Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, ‘’ D ’’ BENCH, AHMEDABAD
Before: SHRI WASEEM AHMED
PER BENCH :
This bunch of appeals by the assessee and the Revenue consisted of nine appeals. The assessee is in the appeal against respective orders of the ld.CIT(A) for the Asstt.Years 2006-07 to 2008-09 and 2010-11 to 2011-12; while Revenue is in cross-appeals for the Asstt.Years 2006-07, 2009-10 to 2011-12. The assessee has also filed cross objection bearing CO no. 1/Ahd/2014 in Revenue’s appeal bearing ITA No. 1656/Ahd/2013. Since issues are either inter-connected or common, for the sake of convenience, we dispose of all these appeals by this consolidated order.
First, we take ITA No. 1385/Ahd/2013 for A.Y 2006-2007. The assessee has raised the following grounds of appeal: “1. The order passed u/s. 143(3) r.w.s. 147 by the learned Asst. Commissioner of Income Tax, Anand Circle. Anand is bad in law.: (Refer Para 15.2, Page 19 of CIT(A)-IV order) The learned Commissioner of Income Tax (Appeals) has erred in holding that the reopening of assessment by AO is valid and legal.
The assessee in this appeal has challenged the validity of the assessment order framed under section 147 of the Act.
At the onset, the learned AR for the assessee has challenged the reopening of the assessment under section 147 of the Act on the ground that the proceedings were initiated under section 147 of the Act on the same set of
Page 2 of 25
ITA nos.1385/AHD/2013 and others Asstt. Years 2006-07 and others 3
documents which were available with the AO during the assessment proceedings under section 143(3) of the Act. Therefore the re-opening of the assessment under section 147 of the Act is nothing but based on the change of opinion which is not permissible under the provisions of law.
On the other hand, the learned DR vehemently supported the order of the authorities below.
We have heard the rival contentions and perused the materials available on record. From the preceding discussion, we note that the assessment was framed for the year under consideration under section 143(3) of the Act dated 30-12-2008. After that the assessment was reopened under section 147 of the Act on the following reasons: REASONS FOR ISSUE OF NOTICE U/S. 148 OF THE I.T. ACT, 1961 1. In this case, the assessment was finalized u/s. 143(3) on 30.12.2008 assessing the total income at Rs. 40,27,25,340/-. 2. On verification of case records, it was found that the assessee has issued “Foreign currency convertible bond (FCCB)” aggregating to 18 million US dollars in AY: 2006-07. In the first phase, 9000 FCCB were issued. For raising the fund through the FCCB, the assessee company had incurred expenditure of Rs. 1,51,82,301/- on account of payments made to consultants, lead managers, solicitors and trustees. This expenditure of Rs. 1,51,82,301/- was claimed as revenue expenditure and out of this, Rs. 16,86,922/- only was disallowed in the assessment stating that out of 9000 bonds only 1000 bonds were converted during this AY and therefore the disallowance was made on proportionate basis. (i.e. 1/9th of Rs. 1,51,82,301/- since 1000 bonds out of total 9000 bonds were converted). Instead of Rs. 16,86,922/-, the entire expenditure of Rs. 1,51,82,301/- should have been disallowed in the assessment treating the same as capital expenditure. Omission to do so, resulted in incorrect allowance of the expenditure to the extent of Rs. 1,34,95,397/- and thus underassessment of income to that extent accordingly. 3. The provisions of Section 145A of the Act mandate inclusive method of accounting for the purpose of the Act in respect of duty, cess and taxes payable by the assessee, even though the assessee might be following exclusive method of accounting. On verification of case records, it was
Page 3 of 25
ITA nos.1385/AHD/2013 and others Asstt. Years 2006-07 and others 4
further found that the assessee had followed mercantile system of accounting and debited P & L Account net of excise duty (exclusive method). During AY: 2006-07, there was unutilized credit balance of CENVAT credit to the extent of Rs. 61,73,5550/-, which was shown in the balance under the head “Loans and Advances” as asset. Since, the assessee has followed the exclusive method of account in respect of excise duty, the unutilized CENVAT credit should form part of P & L Account and exhibited in the receipt side of P & L Account. Omission to do so, resulted in underassessment income of Rs. 61,73,550/- and the underassessment of income to that extent accordingly. 4. In view of the above facts, I have reason to believe that the income of Rs. 1,96,68,929/- (Rs. 1,34,95,379/- + 61,73,550/-) has escaped assessment for A.Y. 2006-07 within the meaning of section 147 of the I.T. Act, 1961. I, therefore, issue notice u/s. 148 of the Act for A.Y. 2006-07 to the assessee after obtaining necessary approval of the higher authority.
