THE DCIT.,CIRCLE-1(1)(1),, AHMEDABAD vs. AMJAY MEDI-MAX INDIA PVT.LTD.,, AHMEDABAD

PER Ms. MADHUMITA ROY - JM:

The instant appeal filed by the revenue is against the order dated 22.09.2017 passed by the Commissioner of Income Tax (Appeals)-1, Ahmedabad under section 143(3) of the Income Tax Act, 1961 (hereinafter referred as to “The Act”) arising out of the order dated 30.11.2016 passed by the DCIT, Circle-1(1)(1), Ahmedabad for the Assessment Year 2014-15 with the following grounds: 1. “That the ld CIT(A) has erred in law and on facts in deleting the disallowance of interest in respect of capital work in progress at Rs.4,51,679/-. 2. That the ld CIT(A) has erred in law and on facts in deleting disallowance of Rs.46,51,125/- made under section 14A r.w.r. 8D of the Act.

- 2 - ITA No.2695/Ahd/2017 DCIT vs. Amjay Medi-Max (India) Pvt. Ltd. Asst.Year – 2011-12 3. That the ld CIT(A) has erred in law and on facts in deleting the disallowance of Rs.28,27,071/- made on account of interest free loans under section 36(1)(iii) of the Act. 4. That the ld CIT(A) has erred in law and on facts in deleting in disallowance made on account of prior period expenses of Rs.44,100/-. 5. the appellant craves, to leave, to amend and/or to alter any ground or add a new ground which may be necessary.”

During the course of assessment proceeding it appears from the details given in Note-9 of the Balance Sheet that there is opening as well as closing balance of capital work-in-progress. The closing balance of capital work-in-progress (CWIP) was reported at Rs.64,86,242/- as on 01.04.2014 and the opening balance of CWIP was reported at Rs.63,78,809/-. It also appeared that the assessee took secured as well as unsecured loans during the year under consideration, details whereof are as follows: Balance of Long Term Borrowings as on 01.04.2014 – Rs.12,19,47,845/- Balance of Long Term Borrowings as on 31.03.2013 – Rs.14,86,53,456/- Balance of Short Term Borrowings as on 01.04.2013 – Rs. 1,23,01,345/- Balance of Short Term Borrowings as on 31.03.2014 – Rs. 1,40,40,340/-

On the above long term capital and secured and unsecured borrowings, the assessee made payment of interest and borrowing costs to the tune of Rs.1,04,25,363/-, during the year for which a notice dated 04.11.2016 was issued upon the assessee to justify as to why no interest was capitalized towards CWIP in view of the balance reflected in the Balance Sheet towards CWIP on the first and last day of the year. Further

- 3 - ITA No.2695/Ahd/2017 DCIT vs. Amjay Medi-Max (India) Pvt. Ltd. Asst.Year – 2011-12 that, the assessee was further asked to explain as to why interest u/s 36(1)(iii) of the Act should not be capitalized to the extent of the interest on borrowed fund utilized for CWIP. In reply whereof the assessee submitted that the expenditure incurred during the year under consideration on account of CWIP amounting to Rs.1,07,433/-, which was incurred during the year is relatable to assessee’s own funds i.e. internal realizations. The receipts as per the audited P&L account during the year amounted to Rs.13,23,72,169/-. Such receipts were more than sufficient for the accretion to the capital work-in-progress of Rs.1,07,433/-. It was further placed on record that no interest bearing borrowed funds was utilized for the purpose of CWIP by the assessee. The long term borrowings taken by the assessee had been utilized for the specific purpose for which such loan was taken. In that view of the matter, there is no question of making any disallowance with respect to the interest expenditure incurred on capital work-in-progress as replied by the assessee. However, the contention made by the assessee was not found acceptable and the Learned AO out of the total interest expenses debited in the P&L account a sum of Rs.4,51,679/- as calculated to be capitalized towards CWIP u/s 36(1)(iii) of the Act added to the total income of the assessee. In appeal, the Learned CIT(A) deleted the addition. Hence, the instant appeal before us.

