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Income Tax Appellate Tribunal, DELHI B BENCH: NEW DELHI
Before: SHRI SATBEER SINGH GODARA & SHRI MANISH AGARWAL
The present appeals have been filed by the Revenue seeking to assail the First Appellate order dated 28.06.2019 & 21.01.2020 passed by Ld. Commissioner of Income Tax (A)-4, New Delhi [“Ld.CIT(A)”] in Appeal No.349/17-18/CIT(A)-4 and Appeal No.277/18-19/CIT(A)-4 passed u/s 250 of the Income Tax Act, 1961 [“the Act”] arising from the assessment order dated 26.12.2017 passed u/s 143(3) of the Act pertaining to assessment years 2015- 16 and 2016-17 respectively.
Brief facts of the case are that the assessee is a company engaged in the business of generation of electricity through wind energy and is operating as a renewable energy independent power producer. The return of income was e-filed on 29.09.2015 declaring total income of INR 1,21,16,410/-. The assessment was taken up for limited scrutiny and in terms of order dated Page | 1 1126/Del/2020 26.12.2017, the total income of the assessee was assessed at INR 3,25,561/- by making disallowance of INR 1,89,40,151/-, after invoking the provision of section 36(1)(iii) and further disallowance of INR 15 Lakhs was made under Section 37(1) of the Act.
Against such order, the assessee preferred appeal before the Ld.CIT(A) who allowed the appeal of the assessee. Thus, the Revenue is in appeal before the Tribunal.
[Assessment Years : 2015-16] 4. The Revenue has taken following grounds of appeal:- 1. “Whether the CIT(A) was correct on facts and circumstances in deleting the disallowance of interest expenses u/s 36(1)(iii) of the Act that have direct nexus established to the investment.
2. Whether the CIT(A) was correct on the facts and circumstances in deleting the disallowance of interest expense u/s 36(1)(iii) of the Act that was disallowed in the proportionate basis.
3. Whether on the facts and circumstance of the case, the Ld CIT(A) was correct in deleting the expenses disallowed u/s 37 of the Act.
4. The appellant craves leave to add, amend, vary, omit or substitute any of the aforesaid grounds of appeal at any time before or at the time of hearing of appeal.”
5. All the grounds by the Revenue are in relation to the deletion of disallowance under section 36(1)(iii) of the Act. The AO has made the disallowance by observing that the assessee has made “non current investment” in its subsidiary and it is having borrowed funds on which interest was paid. Therefore, the AO asked the assessee as to why interest expenses incurred on such “non-current investment” should not be disallowed under s. 36(1)(iii) of the Act. In reply, it was submitted by the assessee that Page | 2 1126/Del/2020 the funds were borrowed for the purpose of business and the investment was made in the group concern which was made out of the interest free funds available with the assessee in the shape of equity capital and reserves. Thereafter, the AO computed the amount of disallowance in terms of the formula provided in Rule 8D(2)(iii) of the Income Tax Rules, 1962 and computed the amount of disallowance under section 36(1)(iii) of INR 1,89,40,151/-. The AO also disallowed half percent of the average value of investment which comes to INR 15 Lakhs under section 37(1) of the Act.
6. Both the disallowances were deleted by the Ld.CIT(A) by placing reliance on the judgement of Hon’ble Supreme Court in the case of S.A. Builders Ltd. vs CIT(A) 288 ITR 1 (SC) and further by observing that the assessee is having interest free funds to make such investments. With regard to the disallowance of INR 15 Lakhs, the Ld. CIT(A) observed that the same was worked out by wrongly invoked Rule 8D with section 37 of the Act.
7. Before us, the Ld. Sr. DR for the Revenue supported the order of the AO and submitted that the assessee has made investment where he is earning exempted income however, at the same time, the interest was paid on the borrowed funds. The Ld.CIT(A) while deleting the disallowances has failed to appreciate the fact that the assessee has made investment of INR 60 crores in the year under appeal and therefore, the disallowance made deserves to be restored.
