DCIT 10(1), MUMBAI vs. APL LOGISTICS (INDIA) P. LTD, MUMBAI

In respect of second issue relating to disallowance under section 14A r.w.r 8D, the ld. Counsel submitted that during the relevant period no exempt income was earned by the assessee, hence, no disallowance is required to be made. To support of her contentions, the ld. Counsel placed reliance on following decisions: (1) CIT Vs. Delight Enterprises decided by Hon’ble Bombay High Court in on 26.01.2019 (2) ACIT Vs. Vireet Investments Pvt. Ltd. 82 taxmann.com 415 (Delhi – Trib.) (SB).

Per contra, Sh. Mehul Jain representing the Department vehemently defended the impugned order. The ld. DR submitted that it is not the case that the investment made by assessee in IILPL would benefit the assessee-company alone. The investment made by the assessee in IILPL would also benefit business of other group companies. The interest expenditure has been claimed by the assessee-company only, whereas, the benefit would be reaped by other group entities. The ld. DR further pointed that in the subsequent AYs, the assessee has suffered losses, the main reason for loss is the huge interest payment. The ld. DR further submitted that the main object of the assessee is not to make investments in subsidiary company. Hence, the plea raised by ld. Counsel of the assessee that the investment has been made in accordance with Memorandum of Association is not tenable.

We have heard the submissions made by rival sides and have examined the orders of authorities below. The assessee in appeal has raised primarily two grounds with sub-grounds. These exhaustive grounds of appeal deal with only two issues i.e. M 10, 6471 M 13, 6482 M 13, 6480 M 13, 6473 M 13 & 2917 M 15- APL Logistics (India) Pvt. Ltd. (1) Disallowance of interest expenditure under section 36(1)(iii)/under section 37(1) of the Act; and (2) Disallowance of interest under section 14A r.w.r 8D.

Disallowance under section 36(1)(iii): The facts relating to the assessee’s nature of business and activities carried on by the assessee are not in dispute. The assessee has made investment in shares of its subsidiary i.e. IILPL. The said company is a joint venture of assessee and Hindustan Infra Projects and Engineering Pvt. Ltd. The assessee is having majority shareholding of 76% in IILPL. The balance shareholding of 24% in IILPL is held by Hindustan Infra. The assessee borrowed Rs.63 crores from Standard Chartered Investments and Loans for acquiring shares of IILPL. During the period relevant to AY under appeal the assessee paid interest of Rs.93,76,644/- on the aforesaid borrowings. The assessee claimed interest expenditure under section 36(1)(iii) of the Act. The same was disallowed by the authorities below for the following reasons: (i) The investments in shares of subsidiary is not for profit or return. The only benefit assessee would derive is dividend income. Hence, expenditures is capital in nature; (ii) The assessee has made investment in shares of subsidiary engaged in rail transportation, a new line of activity for the assessee; (iii) The interest on borrowed capital is utilized for reducing taxable income of the assessee. The capital of subsidiary is increased with interest free contribution, not taxable in the hands of subsidiary; and (iv) The assessee has not lent money to subsidiary for furthering its business interest but has made investment in shares of subsidiary, therefore, interest expenditure is not allowable to the assessee being capital in nature. M 10, 6471 M 13, 6482 M 13, 6480 M 13, 6473 M 13 & 2917 M 15- APL Logistics (India) Pvt. Ltd.

After examining facts of the case and the reasons given by the AO and upheld by the CIT(A) for rejecting assessee’s claim under section 36(1)(iii) of the Act, we do not concur with the findings of the authorities below. The assessee is engaged in transportation of Cargo and Warehouse Management, IILPL is essentially engaged in rail transportation and handling of cargo. Thus, both the assessee and its subsidiary are engaged in the primary business of logistics and cargo handling. Making investment in a subsidiary having same line of activity is a business decision having genesis in augmentation of resources, strategic investment, synergy of business and various other factors. The AO cannot saddle himself in the seat of assessee to decide whether the investments should be made in shares of subsidiary to acquire controlling interest or the amount should be advanced as loan to the subsidiary.

