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Income Tax Appellate Tribunal, “A” BENCH, CHENNAI
Before: HON’BLE SHRI MAHAVIR SINGH & HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM
सुनवाईकीतारीख/ : 05-09-2022 Date of Hearing घोषणाकीतारीख / : 05-09-2022 Date of Pronouncement आदेश / O R D E R Per Bench: 1. Aforesaid appeals by assessee for Assessment Years (AYs) 2003- 04 to 2007-08 arises out of common order passed by learned Commissioner of Income Tax (Appeals)-8, Chennai [CIT(A)] dated 29.11.2019 in the matter of assessment framed by Ld. Assessing Officer under various sections. The issues are pari-materia the same in all the appeals. For the purpose of adjudication, facts from AY 2003-04 have been culled out. The grounds raised by the assessee read as under:
1. The Commissioner of Income tax (Appeals) erred in sustaining the addition of differential interest of Rs.94,13,313/- for the assessment year in question under the provisions of Section 40A(2) of the Income tax Act.
2. The Commissioner of Income tax (Appeals) ought to have accepted the factual position that the Appellant herein was a Holding Company which had provided funds to its subsidiaries at a slightly lower rate on account of commercial expediency.
3. The Commissioner of Income tax (Appeals) ought to have accepted the arguments that once a commercial expediency arises, it is not open to tax authorities to step into the shoes of the businessman and arrive at a commercial decision in respect of a transaction.
4. The Commissioner of Income tax (Appeals) erred in not considering the fact that the said differential interest did not result in any loss to the exchequer and ought to have allowed the claim of your Appellant in full.
5. The Commissioner of Income tax (Appeals) erred in sustaining a portion of the administrative expenses in determining the disallowance under Section 14A of the Income tax Act, 1961 of a sum of Rs.2,10,93,548/-in the absence of any exempt income.
6. The Commissioner of Income tax (Appeals) erred in sustaining the disallowance under Section 14A in the absence of any exempt income received by the Appellant herein for the relevant previous year.
7. The Commissioner of Income (Appeals) erred in sustaining the disallowance at 50% of administrative expenses on an estimated and adhoc basis when Judicial pronouncement have clearly held without ambiguity that in the absence of exempt income, no disallowance under section 14A can arise.
8. The Commissioner of Income tax (Appeals) ought to have accepted the submissions that the earning of exempt income is a prelude to any disallowance that can be made under the provisions of section 14A. As is evident, two issue arises for our consideration – (i) interest disallowance invoking the provisions of Sec. 40A(2); (ii) disallowance u/s 14A. The same are adjudicated as under.
2. The appeal is in second round of appeal since the matter, in the first round, was remitted back by Tribunal for fresh adjudication vide order dated 13.13.2012 as under: -
9. As held by the Hon’ble co-ordinate Bench in its order dated 12-6-2009 passed for the assessment year 2002-03 in ITA No.589(Mds)/2007, the Revenue authorities have not examined the fine distinction between ‘purpose’ and ‘motive’ in either disallowing or later on allowing the claims of the assessee. Therefore, we find that it is just and proper that these matters may be remitted back to the Assessing Officer for de novo consideration in accordance with law and decide the various claims of expenditure made by the assessee. The assessee is free to agitate all the additions and disallowances made by the assessing authority for these assessment years on the basis of the grounds filed before the Tribunal. 10. The orders of the lower authorities for the impugned assessment years 2003- 04, 2004-05 and 2005-06 are set aside and the files are remitted back to the assessing authority for de novo disposal after hearing the assessee.
Pursuant to the same, an assessment has been reframed by Ld. AO on 31.03.2014 u/s 143(3) r.w.s. 254 of the Act wherein impugned disallowance have been made and the same are subject matter of dispute before us.
