KANCHAN PHARMA PVT. LTD.,,AHMEDABAD vs. THE ASST. CIT, CIRCLE-2(1)(2),, AHMEDABAD

The learned CIT(A) has erred both in law and on the facts of the case in confirming disallowance made by the AO u/s.l4A of the Act r.w.r.BD of the Income-tax Rules, 1962 to the extent of Rs.1,54,676/-.

The learned CIT(A) has erred both in law and on the facts of the case in not following the binding decisions of Hon'ble Gujarat High Court allowing credit of owned funds while computing the disallowance u/s 14A of the Act r.w. Rule 8D of the Income-tax Rules, 1962. 5. The learned CIT(A) has erred both in law and on the facts of the case in confirming that disallowance U/S.14A is to be made while calculating book profit u/s. 115JB. 6. The learned CIT(A) has erred both in law and on the facts of the case in confirming the action of the AO of disallowing employee's contribution towards PF and ESIC amounting to Rs.6,09,138/- u/s 36(1)(va) r.w.s.2(24)(x) of the Act. 7. Alternatively and without prejudice to the above, the matter should be remanded to the AO to verity whether the sum was deposited within 21 days from the end of the month of payment of salary as contemplated under the provisions of Employees Provident Funds & Miscellaneous Provisions Act, 1952 and Employees State Insurance Act, 1948. 8. Both the lower authorities have passed the orders without properly appreciating the facts and they further erred in grossly ignoring various submissions, explanations and information submitted by the appellant from time to time which ought to have been considered before passing the impugned order. This action of the lower authorities is in clear breach of law and Principles of Natural Justice and therefore deserves to be quashed. 9. The learned CIT(A) has erred in law and on facts of the case in confirming action of the Ld. A.O. in levying interest u/s. 234A/B/C of the Act.” 3. The fact in brief is that return of income declaring income of Rs. 56,80,207/- was filed on 10th Sep, 2013. The case was subject to scrutiny and notice u/s. 143(2) of the Act was issued on 3rd Sep, 2014. The relevant facts pertained to the issue contested in the grounds of appeal filed by the assessee are narrated as under.

The assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has dismissed the appeal of the assessee.

During the course of appellate proceedings, the ld. counsel has brought to our notice that similar issue on identical facts for the assessment year 2012-13 in the case of the assessee itself has been adjudicated by the Co-ordinate Bench of the ITAT vide 2016 dated 1st June, 2020 where the similar disallowance has been deleted. The ld. Departmental Representative was fair enough not to controvert these undisputed facts.

We have gone through the decision of Co-ordinate Bench of the ITAT as cited above by the ld. counsel and noticed that identical issue on similar fact has been adjudicated and disallowance was deleted. He relevant part of decision of Co-ordinate Bench is reproduced is under:- “ 11.We have heard the rival contentions of both the parties and perused the materials available on record. The issue in the present case relates to the disallowance of the interest expenses paid on the money borrowed from the related parties as specified under section 40A(2)(b) of the Act. The assessee has paid interest at the rate of 24% whereas the Revenue was of the view that the rate of interest at 18% is reasonably enough. Accordingly the interest paid over and above the rate of 18% on the money borrowed was disallowed by the AO which was subsequently confirmed by the learned CIT(A). 12. Under the provision of section 40A of the Act the AO can make the disallowance under section 40A of the Act, if he is of the opinion that the expenditure in respect of which payment has been made to the related parties is excessive or unreasonable after having regard to the fair market value. But the AO in the case on hand has not brought such comparable cases. Therefore we are of the view that there cannot be any disallowance under the provisions of section 40A(2) of the Act without bringing any comparable cases based on cogent material. 13. It is also pertinent to note that the money was borrowed from the related parties in the earlier years and the interest paid to them was accepted in those years. Therefore in our considered view Page No 4 Kanchan Pharma Pvt. Ltd. vs. ACIT there cannot be any disallowance for the year under consideration on the money borrowed in the earlier year. In this regard we find support and guidance from the judgment of Hon'ble Karnataka High Court in the case of CIT vs.Sridev Enterprise reported in 192 ITR 165 wherein it was held as under: In the instant case the status of the amount standing as outstanding due from N on the first day of the accounting year was the amount that stood outstanding on the last day of the previous accounting year; therefore, its nature and status could not be different on the first day of the current accounting year, from its nature and status as on the last day of the previous accounting year. Regarding the past years, the assessee's claims for deductions were allowed in respect of the sums advanced during those years; this could be only on the assumption that those advances were not out of borrowed funds of the assessee. This finding during the previous years was the very basis of the deductions permitted during the past years, whether a specific finding was recorded or not. A departure from the finding in respect of the said amounts advanced during the previous year, would result in a contradictory finding; it would not be equitable to permit the revenue to take a different stand now, in respect of the amounts which were the subject-matter of previous years' assessments consistency and definiteness of approach by the revenue 'was necessary in the matter of recognising the nature of an account maintained by the assessee so that the basis of a concluded assessment would not be ignored without actually reopening the assessment. The principle is similar to the cases where it has been held that a debt which had been treated by the revenue as a good debt in a particular year cannot subsequently be held by it to have become bad prior to that year. The Tribunal was, therefore, justified in holding that since no additions had been made in earlier years, the opening debit balance could not be considered during the current year and the enquiry had to be limited to the increase in the current year only.