4.1 Regarding the reason no. 1 for the reopening of the assessment as discussed above, we note that i. The AO duly considered the issue of the disallowance of FCCB expenses during the original assessment framed under section 143(3) of the Act vide order dated 30-12-2008. ii. The same issue was also dealt with by the learned CIT (A) in his order dated 19-10-2009 in the appeal bearing no. CAB/IV-A- 257/08-09. 4.2 The provisions of section 147 of the Act for the reopening of the assessment mandate that the AO must have reason to believe that any income chargeable to tax has escaped assessment. Such reason to believe must be based on some tangible materials which should come in possession of the AO from the external source and must have a live link to form the belief that the income of the assessee has escaped assessment.
4.3 However, in the case on hand, there was no such material available with the AO leading to form a belief that income has escaped assessment. As
Page 4 of 25
ITA nos.1385/AHD/2013 and others Asstt. Years 2006-07 and others 5
such the reason to believe was formed after verification of the case/assessment records which were available during the assessment proceedings. Thus in the absence of reason to believe based on external documentary evidence/ tangible material, the reopening under section 147 of the Act is not sustainable. In this regard, we find support and guidance from the judgment of Hon’ble Supreme Court in the case of CIT versus M/s Kelvinator of India Ltd. reported in 320 ITR 561 wherein it was held as under: “The Assessing Officer has no power to review; he has the power to reassess, but the reassessment has to be based on fulfilment of certain pre- conditions and if the concept of 'change of opinion' is removed as contended on behalf of the department, then in the garb of reopening the assessment, review would take place. One must treat the concept of 'change of opinion' as an in-built test to check abuse of power by the Assessing Officer. Hence, after 1-4-1989, the Assessing Officer has power to reopen, provided there is 'tangible material' to come to conclusion that there is escapement of income from assessment. Under the Direct Tax Laws (Amendment) Act, 1987, the Parliament not only deleted the words 'reason to believe' but also inserted the word 'opinion' in section 147. However, on receipt of representations from the companies against omission of the words 'reason to believe', the Parliament re-introduced the said expression and deleted the word 'opinion' on the ground that it would vest arbitrary powers in the Assessing Officer.”
4.4 We also note that the AO in the case on hand has formed his reason to believe that the income has escaped assessment based on the same material which was the subject matter of dispute under section 143(3) and 251 of the Act. As the learned CIT-A has already decided the issue of the disallowance of the expenses in connection with the FCCB vide order dated 19th October 2009. Thus in such circumstances, the proviso to section 147 of the Act requires not to assess or reassess escaped income which is the subject matter of any appeal. The relevant extract of the proviso to section 147 of the Act reads as under: 4[Income escaping assessment.
Page 5 of 25
ITA nos.1385/AHD/2013 and others Asstt. Years 2006-07 and others 6
5147. XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX XXXXXXXXXXXXXXX 10[Provided further that the Assessing Officer may assess or reassess such income, other than the income involving matters which are the subject matters of any appeal, reference or revision, which is chargeable to tax and has escaped assessment.]
4.5 There is no dispute that the issue of the disallowance of the expenses concerning FCCB was the subject matter of appeal before the learned CIT (A).
In view of the above, we hold that the reopening of the assessment under section 147 of the Act for a reason No. 1 as discussed above is not sustainable.
4.6 Regarding the reason no. 2 for the reopening of the assessment as discussed above, we note that it was initiated based on the same set of documents which were available during assessment proceedings under section 143(3) of the Act. Therefore the reopening of the assessment based on the same set of documents will amount to change of opinion which is not permissible under the provisions of law. As such, the provisions of law mandate to form the reason to believe in concluding that the income of the assessee has escaped assessment based on some tangible material. But on perusal of the reasons to believe as discussed above, we note that the AO has formed his reason to believe based on the verification of the case records. Thus we hold that the reopening under section 147 of the Act is not sustainable the light of the above-stated discussion. In holding so, we find support and guidance from the judgment of the Hon’ble Supreme Court in the case of M/s Kelvinator of India Limited (supra).