The Hon’ble Supreme Court of India in the case of S.A. Builders (supra) has held that the expression commercial expediency is one of wide import and includes such expenditure as a prudent businessmen would incur for the purpose of business. The expenditure may not have been incurred out of any legal obligation, but yet it is allowable as business expenditure, if it was incurred on grounds of commission expediency. The relevant extract of the observations made by the Hon’ble Apex Court are reproduced herein-below for ready reference: “We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (B.) Ltd. [2002] 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profit. 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 M 10, 6471 M 13, 6482 M 13, 6480 M 13, 6473 M 13 & 2917 M 15- APL Logistics (India) Pvt. Ltd. but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits.”

The Hon’ble Apex Court in the case of Dy. CIT Vs. Core Healthcare Ltd. (supra) has held that it does not matter whether the capital is borrowed for revenue expenditure or to acquire a capital asset. The requirement of section 36(1)(iii) is that the borrowings should be for the purpose of business. The Hon’ble Apex Court, thus held: “13. In our view the above observations have to be confined to the facts in the case of Challapalli Sugars Ltd. (supra). It was a case where the company had not yet started production when it borrowed the amount in question. The more appropriate decision applicable to the present case would be the judgment of this court in the case of India Cements Ltd. v. Commissioner of Income-tax, Madras (1966) 60 ITR 52 in which it has been observed that, for considering whether payment of interest on borrowing is revenue expenditure or not, the purpose for which the borrowing is made is irrelevant. In our view, Section 36(1)(iii) of the 1961 Act has to be read on its own terms. It is a Code by itself. Section 36(1)(iii) is attracted when the assessee borrows the capital for the purpose of his business. It does not matter whether the capital is borrowed in order to acquire a revenue asset or a capital asset, because of that the section requires is that the assessee must borrow the capital for the purpose of his business. This dichotomy between the borrowing of a loan and actual application thereof in the purchase of a capital asset, seems to proceed on the basis that a mere transaction of borrowing does not, by itself bring any new asset of enduring nature into existence, and that it is the transaction of investment of the borrowed capital in the purchase of a new asset which brings that asset into existence. The transaction of borrowing is not the same as the transaction of investment. If this dichotomy is kept in mind it becomes clear that the transaction of borrowing attracts the provisions of Section 36(1)(iii). Thus, the decision of the Bombay High Court in Calico Dyeing & Printing Works (supra) and the judgment of the Supreme Court India Cements Ltd. (supra) have been given with reference to the borrowings made for the purposes of a running business, while the decision of the Supreme Court in Challapalli Sugars Ltd. (supra) was given with reference to the borrowings which could not be treated as made for the purposes of business as no business had commenced in that case. Therefore, there is no inconsistency between the above decisions.”

Thus, in facts of the case and decisions discussed above, we are of considered view that the interest expenditure claimed by the assessee under M 10, 6471 M 13, 6482 M 13, 6480 M 13, 6473 M 13 & 2917 M 15- APL Logistics (India) Pvt. Ltd. section 36(1)(iii) deserves to be allowed. The assessee has been able to demonstrate that the funds were borrowed by the assessee for acquiring shares of subsidiary company for having controlling interest in subsidiary and the subsidiary of the assesee-company is in same line of business, though operating in different segments. In so far as the objection raised by the Revenue that the Object Clause of the assessee does not permit in acquiring shares, the same is unfounded. The ld. Counsel for the assessee has drawn our attention to the Memorandum and Article of the company. As per Clause 13 of the Memorandum of Association, the assessee company can make investments in companies having objects similar or partly similar to those of the assessee-company. Hence, the objection raised by the Revenue is without any merit.

