowed on the amount of share application money has advance by the assessee which was standing in its balance sheet during the F.Y. 2010-11, as the same was not for business purposes. The assessee has submitted its reply on 27.01.2014 which is as under: -

"Regarding your honour's query dated 21.01.2014 with reference to share application money, it is submitted as under:-

The assessee company had opening balance of Share Application Money at Rs. 43.5 Crores out of which Rs. 33.5 Crores were refunded on 30.06.2010. Thereafter the assessee company has been further allotted shares of Hero Motors Ltd. during the year. The Balance b/f share application of Rs. 10 Crore was adjusted towards allotment of these shares. The closing balance of share application money was at Rs. 15 Crores as on 31.03.2011. Statement of share application money is enclosed. Statement of shares allotted during the year is also enclosed. All these investments are in the main unit of company ................. "

The assessee has again submitted a reply dated 29.01.2014 regarding the above issue and has stated:- "It is submitted that the share application money is part & parcel of total investments and accordingly have been shown under head Investments in the audited balance sheet of company. Accordingly are specifically governed by provisions of section 14A. There is always time lag in issue of share capital due to completion of formalities under Companies Act. This part of process towards investments of funds hence by no stretch of imagination same may be treated as advance. It may also be mentioned that the assessee company has not borrowed any amount for making this share application money. The amount advanced was out of its own generated surplus funds and internal accruals. As per routine the assessee company parks the surplus to generate the income. The assessee company had utilized the surplus amount for the purpose of investment

for which separate rule 8D has been prescribed under the Income Tax Act which is read with section 14 A for disallowance of interest etc...."

The assessee's reply has been duly considered. But the same is not acceptable. As mentioned in the pre paras there are heavy secured and unsecured loans standing in the balance sheet of the assessee on which interest payment are being made and the said interest is also being claimed in the Profit and Loss Account for the A.Y. 2011-12. Therefore, it cannot be doubted that the assessee has diverted its interest bearing funds for advancing money for the share application, as discussed above. Accordingly, the interest u/s 36(l)(iii) of the Income Tax Act, 1961 is disallowed and added back to the total income of the assessee. The computation of the interest u/s 36(l)(iii) is as under:-

No. of Date Particulars Debit Credit Balance Intt. @7.5% Days 01.04.2010 Opening Balance 435000000 435000000 91 8133904 30.06.2010 App. Money reed. 335000000 100000000 Back from Ritamay Builders 30.06.2010 Adjusted towards 100000000 0 142 0 Share allotment 19.11.2010 RTGS to M/s. Hero 50000000 50000000 75 770548 Motors 02.02.2011 Cheque No. 100000000 150000000 57 1756849 070573 issued to M/s. Hero Motors TOTAL 585000000 435000000 150000000 365 10661301

Amount of interest to be disallowed u/s. 36(l)(iii) of the Income Tax Act, 1961 regarding share application money = Rs. 1,06,61,301/-.

19.1 The Ld. CIT(A) after considering the submission of the assessee, remand report of the A.O. and counter comments of the assessee deleted the disallowances made by the A.O. under section 36(1)(iii) of the Act by following

the earlier order of the ITAT in ITA Nos. 720 & 758/Chd/2014 for the A.Y. 2010-11 dt. 03/04/2017. The relevant findings given by the Ld. CIT(A) in para 7.4, 8.4, 9.4 and 10.4 of the impugned order read as under:

7.4 I have considered the observations of the Assessing Officer as made by him in para 3 of the assessment order while making the impugned addition. I have also considered written submissions filed by the assessee company through its learned AR vide letters dated 25.07.2014, 18.08.2014, 21.10.2014, 16.01.2015, 19.05.2016 and 02.08.2017 on the issue under reference. I have further considered various judicial pronouncements relied upon by the learned AR of the assessee company including the orders of the Honourable ITAT, Chandigarh in the case of Assessee Company itself for A.Y. 2010-11 as well as other material placed by him on record. On careful consideration of the rival contentions, it has been noticed that the issue under consideration is squarely covered in favor of the assessee company by order of my learned predecessor in office in Appeal No. 54/IT/CIT(A)-2/2013-14 dated 09.06.2014 for the A.Y. 2010-12 and by the order of the Honourable ITAT, Chandigarh in ITA No. 758/Chd./2014 for the A.Y. 2010- 11 dated 03.04.2017 in the case of the assessee company itself as the identical addition made by the Assessing Officer in A.Y. 2010-11 was deleted by the learned CIT(A)-2, Ludhiana and Honorable jurisdictional ITAT. As the facts of the case of the assessee company for the year under consideration as far as the addition under consideration is concerned are identical to the facts of the case of the assessee company for the A.Y. 2010-11 and there is no material difference in the facts, the ratio of the decisions of the learned CIT(A)-2, Ludhiana and Honorable ITAT, Chandigarh for the A.Y. 2010-11 is squarely applicable to the case of the assessee company for the year under consideration. So respectfully following the orders of the learned CIT(A)-2, Ludhiana and Honourable ITAT, Chandigarh in the case of the assessee company itself for the A.Y. 2010-11 supra), the addition of Rs. 1,69,52,715/- in this case on account of disallowance of interest by invoking provisions of section 36(l)(iii) of the Act on the ground that the assessee company has given interest free loans/advances to related parties allegedly out of borrowed funds and that too for non business purposes is directed to be deleted on the basis of same reasoning and logic as adopted by the learned CIT(A)-2, Ludhiana and Honourable ITAT, Chandigarh in the case of the assessee company itself for the A.Y. 2010-11 while deleting the identical addition in A.Y. 2010-11. In the result, the ground No. 4 taken by the assessee company is allowed. 8.4 I have considered the observations of the Assessing Officer as made by him in para 3 of the assessment order while making the impugned addition. I have also considered written submissions filed by the assessee company through its learned A R vide letters dated 25.07.2014, 18.08.2014, 21.10.2014, 16.01.2015, 19.05.2016 and 02.08.2017 on the issue under reference. I have further considered various judicial pronouncements relied upon by the learned AR of the assessee company including the orders of the Honourable ITAT, Chandigarh in the case of Assessee Company itself for A.Y. 2009-10 as well as other material placed by him on record. On careful consideration of the rival contentions, it has been noticed that the issue under consideration is squarely covered in favor of the assessee company by the orders of the Honourable ITAT, Chandigarh in ITA No. 314/Chd./2013 for the A.Y. 2009-10 dated 16.02.2016 in the case of the assessee company itself as the identical addition made by the Assessing Officer in A.Y.

2009-10 was deleted by the Honorable jurisdictional ITAT. As the facts of the case of the assessee company for the year under consideration as far as the addition under consideration is concerned are identical to the facts of the case of the assessee company for the A.Y. 2009-10 and there is no material difference in the facts, the ratio of the decision of Honorable ITAT, Chandigarh for the A.Y. 2009-10 is squarely applicable to the case of the assessee company for the year under consideration. So respectfully following the order of the Honourable ITAT, Chandigarh in the case of the assessee company itself for the A.Y. 2009-10(supra), the addition of Rs.35,26,029/- in this case on account of disallowance of interest by invoking provisions of section 36(l)(iii) of the Act on the ground that the assessee company has given loan/advance to M/s Hero Motors out of borrowed funds but charging interest only @ 6% as against interest paid by the assessee company on borrowed funds @ 7.5% is directed to be deleted on the basis of same reasoning and logic as adopted by the Honourable ITAT, Chandigarh in the case of the assessee company itself for the A.Y. 2009-10 while deleting the identical addition in A.Y. 2009-10. In the result, the ground No. 5 of appeal taken by the assessee company is allowed. 9.4 I have considered the observations of the Assessing Officer as made by him in para 3 of the assessment order while making the impugned addition. I have also considered written submissions filed by the assessee company through its learned AR vide letters dated 25.07.2014, 18.08.2014, 21.10.2014, 16.01.2015, 19.05.2016 and 02.08.2017 on the issue under reference. I have further considered various judicial pronouncements relied upon by the learned AR of the assessee company including the order of the Honourable Apex Court in the case of the assessee company itself reported at (2016) 236 Taxman 447 (SC) as well as other material placed by him on record. On careful consideration of the rival contentions, it has been noticed that the issue under consideration is squarely covered in favor of the assessee company by the order of Honourable Apex Court in the case of the assessee company itself and also by the order of the Honourable Punjab and Haryana High Court in the case of M/s Bright Enterprises (P) Limited Vs. CIT reported at (2016) 381 ITR 107 (P&H) vide which similar additions were deleted. Moreover, the assessee company has sufficient interest free funds to pay share application money under consideration. As the facts of the case of the assessee company for the year under consideration as far as the addition under consideration is concerned are identical to the facts of the case of the assessee company for earlier years and there is no material difference in the facts, the ratio of the decisions of Honourable Apex Court in the case of the assessee company itself reported at (2016) 236 Taxman 447 (SC) and Honourable Punjab and Haryana High Court in the case of M/s Bright Enterprises (P) Limited Vs. CIT reported at (2016) 381 ITR 107 (P&H) vide which similar additions were deleted is squarely applicable to the case of the assessee company for the year under consideration. So respectfully following the orders of the Honourable Apex Court in the case of the assessee company itself reported at (2016) 236 Taxman 447 (SC) and Honourable Punjab and Haryana High Court in the case of M/s Bright Enterprises (P) Limited Vs. CIT reported at (2016) 381 ITR 107 (P&H) (supra), the addition of Rs. 1,06,61,301/- in this case on account of disallowance of interest by invoking provisions of section 36(l)(iii) of the Act on the ground that the assessee company has paid share application money allegedly out of borrowed funds is directed to be deleted on the basis of same reasoning and logic as adopted by the Honourable Apex Court and Honourable Punjab and Haryana High Court while deleting the identical additions. In the result, the grounds No. 6 and 6(b) taken by the assessee company are allowed.