8. Per contra, the Ld.AR vehemently supported the order of the Ld.CIT(A) and submitted that the assessee had installed 45 MW of wind power plant and for this purpose had obtained finances of INR 252.96 crores. Such loans has direct nexus with the investment in plant and machinery for wind power plant Page | 3 1126/Del/2020 installed and has no relationship/nexus with the investment made in non- convertible and non-participating redeemable preference shares in group concerns. He further submits that disallowance under section 36(1)(iii) could not be made as the interest was paid wholly and exclusively for the purpose of business under commercial expediency and for this, he placed reliance on the judgement of Hon’ble Supreme Court in the case of S.A. Builders (supra) and Hero Cycle (P) Ltd. vs CIT (Central) [2015] 379 ITR 347 (SC). It is also submitted by the assessee that the assessee is having interest free funds at the opening day of previous year totaling to INR 85.13 crores comprising of equity share capital of INR 73.30 crores and reserves of surplus INR 11.38 crores. He further submits that the assessee is having sufficient cash flow thus, the investment of INR 60 crores made during the year in non-convertible, non- participating preference was not made out of the borrowed funds and therefore, no disallowance could be made under s. 36(1)(iii) of the Act. For this, he placed reliance on the following judicial precedents:- 1. Munjal Sales Corporation Ltd. 298 ITR (SC) 2. C.I.T vs Reliance Utilities andPower Ltd. (2009) 313 ITR 340 (Bom.) 3. C.I.T vsGujarat Reclaim Ltd. Vs. CIT 383 ITR 236 (Bom.) High Court 4. Amod stamping Vs. CIT 223 Taxmann 256 (Guj.) (HC) 5. ITO Ward v/s First American Securities Pvt Ltd [ITA No 4768/Del/2012] dated11/01/2016 (Delhi ITAT) 6. CIT Vs. DD Industries (2015) 57 taxmann.com 310 9. It is further submitted that from the perusal of the assessment order, it appears that the disallowance has been made by invoking the provision of section 14A of the Act though no specific finding is given. However, the AO has 1126/Del/2020 worked out the amount of disallowance under section 36(1)(iii) of the Act as well as section 37(1) of the Act by taking recourse of Rule 8D(2) of the Rules which is evident from the table given at page 9 & 10 of the assessment order. The Ld.AR for the assessee submits that even otherwise in the instant case, provision of section 14A are not applicable as the assessee has no exempt income. In this regard, he placed reliance on the judgment of Hon’ble Supreme Court in the case of CIT, Mumbai vs M/s. Walfort Share & Stock Brokers P.Ltd. [2010] 326 ITR 1 (SC) & the Hon’ble Jurisdictional Delhi High Court in the case of Cheminvest Limited vs Commissioner Of Income Tax 317 ITR 86 (Del). He therefore, prayed that the order of the Ld.CIT(A) in deleting the disallowances made under section 36(1)(iii) and section 37(1) deserves to be uphold.
We have heard the rival submissions and perused the material available on record. In the instant case, it is seen that though the AO has made disallowance under section 36(1)(iii) of interest and under section 37(1) towards the management fee for making such investment however, both the disallowances were computed in terms of Rule 8D of the Income Tax Rules, 1962. The provisions of Rule 8D(2) could only be invoked if the AO is satisfied that the assessee has incurred certain expenses to earn exempt income. It is an accepted position that in the instant case, no exempt income is earned by the assessee company thus, the action of the AO in computing the amount of disallowances u/s 36(1)(iii) of the Act in terms of the formula provided in Rule 8D(2) of the Rules is patently wrong.