Page 6 of 25
ITA nos.1385/AHD/2013 and others Asstt. Years 2006-07 and others 7
In view of the above, we hold that the reopening in the given facts and circumstances is not sustainable. Therefore we quashed the assessment framed under section 147 of the Act. Hence the ground of appeal of the assessee is allowed.
In the result, the appeal of the assessee is allowed
Coming to ITA No. 1316/AHD/2013 an appeal by the Revenue
At the outset, we note that we have already quashed the assessment framed under section 147 of the Act vide paragraph number 4 of this order. As the assessment framed under section 147 of the Act has been held by us as invalid; therefore the appeal filed by the Revenue has no leg to stand. Therefore we dismiss the same as infructuous.
In the result, the appeal of the Revenue is dismissed
Now coming to ITA No. 2641/AHD/2010 for the AY 2007-08 an appeal by the assessee.
The assessee has raised the following grounds of appeal:
The learned Commissioner of Income Tax (Appeal)-IV has erred in confirming the disallowance of Rs. 1,02,65,533/- being expenses incurred on renovation of office building as expenditure of capital nature.
The learned Commissioner of Income Tax (Appeals) - IV has erred in confirming the disallowance of Rs. 4,09,29,379/- being payment made to clearing and forwarding agent without deduction of tax at source u/s. 40(a)(ia).
Page 7 of 25
ITA nos.1385/AHD/2013 and others Asstt. Years 2006-07 and others 8
The learned Commissioner of Income Tax (Appeal)-IV, has erred in confirming the disallowance in respect of difference of interest on loans and advances taken and given to overseas companies of the appellant. 4. The learned Commissioner of Income Tax (Appeal) -IV, has erred in confirming the disallowance of Rs. 25,22,4227- made under section 14A read with rule 8D.
The 1st issue raised by the assessee is that the learned CIT (A) erred in treating the expenses incurred on the renovation of an office building as capital in nature amounting to ₹ 1,02,65,533.00.
The assessee during the year has incurred expenses on the renovation of its office building amounting to Rs. 3,20,6000.00 which was claimed by the assessee as revenue in nature. The assessee further claimed that major repairs were carried out in the office building which was 2 decades old. The assessee inter-alia furnished the nature of the work and the details of the payments which is extracted as under: Name of the Party Particulars Amount (Rs.) Shakti Slides Work for providing and fixing 91,78,124/- structural glazing system and aluminum cladding system Aluk Bonk India Pvt. Supply of Aluminium Sheets 22,28,014/- Ltd.
6.1 However, the AO was dissatisfied with the contention of the assessee and held that the assessee out of such expenditure is enjoying the enduring benefit. Therefore the same was treated amounting to ₹ 1,14,06,148 as capital Page 8 of 25
ITA nos.1385/AHD/2013 and others Asstt. Years 2006-07 and others 9
in nature. Accordingly, the AO allowed the depreciation on such capital expenditure at the rate of 10% and disallowed the balance amount of ₹ 1,02,65,533.00 only which was added to the total income of the assessee.
The aggrieved assessee preferred an appeal to the learned CIT (A) who confirmed the order of the AO.
Being aggrieved by the order of the learned CIT-A, the assessee is in appeal before us.
The learned AR before us submitted that there was no asset came into existence out of such expenditure. Therefore the same cannot be treated as a capital expenditure. The learned AR left the issue at the discretion of the Bench.
On the other hand, the learned DR vehemently supported the order of the authorities below.
We have heard the rival contentions and perused the materials available on record. At the outset, we note that the learned AR for the assessee has not advanced any argument by pointing out any specific error/defect/infirmity in the order of the authorities below.
10.1 In addition to the above, we also note that the impugned issue relates to the assessment year 2007-08 and the assessee must have claimed the substantial deduction of the disputed expenditure by way of the depreciation until now. Therefore, we are of the view that the assessee shall not get any
Page 9 of 25
ITA nos.1385/AHD/2013 and others Asstt. Years 2006-07 and others 10
benefit even if we decide the issue in its favor. Thus the impugned issue becomes academic considering the facts and the circumstances of the case.
10.2 In view of the above, we do not find any reason to interfere in the finding of the learned CIT (A). Hence the ground of appeal of the assessee is dismissed.
