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Income Tax Appellate Tribunal, “A’’BENCH: BANGALORE
Before: SHRI N.V. VASUDEVAN & SHRI B.R. BASKARAN
PER B.R. BASKARAN, ACCOUNTANT MEMBER:
The revenue has filed this appeal challenging the order dated 22.4.2019 passed by Ld. CIT(A)-7, Bengaluru and it relates to the assessment year 2015-16. The effective grounds of appeal urged by the assessee reads as under:- “2. Whether on the facts and in the circumstances of the case, the CIT(A) was justified in law in following the decision of the jurisdictional High Court in the case of CIT & Anr. Vs. M/s. Microlabs Ltd., (383 ITR 490) without looking into the commercial/business expediency of the transaction between the Assessee and its subsidiary company?
3. Whether in the facts and circumstances of the case, the CIT(A0 was justified in allowing the depreciation of the Home
M/s. Tally Solutions Pvt. Ltd., Bangalore
Page 2 of 7 Theatre Systems relying on the indirect evidences and not providing an opportunity to the AO under Rule 46A(3) of the IT Rules to examine the issue?
Whether on the facts and in the circumstances of the case, the CIT(A) had not erred in not considering the CBDT circular No.5/2014, which made it clear that earning of exempt income was not mandatory for disallowance u/s 14a of the IT Act?”
The assessee is engaged in the business of development and marketing of accounting and business management software. It filed its return of income for the year under consideration declaring total income of Rs.30.07 crores. The A.O. completed the assessment determining the total income at Rs.30.68 crores making various additions. The assessee got relief in respect of the additions in the appeal filed before Ld. CIT(A). Hence, the revenue has filed this appeal on the issues mentioned in the grounds of appeal.
3. The first issue relates to relief granted in respect of disallowance of interest expenditure. The A.O. noticed that the assessee has advanced loans to the tune of Rs.17.17 crores to the following sister concerns:-
Sl.No. Particulars of loans and advances made to As on 31.03.2015 sister concerns 1 Tally (India) Pvt. Ltd. Rs.10,93,34,569/- 2 Tally analytics Pvt. Ltd. Rs.1,14,74,002/- 3 Tally Education Pvt. Ltd. Rs.3,94,25,835/- 4 Tally Solutions Kenya Ltd. Rs.1,14,74,002/- Total Rs.17,17,08,408/- The A.O. also noticed that the assessee has incurred interest expenditure of Rs.82.62 lakhs. Accordingly, he proposed to disallow interest expenditure relatable to the advance given to sister concern. The assessee replied that it has charged interest @ 12.5% on the interest given to sister concerns listed in sl.nos.2 to 4 in the M/s. Tally Solutions Pvt. Ltd., Bangalore
Page 3 of 7 table above. However, the proceeded to compute the disallowance at Rs.1,78,84,873/-. After giving set off of Rs.39,51,617/- being interest collected by the assessee, the A.O. disallowed the balance amount of Rs.1,39,33,256/-. It is pertinent to note that the assessee has claimed interest expenditure of Rs.82,62,857/- only while the A.O. has disallowed an amount of Rs.1,39,33,256/-.
4. The Ld. CIT(A) noticed that the interest free own funds available with the assessee was Rs.96.32 crores, whereas the aggregate amount of advance given to sister concerns was Rs.17.17 crores only. Further, the assessee had also collected interest from 3 of the sister concerns. Accordingly, following the decision rendered by Hon’ble Karnataka High Court in the case of Micro Labs Ltd. 383 ITR 490, the Ld. CIT(A) held that no disallowance of interest expenditure is called for in the facts of the present case. Accordingly, he deleted the disallowance made by the A.O.
We heard the parties on this issue and perused the record. In the grounds of appeal, the revenue has taken a stand that the Ld. CIT(A) should have examined the commercial/business expediency of the transactions between the assessee and its subsidiary companies and hence the Ld. CIT(A) was not justified in granting relief by following the decision rendered by the jurisdictional High Court in the case of Micro Labs Ltd. (supra). However, the Hon’ble Supreme Court in the case of CIT Vs. Reliance Industries Ltd. (Civil appeal No.10/2019) has upheld the view of Hon’ble Bombay High Court that no interest disallowance is required when the interest free funds available with the tax payer was sufficient to meet its investments. The Hon’ble Bombay High Court has also expressed an identical view in the case of CIT Vs. Reliance Utilities & Power Ltd. 313 ITR 340. Both the above said
M/s. Tally Solutions Pvt. Ltd., Bangalore
Page 4 of 7 decisions have been rendered in the context of sec.36(1)(iii) of the Act. The decision rendered by the jurisdictional High Court in the case of Micro Labs Ltd. (supra), though rendered in the context of Rule 8D, yet the underlying ratio is in tune with the view expressed by the Hon’ble Bombay High Court and Hon’ble Supreme Court. When the assessee is having own funds, the existence of commercial/business expediency or otherwise need not be looked into. Only when borrowed funds were diverted to sister concerns, the question of commercial/business expediency is required to be examined. Accordingly, we do not find any infirmity in the decision of Ld. CIT(A) in deleting the interest disallowance.