Interest Disallowance invoking Sec. 40A(2) 3.1 The assessee obtained unsecured loan of Rs.128.38 Crores from M/s Rabo Finance Ltd. and debited interest expenses of Rs.20.66 Crores. At the same time, the assessee had advanced sum of Rs.89.65 Crores to its subsidiaries at interest rate of 9.70%. The Ld. AO, invoking the provisions of Sec.40A(2), alleged that there was no commercial expediency in advancing such loans at discounted rates. Therefore, differential interest between the loan taken and loan advanced to sister concerns was disallowed u/s 40(A)(2) which came to Rs.94.13 Lacs. The Ld. CIT(A) confirmed the same against which the assessee is in further appeal before us. 3.2 Having considered factual matrix, it could be seen that the provisions of Sec.40 (A)(2) have been invoked by revenue to make this disallowance in the hands of the assessee. In terms of Clause (2)(a) of Sec.40(A), where the assessee incurs any expenditure in respect of which payment has been or is to be made to specified persons and Ld. AO is of the opinion that such expenditure is excessive or unreasonable, having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. Therefore, one of the essential conditions to invoke the provision is that the assessee incurs any expenditure in respect of which a payment has to be made to the specified persons. The same is not the case here and no such payment has been made by the assessee to its subsidiaries / sister concerns. In the present case, the allegation of revenue is that the assessee has borrowed funds at higher rates and the same has been advanced to subsidiaries at lower rates. Accordingly, differential interest has been disallowed and added to the income of the assessee. Firstly, there is no expenditure incurred by the assessee in respect of which the payment has been made to the subsidiaries. It is, in fact, a case where the assessee has charged interest from its subsidiaries. Secondly, there is no finding that such rate charged by the assessee was excessive or unreasonable. Rather it is a reverse case wherein Ld. AO has alleged that lesser rate has been charged by the assessee. Therefore, in our considered opinion, the provisions of Sec.40A(2) would have no application in the present case and for this reason alone, the disallowance made by revenue is not sustainable in law. 3.3 Proceeding further, the ratio of decision of Hon’ble Supreme Court in the case of S.A. Builders Ltd vs CIT (288 ITR 1) would be applicable to factual matrix wherein it has been held that once it was established that there was nexus between the expenditure and purposes of business, which need not be the business of the assessee, deduction u/s 36(1)(iii) was to be allowed. It was further held that the expression ‘commercial expediency’ is an expression of wide import and includes such expenditure as prudent businessman incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation but yet it is allowable as a business expenditure if it was incurred on grounds of commercial expediency. Further, the expression ’for the purpose of business’ is wider in scope than the expression ‘for the purpose of earning profits’. Therefore, the loans granted to wholly owned subsidiary entities would fulfil the test of commercial expediency also. 3.4 Another line of argument of Ld. AR is that the assessee has sufficient own funds in the shape of share capital and free reserves to advance funds to its sister concerns. For the same, the copies of financial statements for various years have been placed on record. Upon perusal of financial statements of this year, it could be seen that the assessee has received unsecured loans from ifs holding companies for Rs.63.86 Crores and loans from banks amount to Rs.128.38 Crores. The assessee has made equity investments in its subsidiaries for Rs.73.07 Crores and loan advanced amount to Rs.89.65 Crores. It could be seen that mixed funds have been used to advance the loans and without establishing a clear nexus of interest bearing loans vis-à-vis loans advanced by the assessee, no such disallowance could have been made by revenue. The allegation of revenue is that loans have been borrowed at higher rates and the same has been advanced at lower rates. It is not a case that no interest has been charged by the assessee. Therefore, from this angle also, the impugned disallowance is not sustainable.
3.5 In view of the foregoing, the impugned disallowance of differential interest as made by revenue invoking the provisions of Sec.40A(2) is not sustainable in the eyes of law and therefore, the same stand deleted. We order so. 3.6 Similar are the facts qua this issue for AY 2004-05. Therefore, our adjudication as above shall mutatis-mutandis apply to this year also. The corresponding grounds raised by the assessee in AY 2004-05 stand allowed. 3.7 In AYs 2005-06 to 2007-08, no such disallowance has been made by Ld. AO in the assessment order. The same has been made by Ld. CIT(A) during appellate proceedings. The disallowance has been made on similar lines as made by Ld. AO in earlier assessment years. Aggrieved, the assessee is in further appeal before us. Facts being pari- materia the same, our adjudication as for AY 2003-04, shall mutatis mutandis apply to these years also. The corresponding grounds raised by the assessee in these years stand allowed.
4. Disallowance u/s 14A 4.1 The Ld. AO made disallowance u/s 14A since the entire expenditure claimed was with respect to assessee’s investments only. The Ld. AO considered the entire business expenditure as direct expenditure u/r 8D(2)(i) and disallowed an amount of Rs.24.09 Crores as claimed by the assessee as business expenditure. 4.2 The Ld. CIT(A) concurred with assessee’s submissions that Rule 8D would not apply for AYs 2003-04 to 2007-08 and deleted the computations made by Ld. AO. At the same time, Ld. CIT(A) proceeded to estimate the disallowance. The salaries & wages, rent, legal and professional fees formed major part of administrative expenditure. The Ld. CIT(A) estimated the disallowance at 50% of these expenditures. The assessee relied on the decision of Hon’ble Madras High Court in M/s Redington India Ltd. V/s ADIT (77 Taxmann.com 257) to submit that no disallowance would be attracted in cases where no exempt income was earned by the assessee. However, this plea was rejected. Aggrieved, the assessee is in further appeal before us. 4.3 It is settled position of law that Rule 8D apply prospectively only from AY 2008-09 and it would have no application in earlier years. Further, in terms of cited decision of Hon’ble Madras High Court in M/s Redington India Ltd. V/s ADIT (supra), no disallowance is attracted in case no exempt income is earned by the assessee. We further find that there is no basis for Ld. CIT(A) to estimate the disallowance @50% of administrative expenditure. There is no satisfaction recorded as to why the disallowance is attracted. Therefore, respectfully following the cited decision of jurisdictional High Court, we would hold that in case no exempt income is earned by the assessee, disallowance u/s 14A would not be attracted. In case the assessee has earned any exempt income during the year, it would be fair to estimate the disallowance @5% of exempt income earned by the assessee. We order so. The Ld. AO is directed to re-compute the disallowance, for all the years, in terms of our adjudication. This ground, for all the years, stands partly allowed.
No other grounds have been urged in any of the years.
Conclusion 6. In the result, all the appeals stand partly allowed.