- 4 - ITA No.2695/Ahd/2017 DCIT vs. Amjay Medi-Max (India) Pvt. Ltd. Asst.Year – 2011-12

We have also carefully considered the judgment passed by the Co-ordinate Bench in assessee’s own case in ITA No.289/Ahd/2017 for A.Y. 2012-13. The relevant portion whereof is reproduced hereinbelow:

- 5 - ITA No.2695/Ahd/2017 DCIT vs. Amjay Medi-Max (India) Pvt. Ltd. Asst.Year – 2011-12 “8. We have heard the rival contentions and perused the materials available on record. At the outset, we note that the own fund of the assessee exceeds the amount of capital work in progress. Therefore, a presumption can be drawn that there was no borrowed fund used in such capital work in progress. Accordingly, the question of utilization of borrowed fund in such capital work in progress does not arise. Accordingly, there cannot be any disallowance on account of interest expenses as made by the AO. In holding so, 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”. 8.1 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 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.” 8.2 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 headnote 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 impugned CWIP. Hence, we do not find any reason to interfere in the order of ld. CITA. Accordingly, the AO is directed to delete the addition made by him. Thus the ground of appeal of the Revenue is dismissed.”

Since it appears on record that the appellant has sufficient interest free funds to meet tax free investments, it can be well presumed that they are made from interest free funds and not loaned funds. Relying upon the judgment passed by the Co-ordinate Bench, we find no discrepancy/infirmity in the order passed by the authorities below in granting

- 6 - ITA No.2695/Ahd/2017 DCIT vs. Amjay Medi-Max (India) Pvt. Ltd. Asst.Year – 2011-12 relief to the assessee by deleting the addition towards disallowance of interest expense claimed by the assessee. Hence, this ground of appeal filed by the revenue is dismissed.

- 7 - ITA No.2695/Ahd/2017 DCIT vs. Amjay Medi-Max (India) Pvt. Ltd. Asst.Year – 2011-12 8. Heard the respective parties, perused the relevant materials available on record. It appears that Learned CIT(A) while granting relief to the assessee observed that during the year under consideration the share capital reserves and surplus which are in the form of interest free funds was of Rs.18,88,57,612/- in the earlier year it was Rs.17,83,15,238/- relying on the judgment of Gujarat High Court in the case of Hitachi Home & Life Solutions India Ltd. reported in 221 Taxman 109 passed by the Jurisdictional High Court. The Learned CIT(A) observed that no disallowance u/s 14A can be made when the assessee is having ample interest free funds. Reliance was also placed on the judgment passed by the Jurisdictional High Court in the case of CIT-vs-Corrtech Energy Pvt. Ltd. reported in 45 Taxmann.com 116 where on identical issue of disallowance u/s 14A when no dividend income is earned by the assessee was held as follows: “4. Counsel for the Revenue submitted that the Assessing Officer as well as CIT(Appeals) had applied formula of rule 8D of the Income Tax Rules, since this case arose after the assessment year 2009-2010. Since in the. present case, we are concerned with the assessment year 2009-2010, such formula was correctly applied by the Revenue. We however, notice that sub-section(1) of section 14A provides that for the purpose of computing total income under chapter IV of the Act, no deduction shall be allowed in respect of expenditure incurred by the assesses in relation to income which does not form part of the total income under the Act. In the present case, the tribunal has recorded the finding of fact that the assessee did not make any claim for exemption of any income from payment of tax. It was on this basis that the tribunal held that disallowance under section 14A of the Act could not be made. In the process tribunal relied on the decision of Division Bench of Punjab and Haryana High Court in case of CIT v Winsome Textile Industries Ltd. [2009] 319 ITR 204 in which also the Court had observed as under: "7. We do not find any merit in this submission. The judgement of this court in Abhishek Industries Ltd (2006) 286 ITR 1 was on the issue of allowability of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. The observations made therein have to be read in that context. In the present case, admittedly the assessee did not make any claim for exemption. In such a situation section 14A could have no application." 14. We do not find any question of law arising, Tax Appeal is therefore dismissed."