The 2nd issue raised by the assessee is that learned CIT (A) erred in confirming the order of the AO by sustaining the disallowance of the expenses for ₹ 4,09,29,379.00 paid to the clearing and forwarding agent without the deduction of TDS under section 194C of the Act.
The assessee during the year has incurred the expenses which were paid to Express Transport Private Ltd ( for short ETPL) a custom house agent acting as clearing and forwarding agent on behalf of the assessee amounting to ₹ 4,09,29,379.00 and 49,66,809.00 only. As per the assessee the sum of Rs. 4,09,29,379.00 is representing the reimbursement of the expenses paid to ETPL on which no TDS was deducted and the balance amount of Rs. 49,66,809.00 represents the charges paid to ETPL after deducting the TDS. As such the assessee claimed that it is not liable to deduct the TDS on the payment made to ETPL on account of the reimbursement of the expenses. However, the AO disagreed with the contention of the assessee and held the assessee in default for not deducting the TDS under section 194C/40(a)(ai) of the Act. Accordingly, the AO disallowed the same and added to the total income of the assessee.
The aggrieved assessee preferred an appeal to the learned CIT (A) who has confirmed the order of the AO. Page 10 of 25
ITA nos.1385/AHD/2013 and others Asstt. Years 2006-07 and others 11
Being aggrieved by the order of the learned CIT (A) the assessee is in appeal before us. The learned AR before us submitted that in the identical facts and circumstances the ITAT in the own case of the assessee for the assessment year 2008-09 in ITA No. 2251/AHD/2013 vide order dated 17 September 2018 has decided the issue in the favor of the assessee.
On the other hand, the learned DR vehemently supported the order of the authorities below.
We have heard the rival contentions and perused the materials available on record. The facts of the case are not in dispute; therefore we are not inclined we the same for the sake of brevity. There is no dispute that in the identical facts and circumstances the ITAT in the own case of the assessee (supra) has decided the issue in favor of the assessee. The relevant extract of the order is reproduced as under:
“We have heard the rival contentions and perused the material on record carefully. The assessing officer had disallowed the payment made to clearing and forwarding agent as per provision of section 40(a)(ia) of the act on non-deduction of Tax at source. It is noticed taht the assessee has not deducted tax at source as the bills raised by the clearing and forwarding agent were in respect reimbursement of actual expenses incurred by them on behalf of the assessee. We observed taht these facts demonstrate that there was no element of income involved in such reimbursement transaction. During the course of appellate proceedings before us, the learned counsel has placed reliance on the decision of Co-ordinate Bench of the ITAT in the case of Prayas India Ltd. vs. Addl. CIT ITA No. 2674/Ahd/2011. He has also placed reliance on the decision of Hon’ble High Court in the case of Principal CIT-1 vs. Consumer Marketing Pvt. Ltd. Tax Appeal No. 646 of 2015 dated 21.09.2017. The relevant part of the decision of the Coordinate Bench in the case of Prayas India Ltd. vs. Addl. CIT ITA No. 2674/Ahd/2011 is reproduced as under:-
Page 11 of 25
ITA nos.1385/AHD/2013 and others Asstt. Years 2006-07 and others 12
“5. We have heard both the parties and gone through the case law. The sole issue in the present case is that of TDS deduction. The assessee paid gross amount of Rs. 16,56,989/- to M/s ETPI, its clearing and forwarding agent. It deducted TDS qua a sum of Rs. 5,23,855/-. The balance amount in question of Rs. 11,33,134/- was stated to be reimbursement. The CIT(A) adopts a different view in the impugned assessment to that in the proceeding assessment year for holding that no TDs is required to be deducted in case of reimbursements in question since there is no income element embedded therein. However, he holds that the assessee’s ship line bills etc. are to be subjected to TDS. We find this latter observation to be not correct. The assessee’s stand throughout has been that such shipping payments do not require TDS deduction as per the Boards Circular No. 723 dated 01-09-1995 excluding operation of the relevant tDS provisions. Both the lower authorities fail to rebut this contention on facts and alw. We accordingly hold that the CIT(A) erred in directing the Assessing Officer to consider assessee’s shipping line bills for the purpose of TDs deduction. The case file reveals that a Co-ordinate Bench of the tribunal in assessee’s own case for preceding assessment year in ITA 2825/Ahd/2010 decided on 29.04.2014 holds similar reimbursements made to be very payee as not covered by TDs provisions. The Revenue fails to point out any distinction on facts. We observe inthese circumstances that the Commissionr of Icome Tax(A)’s action in part is not liable to be upheld on both counts i.e. merits as well as judicial consistency. The assessee’s sole substantive ground succeeds.” The Hon’ble High Court in the case of Principal CIT-1 vs. Consumer Marketing Pvt. Ltd. Tax Appeal No. 646 of 2015 dated 21.09.2017 has held taht since the reimbursement bills were separately raised there was no requirement to deduct TDS and disallowance u/s. 40(a)(ia) of the act could not be made in respect of reimbursement bill which were separately raised as no TDS was required to be in respect thereof. Respectfully following the decision of the Coordinate Bench of the ITAT, we do not find any error in the decision of the Ld. CIT(A). Therefore, the appeal of the revenue is dismissed.”