In the result, the assessee succeeds on issue no.1, the AO is directed to allow interest expenditure claimed under section 36(1)(iii) of the Act. Since, we have accepted primary ground with respect to allow ability of interest expenditure u/s.36(1)(iii) of the Act, the alternate prayer to allow interest expenditure u/s 37 of the Act has become academic, hence, left open. The ground no.1.1 and 1.2 of the appeal are allowed pro tanto.

Disallowance under section 14A r.w.r 8D: The contention of the assessee is that no exempt income has been earned by the assessee during the period relevant to AY under appeal. Hence, no disallowance under section 14A r.w.r 8D is warranted.

Per contra, The ld. DR vehemently supported the findings of the CIT(A) in computing disallowance under section 14A r.w.r 8D.

Both sides heard. A perusal of the assessment order reveals that the AO had not made any disallowance under section 14A of the Act. The CIT(A) in M 10, 6471 M 13, 6482 M 13, 6480 M 13, 6473 M 13 & 2917 M 15- APL Logistics (India) Pvt. Ltd. appellate proceedings has raised the issue of disallowance under section 14A r.w.r 8D in respect of interest expenditure incurred by the assessee on borrowings utilized towards making investment in equity shares of a subsidiary company. The short contention of the ld. Counsel for the assessee is that since no exempt income was earned during the year, hence, no disallowance under section 14A r.w.r 8D could be made. It is no more res integra that where no exempt income has been earned during the relevant AY, no disallowance under section 14A r.w.r 8D can be made.

The assessee in ground no. 1.9 of appeal has assailed initiation of penalty proceedings u/s 271(1)(c) of the Act. Challenge to penalty proceedings at this stage is premature, hence, grounds No. 1.9 of appeal is dismissed.

The assessee has raised ground no.2 of appeal with sub-grounds 2.1 to 2.9. We find that the said grounds are either repetitive grounds or are grounds in support of the grounds referred in ground no.1 including sub-grounds 1.1 to 1.9. We have already adjudicated these grounds therefore, the ground no.2 does not require separate adjudication.

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

The ld. Counsel for the assessee submitted at the outset that the Department’s appeal is liable to be dismissed on account of Low Tax Effect in the light of CBDT Circular No. 17/2019 dated 08.08.2019.

Sh. Mehul Jain-Sr.DR fairly admitted that the tax effect involved in the appeal by Revenue is less than Rs. 50,00,000/-.

Both sides heard. In view of the fact that the tax effect involved in the appeal by the Revenue is less than the threshold limit of Rs. 50,00,000/- as specified by the Board vide Circular No. 17/2019 (supra) for filing of appeals before the Tribunal, this appeal of the Revenue is liable to be dismissed on account of low tax effect. Hence, the appeal of the Revenue is dismissed.

The assessee in appeal has assailed the order of CIT(A) on three counts i.e.: (1) Mismatch in AIR Information; (2) Disallowance u/s. 36(1)(iii) of interest expenditure on borrowed funds for acquiring the shares of IILPL; and (3) Disallowance under section 14A r.w.r 8D.

The ld. Counsel for the assessee stated at the outset that the issue No. 2 & 3 are identical to the one raised in the appeal for AY 2006-07. The facts germane to the issue of disallowance of interest under section 36(1)(iii) and disallowance under section 14A r.w.r 8D are identical to the facts in AY 2006-07. Therefore, the arguments raised on this issues while addressing the appeal for AY 2006-07 would hold good for the present appeal as well.

The ld. DR endorsed that in so far as issue no. 2 & 3 raised in the present appeal relating to disallowance of interest expenditure under section 36(1)(iii) and disallowance under section 14A r.w.r 8D, they are identical to the one raised in appeal by the assessee for AY 2006-07. As regards the issue of mismatch in AIR Information, the ld. DR vehemently supported the findings of CIT(A).