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We have also carefully considered the judgment passed in ITA No.289/Ahd/2017 where on the similar set of facts the Tribunal observed as follows: “14. We have heard the rival contentions and perused the materials available on record. It is an undisputed fact that there is no exempt income earned by the assessee in the year under consideration in respect of the investment in shares as discussed above. Once it is on record that there is no dividend income/exempted income then the question of making the disallowance under section 14A does not arise in view of the judgment of Hon’ble Gujarat High Court in the case of Corrtech Energy (P) Ltd reported in 372 ITR 97 wherein it was held as under: “4. Counsel for the Revenue submitted that the Assessing Officer as well as CIT(Appeals) had applied formula of rule 8D of the Income Tax Rules, since this case arose after the assessment year 2009-2010. Since in the present case, we are concerned with the assessment year 2009-2010, such formula was correctly applied by the Revenue. We however, notice that subsection(1) of section 14A provides that for the purpose of computing total income under chapter IV of the Act, no deduction shall be allowed in respect of expenditure incurred by the assessee in relation to income which does not form part of the total income under the Act. In the present case, the tribunal has recorded the finding of fact that the assessee did not make any claim for exemption of any income from payment of tax. It was on this basis that the tribunal held that disallowance under section 14A of the Act could not be made.” In view of the above judgment, there is no ambiguity that there cannot be any disallowance under section 14A of the Act as made by the AO. Accordingly, we do not find any reason to disturb the finding of the learned CIT (A). Thus the AO is directed to delete the addition made by him. Hence, the ground of appeal of the Revenue is dismissed.

In the absence of any change of circumstances, we do not find any reason to interfere with the order passed by the Learned CIT(A). We thus upheld the same. In the result, revenue’s this ground of appeal is dismissed.

- 9 - ITA No.2695/Ahd/2017 DCIT vs. Amjay Medi-Max (India) Pvt. Ltd. Asst.Year – 2011-12

- 10 - ITA No.2695/Ahd/2017 DCIT vs. Amjay Medi-Max (India) Pvt. Ltd. Asst.Year – 2011-12 of the Learned CIT(A) on the basis of the judgment passed by the Jurisdictional High Court in the case of CIT-vs-Raghuvir Synthetics Ltd. reported in (2013) 354 ITR 222 (Guj.) deleted such addition made by the Learned AO. It was further observed that the ratio laid down by the Hon’ble Gujarat High Court in the case of Gujarat Narmada Valley Fertilizers Co. Ltd. that if the company is having own funds far excess than advance to the sister concern and without establishing the nexus by the Assessing Officer the disallowance of interest u/s 36(1)(iii) is not justified. Interest free advances given for commercial expediency not to be disallowed held by the Hon’ble Supreme Court in the case of S.A. Builders Ltd.-vs-CIT reported in (2004) 269 ITR 535 (P&H) was also taken into consideration by the Learned CIT(A).

In light of the above discussion, the Court does not find any infirmity in the impugned order passed by the appellate authority so as to warrant interference. The question is accordingly answered in the affirmation i.e. in favour of the assessee and against the revenue. Consequently, this ground of appeal fails and is accordingly dismissed.

- 11 - ITA No.2695/Ahd/2017 DCIT vs. Amjay Medi-Max (India) Pvt. Ltd. Asst.Year – 2011-12 recorded in the books of accounts and the expenditure has been claimed. It was the case of the assessee that bills/invoices was received in the year not in the earlier year and accordingly the liability to make the payment crystallized only on receipt of such invoices/bills. The Learned CIT(A) deleted such addition made by the Assessing Officer. Hence the instant appeal before us.