10.4 I have considered the observations of the Assessing Officer as made by him in para 3 of the assessment order while making the impugned addition. I have also considered written submissions filed by the assessee company through its learned AR vide letters dated 25.07.2014, 18.08.2014, 21.10.2014, 16.01.2015, 19.05.2016 and 02.08.2017 on the issue under reference. I have further considered various judicial pronouncements relied upon by the learned AR of the assessee company including the order of learned CIT(A)-2, Ludhiana in Appeal No. 490/IT/CIT(A)-2/LDH/2014-15 dated 10.03.2016 in the case of M/s Munjal Castings and the orders of the Honourable ITAT, Chandigarh in the case of Assessee Company itself for A.Ys. 2009-10 and 2010-11 as well as other material placed by him on record. On careful consideration of the rival contentions, it has been noticed that the issue under consideration is squarely covered in favor of the assessee company by the orders of the Honourable ITAT, Chandigarh in ITA No. 314/Chd./2013 for the A.Y. 2009-10 dated 16.02.2016 and ITA Nos. 720/Chd./2014 for the A.Y. 2010-11 dated 03.04.2017 in the case of the assessee company itself as the identical addition made by the Assessing Officer in A.Ys. 2009-10 & 2010-11 was deleted by the Honorable jurisdictional ITAT. As the facts of the case of the assessee company for the year under consideration as far as the addition under consideration is concerned are identical to the facts of the case of the assessee company for the A.Ys. 2009-10 & 2010-11 and there is no material difference in the facts, the ratio of the decisions of Honorable ITAT, Chandigarh for the A.Ys. 2009-10 & 2010-11 is squarely applicable to the case of the assessee company for the year under consideration. So respectfully following the orders of the Honourable ITAT, Chandigarh in the case of the assessee company itself for the A.Ys 2009-10 and 2010-11 (supra), the addition of Rs. 2,02,663/- in this case on account of capitalization of interest by invoking provisions of section 36 (i)(iii) of the Act as the assessee company has shown huge assets under the head capital work in progress is directed to be deleted on the basis of same reasoning and logic as adopted by the Honourable ITAT, Chandigarh in the case of the assessee company itself for the A.Ys. 2009-10 and 2010-11 while deleting the identical addition in these years. In the result, the ground No. 7 taken by the assessee company is allowed.

dismissed vide order dt. 03/04/2017, the relevant findings are given in the aforesaid order vide paras 18,19,23,24,42 and 43 which read as under:

"9. The provisions of main section and the proviso are in relation to the amount of interest payable on capital borrowed. The first juncture thus to be seen is whether the assessee had borrowed any capital for the purposes of investment in capital asset for extension of existing business or profession. In the facts of the present case, there is no finding by the Assessing Officer in respect of the borrowals made by the assessee for the purposes of investment in capital work-in-progress. The Assessing Officer noted that the assessee had shown capital work-in-progress in its Balance Sheet and consequently computed disallowance in view of the provisions of proviso to section 36(l)(iii) of the Act.The CIT (Appeals) has given the finding that no loan had been raised by the assessee company for the purchase of furnace or for the construction of building. The said finding of the CIT (Appeals) had not been controverted by the learned D.R. for the Revenue. Further the CIT (Appeals) has also noted that the total investment made by the assessee during the year on

capital work-in-progress was Rs.42.46 lacs spent on furnace and Rs.33.23 lacs on the building as against the net profit of the assessee for the year at Rs.1.97 crores. In view of the above said facts and circumstances, we find no merit in the disallowance made by the Assessing Officer. Uploading the order of the CIT (Appeals) we dismiss ground No.l raised by the Revenue. " 23.Since no distinguishing facts were brought to our notice during the course of hearing, respectfully following the order of the coordinate Bench, we allow this ground of appeal "

us. Admittedly, the amount was not advanced as a loan and we find no merit in the orders of authorities below in applying the ratio laid down by the Hon'ble Punjab & Haryana High Court in the case of Abhishek Industries (Supra). " This observation of the Hon'ble IT AT was also noted by the Hon'ble Punjab and Haryana High Court in the case of Power Drugs Ltd. Vs. CIT (2011) 62 DTR(P&H) 276 Keeping in view the aforesaid decisions of the Hon'ble ITAT and Hon'ble Jurisdictional High Court, it is held that the case of M/s Abhishek Industries Ltd. is not applicable where any amount was not advanced as loan. In the instant case, the undisputed fact is that no amount of debit balance is on account of any loan given by the appellant to M/s Hero Exports Ltd. or to M/s Hero Motors Ltd. This fact had been stated by the appellant during the course of assessment proceedings. The same was not controverted by the AO. The AO merely held that in view of the fact that the three companies are group concerns and in view of the fact that huge amounts were outstanding from both M/s Hero Exports Ltd. and M/s Hero Motors Ltd. the same is in the nature of interest free advance. This observation of the AO is not based on proper appreciation of facts as discussed in the findings above. The total sales to M/s Hero Exports Ltd. were of the amount of Rs.68.55 Crores out of which the appellant had received more than Rs.42.00 Crores. Thus about 2/3rd of the payments on account of sales made to M/s Hero Exports Ltd. were actually received by the appellant during the year. Keeping in view the aforesaid factual and legal position, I hold that the AO was not justified in disallowing the proportionate interest expenditure on debit balance outstanding in the names of group companies. These grounds of appeal are accordingly allowed.” 36. We do not find any infirmity in the order of the learned CIT (Appeals) as it is an undisputed f act that the assessee was making constant sale and purchases from these two concerns and amounts of money coming and going were on account of regular business of the assessee. During the course of business if some amount remains at the debit of the other company, the Assessing Officer cannot just presume it to be in the nature of loans and advances. Here also, the observations of the Delhi High Court in the case of Dalmia Cement Ltd. (supra) is pertinent, whereby it was held that it is not the prerogative of the Department to dictate the terms of the business and Revenue cannot impose its view on the businessman when to give any money and when to receive it back. The transactions are going on with the sister concerns on regular business. Steps are being made and even if some amount remains at the debit, the Assessing Officer cannot consider the same as loan and cannot make addition under section 36(1)(iii) of the Act on the same.” 43. Since the facts of the present case are identical to that in assessment year 2009-10 and no distinguishing facts were brought to out notice, the decision of the I.T.A.T. in assessment year 2009-10 squarely applies to the present case also following which we confirm the order of the Ld. CIT (Appeals) in deleting disallowance made u/s 36(1)(iii) of the Act of Rs.2,09,66,994/-. So respectfully following the aforesaid referred to order in assessee’s own case for the preceding assessment year i.e; 2010-11 in ITA No. 720 &

758/Chd/2014 dt. 03/04/2017. We do not see any valid ground to interfere with the findings given by the Ld. CIT(A).

Also vide letter dated 09.01.2014 (para-4) the assessee was asked to further justify the allowability of the consultancy expenses pay, the relevant paras of the said letter is as below:-

i) The nature of consultancy provided during the F. Y. 2010-11. ii) The whether any consultancy was specifically sought by M/s. Hero Cycles Ltd. From M/s. Hero Corporate Services Ltd.? If yes, for which areas the consultancy was required for? Please submitted the correspondence from your side regarding the same.

iii) In continuation of the above para please submit the documentation of the consultancy as provided by M/s. Hero Corporate Services Ltd.

iv) Please Justify the quantification of the amount paid to M/s. Hero Corporate Services Ltd. By your Company for the F.Y. 2010-11".