In view of the above, we hold that there cannot be any disallowance on account of interest expenses being excessive paid to the related parties under section 40A of the Act. Hence we set aside the finding of the learned CIT (A) and direct the AO to delete the addition made by him. Hence the ground of appeal of the assessee is allowed. Respectfully following the decision of Co-ordinate Bench as cited above, disallowance on excess interest payment made u/s. 36(1)(iii) is deleted. Therefore, this ground of appeal of the assessee is allowed.

The assessee has filed appeal before the ld. CIT(A). The ld. CIT(A) has restricted the disallowance to the extent of income to the amount of Rs. 1,54,676/-.

During the course of appellate proceedings before us, the ld. counsel has brought to our notice that assessee was having substantial interest free funds in the form of share capital of Rs. 81,04,600/- and reserve and surplus to the amount of Rs. 4,93,44,667/- totaling to the amount of Rs. 5,74,49,267/- as against the investment of Rs. 75,45,186/-. After referring the aforesaid position of substantial fund, the ld. counsel has submitted that no disallowance out of interest expenditure should be made in the case of the assessee. The ld. counsel has also referred the judicial pronouncement and stated that in the case of the assessee itself for assessment year 2012-13 the Co-ordinate Bench of the ITAT vide has deleted the disallowance made under the head interest component. On the other hand, the ld. Departmental Representative has supported the order of lower authorities.

We have gone through the order of the Co-ordinate Bench of the ITAT as referred above by the learned counsel. It is noticed that the Co-ordinate Bench has adjudicated the similar issue on identical facts and deleted the addition pertaining to the interest expenses. The relevant part of decision is as under:- “22. We have heard the rival contentions of both the parties and perused the materials available on record before us. It is the settled laws that there cannot be any disallowance of interest expenses if the own fund of the assessee exceeds the amount of investments. Admittedly the own fund of the assessee exceeds the amount of investment in the present case. In this connection, we find support and guidance from the judgment of Hon'ble Bombay High Court in the case of Reliance Utilities and Power Ltd. reported in 313 ITR 340 wherein it was held as under:- "The principle therefore would be that if there are funds available both interest- free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments. In this case this presumption is established considering the finding of fact both by the CIT(A) and Tribunal". 23. Similarly, we also rely on the judgment of the Hon'ble Bombay High Court in the case of CIT vs. HDFC Bank Ltd reported in 366 ITR 505 (Bom). The relevant extract of the order is reproduced below:- "Where assessee's capital, profit reserves, surplus and current account deposits were higher than the investment in tax-free securities, it would have to be Page No 6 Kanchan Pharma Pvt. Ltd. vs. ACIT presumed that investment made by the Assessee would be out of the interest-free funds available with Assessee and no disallowance was warranted u/s 14A."

Similarly, we also find support from the judgment of Hon'ble Gujarat High Court in the case of UTI Bank Ltd. reported in 32 Taxmann.com 370 where the head note reads as under: If there are sufficient interest free funds to meet tax free investments, they are presumed to be made from interest free funds and not loaned funds and no disallowance can be made under section 14A ".

In view of the above proposition, we hold that no disallowance of interest expense claimed by the assessee can be made on account of investments as discussed above under the provision of section 14A r.w.r. 8D of Income Tax Rules. Hence, we reverse the order of the authorities below. The AO is directed to delete the addition made by him on account of the interest expenses. Respectfully following the decision of Co-ordinate Bench on similar facts and issue as cited above, we restricted the disallowance pertaining to administrative expenditure to the amount of Rs. 37,726/- and delete the disallowance pertaining to the interest component. Accordingly, this ground of appeal is partly allowed.

During the course of appellate proceedings before us, the ld. counsel has brought to our notice that this issue has been adjudicated by the Special Bench of the ITAT in the case ACIT vs. Vineet Investments 165 ITD 27 (Del) SB wherein it is held that disallowance u/s. 14A r.w. rule 8D cannot be subject matter of disallowance while computing book profit u/s. 115JB of the Act. The ld. Departmental Representative could not controvert this undisputed fact. Therefore, after following the decision of Special Bench in the above referred case of ACT vs. Vineet Investments supra, we are not inclined with the decision of ld. CIT(A). Therefore, this ground of appeal of the assessee is allowed.

During the course of appellate proceedings before us, the ld. counsel has agreed that this issue has been decided by the Hon’ble Jurisdictional High Court in the case of CIT vs. GSRTC Tax Appeal No. 637 of 2013 against the assessee. Therefore, we do not find any merit in this ground of appeal and the same is dismissed.

In the result, the appeal of the assessee is partly allowed.