We have also carefully considered the judgment passed in ITA No.289/Ahd/2017 wherein assessee’s own case on the similar set of facts the Tribunal observed as follows: “20. We have heard the rival contentions and perused the materials available on record. Regarding the prior period expenses claimed by the assessee we note that the genuineness of such expenses has not been doubted. Therefore, we can presume that the impugned prior period expenses were incurred in connection with the business of the assessee under section 37(1) of the Act. 20.1 The sole basis of the disallowances is that these expenses are pertaining to the period of earlier years. Therefore, the same was disallowed. However, we note that the assessee in the year under consideration and in the earlier years was paying the tax at the maximum marginal rate. As such there was no loss to the Revenue as the assessee was very much entitled to the deduction of such expenses in the earlier year. Thus merely the assessee omitted to claim the expenses in the earlier year cannot be a ground for the disallowance for the year under consideration. In this regard we find support and guidance from the judgment of Hon’ble Gujarat High Court in the case of Indian petrochemicals corporation Ltd (Supra) wherein it was held as under:

- 12 - ITA No.2695/Ahd/2017 DCIT vs. Amjay Medi-Max (India) Pvt. Ltd. Asst.Year – 2011-12

“2.3 Mr. Soparkar, learned Senior Counsel assisted by Mr. Amit K. Mathur and Mrs. Swati Soparkar, learned advocates for the assessee supported the impugned order and submitted that the issue involved in the present appeal is now squarely covered by a decision of the Apex Court in the case of CIT v. Excel Industries Ltd. [2013] 358 ITR 295/219 Taxman 379/38 taxmann.com 100 (SC).

2.4 The Apex Court in the case of Excel Industries Ltd. (supra) has held as under: "32. Thirdly, the real question concerning us is the year in which the assessee is required to pay tax. There is no dispute that in the subsequent accounting year, the assessee did make imports and did derive benefits under the advance licence and the duty entitlement pass book and paid tax thereon. Therefore, it is not as if the Revenue has been deprived of any tax. We are told that the rate of tax remained the same in the present assessment year as well as in the subsequent assessment year. Therefore, the dispute raised by the Revenue is entirely academic or at best may have a minor tax effect. There was, therefore, no need for the Revenue to continue with this litigation when it was quite clear that not only was it fruitless (on merits) but also that it may not have added anything much to the public coffers."

2.5 The Bombay High Court in the case of CIT v. Nagri Mills Co. Ltd.[1958] 33 ITR 681 has held as under:

"3. We have often wondered why the Income-tax authorities, in a matter such as this where the deduction is obviously a permissible deduction under the Income-tax Act, raise disputes as to the year in which the deduction should be allowed. The question as to the year in which a deduction is allowable may be material when the rate of tax chargeable on the assessee in two different years is different; but in the case of income of a company, tax is attracted at a uniform rate, and whether the deduction in respect of bonus was granted in the assessment year 1952-53 or in the assessment year corresponding to the accounting year 1952, that is in the assessment year 1953-54, should be a matter of no consequence to the Department; and one should have thought that the Department would not fritter away its energies in fighting matters of this kind. But, obviously, judging from the references that come up to us every now and then, the Department appears to delight in raising points of this character which do not affect the taxability of the assessee or the tax that the Department is likely to collect from him whether in one year or the other.

- 13 - ITA No.2695/Ahd/2017 DCIT vs. Amjay Medi-Max (India) Pvt. Ltd. Asst.Year – 2011-12