15.1. The facts of the case on hand are identical to the facts of the case as discussed above, therefore respectfully following the same, we do not find any reason to uphold the order of the learned CIT-A. Hence we reverse the order of the learned CIT (A) and direct the AO delete the addition made by him. Hence the ground of appeal of the assessee is allowed.
Page 12 of 25
ITA nos.1385/AHD/2013 and others Asstt. Years 2006-07 and others 13
The 3rd issue raised by the assessee is that the learned CIT (A) erred in confirming the disallowance made by the AO for ₹14,94,555 on account of difference in the rate of interest.
The assessee paid interest on the money borrowed at the rate of 7.91% per annum whereas it was charging interest on the money advanced to associated concern in foreign countries at the rate of 6% per annum. The assessee claimed that the money was advanced to the associated concern for commercial expediency and therefore the rate of interest, i.e., 6% per annum is justifiable.
16.1 The assessee also claimed that money was advanced to the associated concern out of its own fund. Therefore there cannot be any disallowance of interest expenses.
16.2 However, the AO disagreed with the contention of the assessee by observing as under: “8.4 During A.Y. 2005-06, addition was also made on this account. The issue was examined by the CIT(A), who on this issue has held that the claim that advances to these parties is for reasons of commercial expediency is not substantiated and the AO was directed to recalculate interest on average rate of borrowing and to disallow the amount of interest above 6% on the borrowed funds to the extent of diverted fund. 8.5 Further, it is also pertinent to notethat the aforesaid overseas agents are paid commission by the assessee company for their services. Therefore, there cannot be any justification for advancing loans at a rate lesser than average rate of its borrowing. Therefore, on this account, interest of 7.91% - 6% = 1.91% of 7,82,48,945/- = 14,94,555/- is being disallowed.”
The aggrieved assessee preferred an appeal to the learned CIT (A) who confirmed the order of the AO.
Page 13 of 25
ITA nos.1385/AHD/2013 and others Asstt. Years 2006-07 and others 14
Being aggrieved by the order of the learned CIT (A), the assessee is in appeal before us.
The learned AR before us submitted that the money was advanced to the associated concern based on commercial expediency. The ld. AR in support of his contention filed a chart showing the business transactions with the associated concern.
18.1 The learned AR also submitted that its own funds of ₹ 187.90 crores exceed the loans and the advances given to the associated concern, i.e. 7.82 crores.
On the other hand, the learned DR submitted that the theory of the own fund exceeding the advances cannot be applied in the given facts and circumstances. It is because the amount of loan was advanced to the associated companies based in foreign countries. The learned DR vehemently supported the order of the authorities below.
We have heard the rival contentions and perused the materials available on record. The facts of the case are not in dispute. Therefore we are not inclined to repeat the same for the sake of brevity and the convenience.
20.1 It is an undisputed fact that owned fund of the assessee exceeds the amount of advances given to the associated enterprises. Indeed the assessee is charging the interest from the associate enterprises at the rate of 6% which is less than that the interest at which the assessee borrowed the money. But the own fund of the assessee exceeds the amount of the advances made by it, Page 14 of 25
ITA nos.1385/AHD/2013 and others Asstt. Years 2006-07 and others 15
therefore in our considered view, there cannot be any disallowance of the interest expenses on account of the interest charged at the low rate. In this regard, 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”.
20.2 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.”
20.3 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 fund advanced to the associated concern as discussed above.