The assessee has submitted its reply vide letter dated 27.01.2014 as follows:- "With reference to your honour's queries raised vide letter dated 09.01.2014 regarding professional fee paid at Rs. 34,74,448/-, it is submitted as under:-

The assessee Company has already filed photocopy of letter dated 02.04.2010 from M/s. Hero Corporate Service Limited (HSCL) giving details of services being provided by the party alongwith photocopy of one of the invoice for the quarter ended September, 2010 at pages 1073 to 1075. Statement of party's account has also been filed at page-380.

M/s. HCSL was incorporated with an objective to provide, management advisory services to various group entities instead of, engaging professionals at individual company/undertaking level on the corporate basis in the filed of finance, treasury, HR, product effectiveness, expansion of clients and new markets, cost reduction programs, increase in productivity programs etc ....... * In evidence of the services taken by CR Division from HCSL we are enclosing alongwith the following:

Agenda, minutes of the meeting held on 5th May, 2010 with HCSL and photocopies of hotel bills of their stay on 4th and 5th May 2010. Agenda and photocopies of the hotel stay bills of employees of HCSL on 13/14 July, 2010. Photocopies of hotel stay bills of HCSL on 10/11 Aug. 2010 and stay charges of Kores Engg. Consultants through HCSL on 25th/26th October, 2010 in connection with the engineering study. Photocopies of the brief engineering study to improve the equipment health and processes are also enclosed.

Minutes of the meeting held on 20th October, 2010 with HCSL.

Minutes of the meeting held on 25th November, 2010. Photocopies of hotel stay of HCSL on 14th/15th December, 2010 and 15th February & 16th February, 2011. Agenda and paper on the programme -"Supplier of Choice" by HCSL for Hero C.R.D. organized on 22nd and 23rd January, 2011. Photocopies of travelling bills- 13th and 14<h May, 2010/17th to 21st April, 2010 of Hero CRD employees who visited HCSL office in connection with the follow up on above minutes of meeting." The assessee has also given second submission of even date which includes certain correspondence and reports. The submissions of the assessee, both of 27.01.2014 in reference to the note sheet queries dated 04.12.2013 and of the letter issued from this office dated 09.01.2014 have been duly perused and considered. The assessee in its submission has merely given a generalist reply regarding the services being provided by HCSL. The assessee has primarily submitted the hotel bills, travelling bills and certain emails which do not provide any conclusive proof of the consultancy services being rendered by HCSL to the assessee Company. The assessee has also submitted certain minutes of the meeting (pages-2051-2052 of the assessee submission) which are vague and do not provide any evidence of consultancy services provided by HCSL to the assessee Company.

The submissions of the assessee also do not reply to the queries as raised vide this office letter dated 09.01.2014. The nature of consultancy as provided by HCSL to the assessee Company has still not being replied so as to justify the payment of the said expenses for the purpose of business. The replies of the assessee do not show any documentary evidence of Strategic Planning consultancy, Finance Consultancy, HRD Consultancy etc. as promised by HCSL being provided to the assessee Company. The assessee has also not replied to the query as to whether any consultancy was specifically sought by M/s. Hero Cycles Ltd. From M/s. Hero Corporate Services Ltd. The assessee has also not replied to as to which areas the consultancy was required for. Also no correspondence regarding the same has been submitted by the assessee. The assessee has also not submitted the quantification and the methodology as to how the amount of consultancy amount paid of Rs. 34,74,448/- was arrived at. In view of the above discussion and that the assessee has not proved with evidence the justification about the consultancy services availed and that the said payment was wholly and exclusively for business purposes, the said amount of consultancy expenses of Rs. 34,74,448/- is disallowed and added back to the total income of the assessee.