bonus and section 10(5). Now, in section 10(2)(x), what is allowable as a deduction is "any sum paid to an employee as bonus". By itself this contemplates actual payment; but section 10(5) defines the word "paid" which appears in subsection (2) as meaning "actually paid or incurred according to the method of accounting upon the basis of which the profits or gains are computed under this section". Therefore, an actual payment is not necessary for the purpose of this deduction; it is sufficient if the liability to bonus is incurred according to the method of accounting upon the basis of which the profits or gains are computed. Now, considering that the profits or gains are computed on the mercantile basis, the amount of bonus for the year 1951 would properly be treated under the mercantile system as an expense for the year 1951. It appears to us to be a matter of little consequence that in point of fact no entry was made in the account of that year making a provision for the bonus, because obviously such an entry could only be made after the conclusion of that year when the profits of that year were known, and, therefore, the liability for a bonus, and it could have been made at any time. The absence of an entry, therefore, does not appear to us to affect the question of whether the assessee was entitled to a deduction in respect of this amount of Rs. 1,80,000. The position appears to us to be made clearer when one turns to the prescribed form of return in Part IV whereof an assessee is to give particulars of income from a business, profession or vocation. The particulars consist, in the first instance, of profit or loss as per profit and loss account; then there are several items which have to be added to the figure of profits or deducted from the figure of loss; and then follow several items which are to be deducted from the profits or added to the figure of losses. Amongst the items which are to be deducted, the last item is "any other allowable expense which has not been charged in arriving at the above figure of profits". It is under this head that the assessee claimed Rs. 1,80,000 as the return in this case was made after the conciliation board had fixed the amount of bonus. Obviously, this amount of Rs. 1,80,000 is an allowable expense. Obviously, again, it has not been charged in arriving at the figure of profits according to the profit and loss account. Therefore, it was an amount that could legitimately be shown as a deduction under this part of the statutory form of return, and the assessee were, in our opinion, entitled to have this deduction or allowance. There is no dispute, and there can be none, as to the reasonableness of the quantum which might have been material if there had been no conciliation and an award in regard to the bonus. The only dispute relates to the year in which the amount should be allowed. In our opinion, the amount was rightly allowable in the assessment year 1952-53 and the Tribunal came to the correct conclusion."

- 14 - ITA No.2695/Ahd/2017 DCIT vs. Amjay Medi-Max (India) Pvt. Ltd. Asst.Year – 2011-12 3. In the above view of the matter, no elaborate reasons are required to be given as the controversy already stands concluded. It is amply clear that the only dispute is with regard to the year in which the amount should be allowed. We agree with the view adopted by the Tribunal and accordingly the question raised is answered in favour of assessee and against the revenue. Tax Appeal No. 1773 of 2008 is accordingly dismissed. In view of the above we do not find any reason to disturb the finding of ld. CIT-A. Hence the ground of appeal of the Revenue is dismissed.”

Finding no such change of circumstances in the case in hand before us, respectfully relying upon the judgment passed by the Co-ordinate Bench, we confirm the order passed by the first appellate authority. Hence, this ground of appeal preferred by the revenue is dismissed.

The 5th Ground of appeal is general in nature and not order need be passed. 15.

Sd/- Sd/- ( PRAMOD KUMAR ) ( Ms. MADHUMITA ROY ) VICE PRESIDENT JUDICIAL MEMBER

Ahmedabad; Dated 30/04/2019 Priti Yadav, Sr.PS

- 15 - ITA No.2695/Ahd/2017 DCIT vs. Amjay Medi-Max (India) Pvt. Ltd. Asst.Year – 2011-12

आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A)-1, Ahmedabad. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, अहमदाबाद / DR, ITAT, Ahmedabad 5. 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy// उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Ahmedabad 1. Date of dictation ……29.04.2019 (dictation pages 14) 2. Date on which the typed draft is placed before the Dictating Member 30.04.2019 3. Other Member………………… 4. Date on which the approved draft comes to the Sr.P.S./P.S …30.04.2019 5. Date on which the fair order is placed before the Dictating Member for pronouncement…… 6. Date on which the fair order comes back to the Sr.P.S./P.S……. 7. Date on which the file goes to the Bench Clerk………………… 8. Date on which the file goes to the Head Clerk…………………………………... 9. The date on which the file goes to the Assistant Registrar for signature on the order…………………….. 10. Date of Despatch of the Order……………………………………