Both sides heard, order of the authorities below examined. During the course of First Appellate Proceedings, the assessee was able to reconcile substantial transaction out of un-reconciled amount of Rs. 3,56,07,345/-and only the transactions amounting to Rs. 29,70,991/- could not be reconciled. Since, the assessee was able to reconcile substantial transactions and only a meagre part of the transaction remained un-reconciled, we are of considered view that no suspicion can be raised for disallowing the said amount as substantial transactions were found to be genuine and were accepted by the Revenue. We find no reason to disallow un-reconciled amount merely on the basis of suspicion. It is further observed that the AO during assessment proceedings has made no efforts to investigate and issue notices under section 133(6) to find the genuineness of the transactions. Taking into consideration entirety of facts and decisions relied on by the ld. Counsel for the assessee, the addition made on account of mismatch in AIR Information is directed to be deleted.

Insofar as grounds raised challenging disallowance of interest under section 36(1)(iii) and disallowance under section 14A r.w.r 8D, both sides are unanimous in stating that the facts in respect of both the above disallowances M 10, 6471 M 13, 6482 M 13, 6480 M 13, 6473 M 13 & 2917 M 15- APL Logistics (India) Pvt. Ltd. are identical to the facts in AY 2006-07. The disallowances have been made for identical reasons in the impugned AY as well.

Considering the statement made by ld. representatives of rival sides, the findings given on both the issues in AY 2006-07 would mutatis mutandis apply to the AY 2007-08 as well. The disallowance made under section 36(1)(iii) of the Act and disallowance made under section 14A r.w.r 8D are deleted for parity of reasons.

In the result, appeal of the Revenue is dismissed and the appeal of assessee is allowed.

The ld. Counsel for the assessee pointed that the appeal of the Revenue is liable to be dismissed on account of Low Tax Effect in the light of CBDT Circular No. 17/2019 (supra).

The ld. DR fairly admitted that the tax effect involved in the appeal by the Revenue is below Rs. 50,00,000/-.

In view of the statements made by ld. counsel for the assessee which has not been rebutted by the ld. DR, the appeal of the Revenue is dismissed on account of low tax effect in the light of CBDT Circular No. 17/2019 (supra).

The ld. Counsel for the assessee submitted that the assessee in appeal has assailed the order of CIT(A) primarily on three counts i.e. (1) Addition made on account of mismatch in AIR Information (2) Disallowance of interest expenditure under section 36(1)(iii); and (3) Disallowance under section 14A r.w.r 8D. M 10, 6471 M 13, 6482 M 13, 6480 M 13, 6473 M 13 & 2917 M 15- APL Logistics (India) Pvt. Ltd. The ld. Counsel submitted that the issue raised in the present appeal are identical to the issues adjudicated by the Tribunal in assessee’s appeal for AY 2006-07 & 2007-08. The ld. Counsel pointed that the submissions made while addressing the issue in AY 2006-07 & 2007-08 would equally apply to the AY 2008-09. The ld. Counsel submitted that in impugned AY, the AO made addition of Rs. 4,60,88,497/- on account of alleged difference in the AIR Information and the books of account of the assessee. During first appellate stage, the assessee was able to reconcile substantial transactions and the difference was reduced to Rs. 1,49,13,221/- and the same has been confirmed by the CIT(A).

We have heard the submissions made by rival sides. The first issue in the present appeal is in respect of the addition made on account of mismatch as per information received in AIR and the books of assessee. The AO had made addition of Rs. 4,60,88,497/- on account of difference in AIR information and the books of assessee, during First Appellate Proceedings, the assessee was able to reconcile substantial amount and the difference was reduced to Rs. 1.49 crore. The CIT(A) confirmed the addition to the extent of un-reconciled difference. A perusal of the assessment order reveals that the AO has accepted the books of assessee, once the books have been accepted, the AO cannot question entries on the basis of AIR information alone. The addition made on account of AIR information is purely on the basis of suspicion. It is a well-settled law that no addition can be made merely on the basis of suspicion, howsoever strong it may be. During the course of assessment proceedings, the AO provided AIR information to the assessee. The assessee was able to reconcile substantial transactions. We find that in respect of some parties, the assessee denied to have any transactions and in case of some of the transactions the names of the parties were not mentioned. The assessee cannot be asked to prove negative. Onus is on the AO to show that the amounts M 10, 6471 M 13, 6482 M 13, 6480 M 13, 6473 M 13 & 2917 M 15- APL Logistics (India) Pvt. Ltd. reflected in AIR information were in fact received by the assessee. No effort whatsoever was made by the AO to investigate the transactions, no notices under section 133(6) of the Act were issued to the parties. It was obligatory for the AO to make necessary enquiries from the parties whose name appeared in the AIR information before making addition. We are of considered view that addition on account of mismatch in AIR information is unsustainable. Consequently, the assessee succeeds on this ground of appeal.