The next issue relates to disallowance of depreciation on home theatre equipment. The A.O. noticed that the assessee had purchased home theatre equipment in the earlier assessment year and WDV of it as on 1.4.2014 was Rs.1,71,61,524/-. During the year under consideration the assessee has purchased fresh equipment for Rs.19,60,122/-. The assessee claimed depreciation on these items to the tune of Rs.28,39,695/-. Since the assessee is engaged in the business of developing accounting software, the A.O. took the view that the above said asset is not relatable to the business activities carried on by it. Accordingly, he disallowed the depreciation claim of Rs.28,39,695/-. The Ld. CIT(A) deleted the disallowance with the following observations:- “5.2 The submission of the appellant has been considered. The appellant is a leading provider of accounting software known as Tally Software which has a global market. It has been emphasized that the high-end home theatre equipment/AV room is used for periodical updating of the sales employees and channel partners of the company. The regular meetings are held between the management and the channel partners to make aware about the specifications and utility of each product. Regular training of employees of the company is held to impart the knowledge of various technological developments in the field of software and the trends in the competitive market. It was also submitted that the M/s. Tally Solutions Pvt. Ltd., Bangalore
Page 5 of 7 equipment is used for training employees is to increase their efficiency which is necessary for the business interest of the company.
5.3 It is observed that considering the utility of the equipment and detailed justification submitted by the appellant it cannot be said that the expenditure was not for the business purpose. The AO has accepted the genuineness of the expenditure. Similar disallowance of depreciation made in the AY 2014-15 has been considered and deleted by the CIT(A) 10, Bangalore vide order dated 4.12.2017. Considering all these aspects, I am of the view that the disallowance made by the AO is not sustainable. Hence, the same is deleted. The ground of appeal is allowed.”
The Ld. A.R. submitted that identical disallowance was made in assessment year 2014-15 and the Tribunal vide its order dated 14.10.2021 in in the assessee’s own case has confirmed the order of Ld. CIT(A) in deleting the disallowance of depreciation.
We heard Ld. D.R. on this issue and perused the record. From the order passed by Ld. CIT(A), we notice that the assessee has established that the home theatre is related to the business activities carried on by the assessee and further identical disallowance made by the A.O. in assessment year 2014-15 has since been deleted both by Ld CIT(A) and by the Tribunal. Accordingly, we do not find any infirmity in the order passed by Ld. CIT(A) on this issue.
The last issue relates to disallowance made u/s 14A of the Act. The A.O. noticed that the assessee has made long term investment in the equity shares/mutual funds. He noticed that the assessee has not made any disallowance u/s 14A of the Act. When questioned, the assessee submitted that it did not receive any dividend income and hence, no disallowance is called for. However, the A.O., following the decision rendered by Chennai Bench of ITAT
M/s. Tally Solutions Pvt. Ltd., Bangalore
Page 6 of 7 in the case of M/s. MGM Diamond Beach Resorts Pvt. Ltd. (ITA No.2173/MDS/2015 dated 13.6.2008), held that disallowance u/s 14A of the Act should be made even if no dividend income is earned and claimed as exempt. Accordingly, he computed the disallowance under Rule 8D(2)(iii) at Rs.5,47,162/- and added the same to the total income. The Ld. CIT(A), following the decision rendered by Hon’ble Delhi High Court in the case of IL&FS Energy Development Company Ltd. (2017) 84 Taxmann.com 186 held that no disallowance is called for when the assessee has not earned any exempt income. Accordingly, he deleted the disallowance.
The ld. D.R. submitted that the Hon’ble jurisdictional High Court has held in the case of CIT Vs. Kingfisher Finvest India Ltd., wherein it was held that the disallowance u/s 14A read with Rule 8D has to be made, even when the tax payer in a particular year has not earned any exempt income. Accordingly, the Ld. D.R. submitted that the disallowance made by the A.O. should be restored.
On the contrary, Ld. A.R. submitted that the jurisdictional High Court has considered the decision rendered by it in the case of Kingfisher Finvest India Ltd. in a subsequent decision rendered in the case of CIT Vs. M/s. Quest Global Engineering Services Pvt. Ltd. (ITA No.133/2015 dated 15.2.2021) and held that no disallowance u/s 14A of the Act should be made when the assessee has not earned any exempt income.
We heard the parties on this issue. As rightly submitted by the Ld. A.R., the Hon’ble High Court has held in the case of Quest Global Engineering Services Pvt. Ltd.(supra), after considering its earlier decision in the case of Kingfisher Finvest India Ltd., that the provisions of section 14A of the Act do not apply when no exempt
M/s. Tally Solutions Pvt. Ltd., Bangalore
Page 7 of 7 income has accrued to the assessee. In this regard, the Hon’ble jurisdictional High Court has agreed with the view taken by the Hon’ble Madras High Court in the case of CIT Vs. Chettinad Logistics Pvt. Ltd. (2017) 80 Taxmann.com 221 (MAD) and the decision rendered by Hon’ble Delhi High Court in the case of Chem Invest Ltd. Vs. CIT (2015) 16 Taxmann.com 118 (Del). Since the decision rendered by Ld CIT(A) on this issue is in accordance with the binding decision rendered by Hon’ble jurisdictional High Court in the case of Quest Global Engineering Services (P) Ltd (supra), we do not find any reason to interfere with the decision rendered by the Ld. CIT(A) on this issue also.
In the result, the appeal filed by the revenue is dismissed. Order pronounced in the open court on 21st Feb, 2022.