25.1 The Ld. CIT(A) forwarded the written submissions furnished by the assessee to the A.O. for his comments in response the A.O. furnished the report vide letter dt. 06/02/2015 relevant portion of which read as under:

Sl. No. Contention Comments 5. That the Id. Addl. CIT has wrongly The Ld. Addl. CIT, had provided ample held that the Advisory fee paid to opportunity to the assessee to explain the M/s Hero Corporate Service Limited business expediency of the expenses. The id. A.O. had provided opportunity vide order is not justifiable for business purposes disallowed of sheet entry dated 04.12.2013 and then again Rs.34,74,448/- by not following the on 09.01.2014 and had raised specific queries consistency of this expenditure to which the assessee could not provide any being allowed in last more than 15 satisfactory reply. Thus the id. A.O. had very years. rightly made the disallowance. The issue may therefore, be considered by your goodself on merits.

25.2 The said report of the A.O. was forwarded to the assessee by the Ld. CIT(A) for its comments and the assessee in counter comments submitted vide letter dt. 19/05/2016 as under:

Sr.No.5 - Advisory fee paid to M/s. Hero Corporate Service Ltd. - Gr.No.8 - (Refer appeal notes pages at 65 to 79) The complete details were submitted before the AO along with necessary evidence during the assessment proceedings. Please refer to photocopies of details and documents already filed before the AO at paper book pages 361 to 679. However, it may be mentioned that under the similar circumstances and facts advisory fee paid to M/s. Hero Corporate Service Ltd. in the A.Y.2012-13, the AO after due consideration of submissions has accepted the assessee's claim. Decision of Hon 'ble Supreme Court in the case of CIT v Glaxo Smithkline Asia P Ltd, 195 Taxman 35 is squarely applicable. Your honour's predecessor had relied upon this decision while deciding the issue of commission paid to Munjal Sales Corporation (GNo. 3) being tax neutral. The reliance is also placed on Hon 'ble Supreme Court judgment reported in 236 Taxman 447 refer supra in assessee's case.

25.3 The Ld. CIT(A) after considering the submissions of the assessee, remand report of the A.O. and coutner comments of the assessee and by following the earlier order of the ITAT dt. 03/04/2017 for the A.Y. 2010-11 in ITA No. 758/Chd/2014 in assessee’s own case deleted the impugned addition by observing in para 11.4 of the impugned order as under:

11.4 I have considered the observations of the Assessing Officer as made by him in para 3 of the assessment order while making the impugned addition. I have also considered written submissions filed by the assessee company through its learned AR vide letters dated 25.07.2014, 18.08.2014, 21.10.2014, 16.01.2015, 19.05.2016 and 02.08.2017 on the issue under reference. I have further considered various judicial pronouncements relied upon by the learned AR of the assessee company as well as other material placed by him on record. On careful consideration of the rival contentions, it has been noticed that the Assessing Officer has allowed identical expenses in A.Y. 2012-13 after considering the nature of expenses in detail. It has also been noticed that no such disallowance was ever made in earlier years. Moreover, the issue under consideration is squarely covered in favor of the assessee company

by the order of the Honourable ITAT, Chandigarh in ITA No. 758/Chd./2014 for the A.Y. 2010-11 dated 03.04.2017 in the case of the assessee company itself as the identical addition made by the Assessing Officer in A.Y. 2010-11 was deleted by the Honorable jurisdictional ITAT. As the facts of the case of the assessee company for the year under consideration as far as the addition under consideration is concerned are identical to the facts of the case of the assessee company for the A.Ys. 2010-11 and there is no material difference in the facts, the ratio of the decision of Honorable ITAT, Chandigarh for the A.Y. 2010-11 is squarely applicable to the case of the assessee company for the year under consideration. So respectfully following the order of the Honourable ITAT, Chandigarh in the case of the assessee company itself for the A.Y. 2010-11 (supra), the addition of Rs.34,74,778/- in this case on account of disallowance of consultancy services expenses is directed to be deleted on the basis of same reasoning and logic as adopted by the Honourable ITAT, Chandigarh in the case of the assessee company itself for the A.Y. 2010-11 while deleting the identical addition in A.Y. 2010-11. Moreover, the addition made is revenue neutral as both the companies are paying tax at same rate. In the result, the grounds No. 8 taken by the assessee company is allowed.

Ld. CIT(A) and as such do not see any merit in this ground of the departmental appeal.

“ That the learned CIT(A)-2, has erred in confirming disallowance of Rs. 6,03,45,313/- u/s 14 r.w.r 8D which is against the law and facts of the case.”