Page 15 of 25
ITA nos.1385/AHD/2013 and others Asstt. Years 2006-07 and others 16
20.4 Besides the above we also note that the impugned transaction of advancing the money to the associated enterprises is the international transaction within the meaning of the provisions of section 92 of the Act. Therefore any disallowance of the expenses is to be made then; it can be made under the provisions of chapter X of the Act relating to transfer pricing. However, we note that the AO has not invoked the provisions of transfer pricing. Therefore in our considered view, there cannot be any disallowance on account of interest expenses due to the diversion of the fund. Hence the ground of appeal of the assessee is allowed.
The 4th issue raised by the assessee is that the learned CIT (A) erred in confirming the disallowance of Rs. 25,22,422.00 under the provisions of section 14A of the Act.
The assessee in the year under consideration has shown dividend income of ₹ 60.19 lakhs only. As per the assessee, there was no expenditure incurred by it in relation to such dividend income. Therefore there was no disallowance made under section 14A of the Act.
21.1 However the AO was not satisfied with the contention of the assessee and accordingly he invoked the provisions of section 14A read with rule 8D of Income Tax Rule. Thus the AO made the disallowances as under: Direct expenses NIL Interest expenses Rs. 21,64,265.00 Administrative expenses Rs. 3,58,157.00 Total 25,22,422.00 21.2 Thus the AO disallowed the above expenses and added to the total income of the assessee. Page 16 of 25
ITA nos.1385/AHD/2013 and others Asstt. Years 2006-07 and others 17
The aggrieved assessee preferred an appeal to the learned CIT (A) who has confirmed the order of the AO.
Being aggrieved by the order of the learned CIT (A), the assessee is in appeal before us.
The learned AR before us submitted that the rule 8D is not applicable for the year under consideration. Therefore there cannot be any disallowance of the expenses as per the provisions of rule 8D of Income Tax Rule.
23.1 The learned AR also submitted that its own funds of ₹ 187.90 crores exceed the investment made in the shares. Therefore there cannot be disallowance on account of the interest expenses.
On the other hand, the learned DR vehemently supported the order of the authorities below.
We have heard the rival contentions and perused the materials available on record. The facts of the case are not in dispute. Therefore, we are not inclined to repeat the same for the sake of brevity and convenience.
25.1 It is an undisputed fact that the rule 8D does not apply to the assessee for the year under consideration. Therefore there cannot be any disallowance of the expenses in pursuance to the provisions of rule 8D of Income Tax Rule. However, the provisions of section 14A of the Act requires to make the disallowance of the expenses incurred by the assessee in relation to the exempted income. Therefore we are of the view that the disallowances have Page 17 of 25
ITA nos.1385/AHD/2013 and others Asstt. Years 2006-07 and others 18
to be made concerning the exempted income of the assessee after having regard to the books of accounts of the assessee.
25.2 Regarding the disallowance of interest expenses we note that the own fund of the assessee exceeds the amount of the Investment made by it, therefore in our considered view there cannot be any disallowance of the interest expenses on account of the investment in the securities/ shares. In this regard, 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”. 25.3 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.” 25.4 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”.
Page 18 of 25
ITA nos.1385/AHD/2013 and others Asstt. Years 2006-07 and others 19
25.5 In view of the above proposition, we hold that no disallowance of interest expense claimed by the assessee can be made on account of the fund invested in the securities/shares as discussed above. Hence, we reverse the order of the ld. CIT-A and accordingly, the AO is directed to delete the addition made by him.
25.6 Regarding the disallowance of the administrative expenses, we find that though the Rule 8D of IT Rule is applicable w.e.f. 24.03.2008, however, Sec. 14A is applicable since the beginning of Income Tax Act, 1961. Therefore, the disallowance u/s 14A of the Act was very much applicable even for the A.Y. under consideration, i.e. 2007-08. However, several courts have decided to disallow the expense @ 1% of the total exempt income before the insertion of Rule 8D of the IT Rule w.e.f. 01.04.2008. In holding so, we rely on the order of Hon’ble Calcutta High Court in the case of CIT Vs. R.R. Sen & Brothers Pvt. Ltd. G.A. No. 3019 of 2012, ITAT No. 243 of 2012 wherein the issue was decided by observing as under: “The court:- The assessee did not show any expenditure incurred by him for the purpose of earning the money which is exempted under the income tax. The Tribunal has computed expenditure at 1 per cent of such dividend income which, according to them, is the thumb rule applied consistently. We find no reason to interfere.”