It is also seen that for making disallowance under section 36(1)(iii) nexus has to establish between the borrowed funds and investment made. In the Page | 5 1126/Del/2020 instant case, the assessee has installed wind power plant with the funds borrowed from various financial institutions which had provided the finances in terms of the agreements according to which re-payment must be as per the repayment schedule provided under the agreement and the assessee has no right to make additional payments. Further when the assessee is having interest free funds and also cash reserves which were utilized for making investment in the group companies therefore, provisions of section 36(1)(iii) cannot be invoked. The Ld.CIT(A) after appreciating this fact deleted the disallowances by observing in para 6.2 of the order which is as under:- 6.2 Examination of the issue and decision:- 6.2.1 “By way of background, the appellant company during the year under consideration has taken a loan facility on which interest was paid and expense was claimed u/s 36(1)(iii) of the Act. Such loan amount was invested by the appellant company in the preference share capital of the subsidiary company M/s Green Infra Corporate Solar Ltd. which is engaged in the similar line of business. The said investment was reflected as non-current investment in the books of accounts. 6.2.2 AO held that the loan funds were used for making investment in preference shares as non-current investment, hence the interest expense paid on the loan used for making such investment is not an allowable expense in terms of the provisions of section 36(1)(iii) of the Act and the expense of interest is not incurred for the purpose of business. However, it is interesting to note as to how the AO made the disallowance. The AO made the disallowance u/s 36 & 37 of the Act but computed the value of disallowance using the methodology provided in Rule 8D of the IT Rules. It is worth to note that Rule 8D is associated with section 14A, thus applying the same to compute disallowance u/s 36(1) (iii) & 37 is totally inconceivable, unjustified Page | 6 1126/Del/2020 and bad in law. For the sake of argument, if it is presumed that an addition was attracted, if otherwise sustainable in the eyes of law, the same could be only made with regard to direct expenses (interest expense in this case) which is directly relatable to be incurred not for the business purpose. 6.2.3 Coming to merits of the case, the appellant's emphatic submission supported by judicial pronouncements can be summarized as follows:- a) The appellant company has borrowed finds for business as it has invested in a fellow subsidiary of the associated company conducting similar business and therefore interest is allowable as business expenditure. b) Since the appellant company has sufficient interest free fund, the presumption would be that investment is from interest free part of its composite kitty. 6.2.4 It was further argued that AO has erred by mixing up Section 36(1)(ii) and Rule 8D(2)(ii) while disallowing interest expenses. 6.2.5 I have considered AO's view point and appellant's detailed submission. The appellant has relied on many judgments with similar facts, wherein the Hon'ble courts held that where the money has been advanced or invested into fellow subsidiary, the same is for business purpose and disallowance of interest on such loan or investment cannot be made. Reliance by the appellant is placed on the decision of the Hon'ble Supreme Court in the case of S.A. Builders Ltd. vs. CIT (A) [2007] 288 ITR 1 and many others. Further, appellant's submission that it has sufficient interest free funds to make the said investment and therefore presumption that investment were from interest free portion of its total fund is supported by financials of the company and a number of case laws relied upon by the appellant. In view of that facts of this case and the decisions relied upon by the appellant, I am of the view that the 1126/Del/2020 addition made by the AO on account of disallowance of interest amounting to Rs.1,89,40,151/- is unjustified as the same is allowable business expenditure. 6.2.6 Similarly, as regards disallowance of Rs.15,00,000/- u/s 37(1), as discussed above, the same has been wrongly worked out by applying formula given in Rule 8D(2)(iii) thus by mixing up Rule 8D and Section 37 of the Act. Disallowance u/s 37(1) of the Act cannot be made on presumption that making and maintaining investment entails certain expenditure. Otherwise also, no disallowance is called for in this case even u/s 14A in view of a number of judicial decisions, as neither any dividend income was earned nor the investment was even capable of earning dividend income in future as explained by the appellant company in its submission. 6.2.7 Hence, the addition of Rs.2,04,40,151/- which consists of Rs.1,89,40,151/-on account of disallowance of interest and Rs.15,00,000/- on account of passive expenditure for making or maintaining of investment made by the AO u/s 36(1)(iii) and u/s 37(1) of the Act respectively is bad in law and is therefore deleted. The grounds of appeal
(2 to 5) are allowed.”
12. In view of the fact that interest was incurred wholly and exclusively for the purpose of business and the Ld.Sr.DR has failed to controvert the findings given by the Ld.CIT(A). Thus, we find that no infirmity in the order of the Ld.CIT(A) in deleting the disallowance made under section 36(1)(iii) and 37(1) which observations of Ld.CIT(A) are supported by various judgement by Hon’ble Supreme Court and Hon’ble Jurisdictional High Court. Thus, the order of Ld.CIT(A) is hereby upheld. Grounds raised by the Revenue are accordingly, dismissed.
13. In the result, the appeal of the Revenue is dismissed.
[Assessment Year : 2016-17] 14. The Revenue appeal for AY 2016-17 in is having common issues as were in appeal of the Revenue in AY 2015-16 where under identical facts and circumstances, disallowances under section 37(1) & 36(1)(iii) of the Act made which stood deleted by the Ld.CIT(A).
Since both the parties have agreed that the facts are identical thus, by following the observations made in 2015-16] which are mutatis mutandis apply to the present case, the appeal of the Revenue is dismissed.