“ Initially the revenue had raised only two grounds of appeal. Thereafter six grounds of appeal were filed by the revenue. All the grounds raised by the revenue are duly covered by the order of the Hon'ble Tribunal in the earlier years to which reference has been made by the Ld. CIT(A) in his order and I have filed copies of the orders on which reliance had been placed by the Ld. CIT(A) while allowing relief to the assessee. I had also filed short notes on 05.02.2018 and again on 12.04.2019 on this issue. The only controversial issue is regarding disallowance made by the AO and deleted by the CIT(A) u/s 14A / Rule 8D, because the appellant has already filed CO against suo-moto disallowance made by the assessee in the computation of income. However the issue needs fresh submissions which are as under:-

The AO has dealt with this issue on pages 1 - 16 of the order and has made the following disallowance in his original order. (Short notes & brief synopsis dated 05.02.2018 and again on 12.04.2019).

Thus the AO in his order u/s 154 reduced the disallowance u/s 14A/rule 8D to Rs.1,95,20,496/- as against 3,27,74,176 originally disallowed by him.

Availability of own funds

31.03.2010 31.03.2011 Share Capital 39,82,12,800/- 39,82,12,800/- Reserves 857,93,84,929/- 950,73,33,507/- Total 897,75,97,729/- 990,55,46,307/-

It is this disallowance of Rs. l,95,20,496/-which was deleted by the CIT(A) on the basis of availability of own funds.

Now reliance is placed on the following case law on the issue of availability of own funds:-

ACIT vs. Janak Global Resources Pvt. Ltd ITA No. 470/2018 A.Y. 2014-15 dated 16.10.2018 (Chd) (PB 234 - 257) CIT vs. Reliance Industries Ltd (2019) 410ITR 466 (SC.) Dated 02.01.2019 Pr. CTT vs. Living Media India Ltd (2019) 2 TMI1215 (SC.) dated 18.02.2019 Pr. CIT vs. Sintex industries Ltd (2018) 255 Taxman 171 (SC)

The CIT(A) in his order has considered the suo-moto disallowance of Rs. 6,03,45,313/- while deleting the disallowance of Rs. 1,95,20,496/-. The assessee has however filed CO against the suo-moto disallowance of Rs. 6,03,45,313/- on dividend income of Rs. 5,13,80,744/- in the return of income filed. The submissions are as under:-

Though the figures of total investments (page 15 of AO) to be considered for disallowance are not correctly taken by the lower authorities but the same will not make any disallowance for making disallowance under rule 8D(2)(ii) because of availability of own funds is more than the investments. In fact only those investments are to be considered which have yielded exempt income (ACB India Ltd vs. ACIT 374 ITR 108 Del) for making disallowance under rule 8D(2)(ii) and rule 8D(2)(iii). As such the correct disallowance would work out as below:-

Annexure -1 Total investments as per Balance Sheet as on 31.03.2010 Rs. 571,67,07,994/- Investments yielded exempt income and outstanding as on 31.03.2010 Rs. 86,35,49,132/-

Annexure -2 Total investments as per Balance Sheet as on 31.03.2011 Rs. 870,73,62,564/- Investments yielded exempt income and outstanding as on 31.03.2011 Rs. 201,65,21,670/-

Average of investments (86,35,49,132 + 201,65,21,670) Rs. 144,00,35,401/- Disallowance @ 0.5% = Rs. 72,00,177/- as against Rs. 2,45,56,827/- suo-moto disallowed by assessee.

CO No. 4/2018

The assessee has filed CO against suo-moto disallowance made at Rs. 603,45,313/- (Annexure-3) The details are given as per Annexure 3. The assessee is entitled to file cross objections against the suo-moto disallowance if the same has not been correctly made as per law. Reliance is placed on various judgments filed before your Honour.

32.1 It was further submitted that there was a mistake in the calculation in the disallowance to be made under section 14A of the Act r.w.r 8D of the Income Tax Rules, 1962. He requested to restore this limited issue to the file of the A.O. for verification of the calculation furnished by the assessee and to make the correct disallowance.

(Order pronounced in the open Court on 15/06/2021) Sd/- Sd/- आर.एल. नेगी एन.के.सैनी, (R.L. NEGI ) ( N.K. SAINI) �या�यक सद�य/ Judicial Member उपा�य� / VICE PRESIDENT AG Date: 15/06/2021

आदेश क� ��त�ल�प अ�े�षत/ Copy of the order forwarded to :