25.7 Taking a consistent view and relying on the decision of this Hon'ble Calcutta High Court in above-cited case of R. R. Sen & Brothers Pvt. Ltd.(supra) we find that there was no applicability of Rule 8D in the instant case as this Rule 8D came in force w.e.f. 24.03.2008. But the disallowance was very much warranted as per the provisions of section 14A of the Act. In view of the above, we direct the AO to restrict the disallowance of the expenses under section 14A of the Act to the extent of 1% of dividend income. Thus the ground raised by the assessee is partly allowed. Page 19 of 25
ITA nos.1385/AHD/2013 and others Asstt. Years 2006-07 and others 20
In the result, the appeal of the assessee is partly allowed.
Now coming to ITA No. 2253/AHD/2013 for the AY 2008-09 an appeal by the assessee.
The assessee has raised the following grounds of appeal:
The learned Commissioner of Income Tax (Appeal)-IV, has erred in confirming the disallowance in respect of difference of interest on loans and advances taken and given to overseas companies of the appellant.
The only issue raised by the assessee is that the learned CIT (A) erred in confirming the disallowance made by the AO for ₹ 14,62,558.00 on account of difference in the rate of interest.
At the outset, we note that we have already adjudicated the identical issue in the ground no. 3 of the ITA 2641/AHD/2010 in favor of the assessee vide paragraph no. 20 of this order. Respectfully following the same, we allow the ground of the appeal of the assessee.
In the result, the appeal of the assessee is allowed.
Now coming to ITA No. 1656/AHD/2013 for the AY 2009-10 an appeal by the Revenue
The Revenue has raised the following grounds of appeal:
“1. On the facts and in the circumstances of the case, the learned CIT(A) erred in deleting the disallowance of Rs. 2,75,86,377/- made u/s. 40(a)(ia) of Page 20 of 25
ITA nos.1385/AHD/2013 and others Asstt. Years 2006-07 and others 21
the Act, in respect of payments made for reimbursement of expenses to clearing house agents without appreciating the fact that TDS was not dedeucted on the above payments although the clearing and forwarding agents are subjected to deduction of tax at source u/s. 194C of the Act.
The appellant craves leave to add to, amend or alter the above grounds as may be deemed necessary. ”
The only issue raised by the Revenue is that learned CIT (A) erred in confirming the order of the AO by sustaining the disallowance of the expenses for ₹ 2,75,86,377.00 paid to the clearing and forwarding agent without the deduction of TDS under section 194C of the Act.
At the outset, we note that we have already adjudicated the identical issue in the ground no. 2 of the ITA 2641/AHD/2010 in favor of the assessee and against the revenue vide paragraph no. 15 of this order. Respectfully following the same, we dismiss the ground of appeal of the Revenue.
In the result, the appeal of the Revenue is dismissed.
Now coming to CO No. 01/AHD/2013 for the AY 2009-10 a CO filed by the assessee
The assessee has raised the following grounds in its CO:
The learned Commissioner of Income Tax (Appeal)-IV, has erred in confirming the disallowance in respect of difference of interest on loans and advances taken and given to overseas companies of the respondent (cross-objector).”
Page 21 of 25
ITA nos.1385/AHD/2013 and others Asstt. Years 2006-07 and others 22
The only issue raised by the assessee is that the learned CIT (A) erred in confirming the disallowance made by the AO for ₹ 31,04,675.00 on account of difference in the rate of interest.
At the outset, we note that we have already adjudicated the identical issue in the ground no. 3 of the ITA 2641/AHD/2010 in favor of the assessee vide paragraph no. 20 of this order. Respectfully following the same, we allow the ground raised the assessee in its CO.
In the result, the CO of the assessee is allowed.
Now coming to ITA No. 2067/AHD/2014 for the AY 2010-11 an appeal by the assessee
The assessee has raised the following grounds of appeal:
The learned Commissioner of Income Tax (Appeal)-IV, has erred in not delteing the disallowance in respect of interest on loans and advances given to overseas companies of the appellant.”