In the result, appeal of the Revenue is dismissed and the appeal of assessee is allowed.

The ld. Counsel submitted that Ground No. (i), (ii), (iv) and (v) of appeal are identical to the grounds raised in the preceding AY and the facts giving rise to the said grounds are identical to the facts in AY 2006-07, 2007-08 and 2008-09.

The assessee is not pressing ground no. (iii) relating to interest from Bank. The Ground No. (vi) relates to interest under section 234A, 234B & 234D, it is consequential. The other grounds raised in the appeal are general in nature.

The ld. DR fairly admitted that the primary issues raised in Ground No. (i), (ii), (iv) and (v) of appeal are identical to the grounds raised in appeal by the assessee for AYs 2006-07, 2007-08 and 2008-09.

Both sides heard, orders of the authorities below examined. M 10, 6471 M 13, 6482 M 13, 6480 M 13, 6473 M 13 & 2917 M 15- APL Logistics (India) Pvt. Ltd.

In respect of disallowance under section 14A, the short contention of ld. Counsel is that no exempt income has been earned during the relevant period, hence, no disallowance under section 14A r.w.r 8D can be made. It is no more res-integra that where no tax free income is earned during the relevant period, no disallowance under section 14A r.w.r 8D is warranted. Therefore, we find merit in Ground No. (i) and (ii) of the appeal, the same are allowed.

In Ground No. (iii), the assessee has assailed addition on account of interest income from Bank under the head “Income from Other Sources”. The ld. Counsel for the assessee stated at Bar that this ground is not pressed. Accordingly, Ground No. (iii) is dismissed as not pressed.

In Ground No. (iv), the assessee has assailed addition arising from discrepancy in AIR and the books of account of the assessee. The AO made addition of Rs. 2,77,62,662/- during First Appellate Proceedings, the assessee was able to reconcile transaction and hence the discrepancy was reduced to Rs.1,41,82,900/-. The CIT(A) has made addition of the aforesaid amount that remained to be reconciled. Similar ground was raised by the assessee in appeal for AY 2008-09, we find that in the impugned AY as well the AO has made addition on account of mismatch in AIR information and books of assessee for similar reasons. Facts being similar, the findings given on this issue in the appeal of assessee for AY 2008-09 would mutatis mutandis apply to the present ground raised by the assessee in appeal. For parity of reasons, the addition made on account of mismatch in AIR statement and books of assessee is directed to be deleted. Hence, ground No. (iv) of assessee's appeal is allowed.

In Ground No. (v), the assessee has assailed disallowance of interest on borrowed funds under section 36(1)(iii) of the Act. The facts resulting in the M 10, 6471 M 13, 6482 M 13, 6480 M 13, 6473 M 13 & 2917 M 15- APL Logistics (India) Pvt. Ltd. disallowance are identical to the facts in AY 2006-07. The findings on the issue for AY 2006-07 would mutatis mutandis apply to the present AY. This ground of appeal is allowed for parity of reasons.

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

To sum up, appeal of the Revenue for AY 2007-08 & 2008-09 are dismissed. The appeal of assessee for AY 2006-07 & 2009-10 are partly allowed and appeal of the assessee for AY 2007-08 and 2008-09 are allowed.