At the outset, we note that we have already adjudicated the identical issue in the ground no. 3 of the ITA 2641/AHD/2010 in favor of the assessee vide paragraph no. 20 of this order except for the minor change that the assessee did not charge any interest from the associated parties in the year under consideration. But in our considered view this change in the fact will not alter the principle on which we decided the issue. Therefore, respectfully following the same, we allow the ground of appeal of the assessee.
In the result, the appeal of the assessee is allowed.
Page 22 of 25
ITA nos.1385/AHD/2013 and others Asstt. Years 2006-07 and others 23
Now coming to ITA No. 3278/AHD/2014 for the AY 2011-12 an appeal by the assessee
The assessee has raised the following grounds of appeal:
The learned Commissioner of Income Tax (Appeal)-IV, has erred in not deleting the disallowance in respect of interest on loans and advnces given to overseas companies of the appellant.”
At the outset, we note that we have already adjudicated the identical issue in the ground no. 3 of the ITA 2641/AHD/2010 in favor of the assessee vide paragraph no. 20 of this order except for the minor change that the assessee did not charge any interest from the associated parties in the year under consideration. But in our considered view this change in the fact will not alter the principle on which we decided the issue. Therefore, respectfully following the same, we allow the ground of appeal of the assessee.
In the result, the appeal of the assessee is allowed.
Now coming to ITA No. 3221/AHD/2014 for the AY 2011-12 an appeal by the Revenue
After going through the grounds of appeal and the impugned orders of the Revenue authorities below, a query was raised by the Bench as to the applicability and maintainability of the appeal filed by the Revenue in view of recent CBDT Circular No. 3/2018 dated 11.7.2018 restricting the filling of the appeal by the Revenue where the tax effect is below Rs. 20 lakhs. In reply to it the ld. DR did not dispute the same and left the issue at the Tribunal with the pray to decided the same by law.
Page 23 of 25
ITA nos.1385/AHD/2013 and others Asstt. Years 2006-07 and others 24
We find that the appeal of the Revenue was presented on 12/02/2019. On 11/07/2018 the CBDT has issued Instructions bearing No. 3 of 2018 under file No. F.No. 279/Misc.142/2007-ITJ(Pt) prohibiting its subordinate authorities from the filing of the appeal to the Tribunal against the order of the ld. CIT(A) where the tax effect by virtue of the relief given by the ld. CIT(A) is less than Rs. 20 lakhs. The instructions have been made applicable with retrospective effect, meaning thereby, these instructions are applicable on pending appeals also. In the present case, “tax effect” on the total income assessed minus the tax that would have been chargeable had such total income been reduced by the amount of income in respect of the issue against which appeal is filed, is less than Rs.20 lakhs. Further, the case of the Revenue does not fall within the ambit of exceptions provided in the Circular. Thus, keeping in view the above CBDT circular and provisions of section 268A of the Income Tax Act, we are of the view that the present appeal of the Revenue deserves to be dismissed. It is accordingly dismissed.
32.1 However, it is observed that in the case on re-verification at the end of the AO it comes to the notice that the tax effect is more or Revenue’s case falls within the ambit of exceptions provided in the Circular, then the Department will be at liberty to approach the Tribunal for the recall of this order. Such an application should be filed within the period prescribed under the Act. In view of the above, the appeal of the Revenue is dismissed due to low tax effect.
In the result, the appeal of the Revenue is dismissed.
Page 24 of 25
ITA nos.1385/AHD/2013 and others Asstt. Years 2006-07 and others 25
In the combined results appeals of assessee bearing ITA nos.1385/Ahd/2013 for A.Y. 2006-07, No.2253/Ahd/2013 for A.Y 2008-09, C.O.No.1/Ahd/2014 for A.Y. 2009-10, No.2067/Ahd/2014 for A.Y. 2010-11, No.3278/Ahd/2014 for A.Y.2011-12 are allowed however, appeal bearing No.2641/Ahd/2010 for A.Y. 2007-08 is partly allowed and appeals of Revenue bearing Nos.1316/Ahd/2013 for A.Y 2006-07, No.1656/Ahd/2013 for A.Y 2009-10 and ITA No.3221/Ahd/2014 for A.Y. 2011-12 are dismissed.
Order pronounced in the Court on 25/04/2019 at Ahmedabad.
-Sd- -Sd- (Ms MADHUMITA ROY) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 25/04/2019 Manish
Page 25 of 25