THE ACIT, (CENTRAL)-1, INDORE vs. M/S. PRAKASH ASHPHLTING & TOO HIGHWAY LTD., INDORE

आयकर अपील�य अ�धकरण ,इ�दौर �यायपीठ ,इ�दौर IN THE INCOME TAX APPELLATE TRIBUNAL, INDORE BENCH, INDORE �ी कुल भारत, �या�यक सद�य तथा �ी मनीष बोरड, लेखा सद�य के सम� BEFORE SHRI KUL BHARAT, JUDICIAL MEMBER AND SHRI MANISH BORAD, ACCOUNTANT MEMBER आ.अ.सं /.I.T.A. Nos. 227 & 228/Ind/2017 �नधा�रणवष� / Assessment Years: 2010-11 & & 2011-12 Assistant Commissioner of vs. M/s Prakash Asphalting & Toll Highway Limited, Income-tax (Central)-I, 76, Mall Road, Mhow, Indore. Indore.

अपीलाथ� /Appellant ��यथ� /Respondent �था.ले.सं./PAN: AABCP0398N

: Shri Rajeev Jain, अपीलाथ� क� ओर से/Appellant Sr. DR by : Shri Anil Garg & ��यथ� क� ओर से/Respondent Shri Arpit Gaur, by CAs

: 21.03.2018. सुनवाई क� तारीख/Date of hearing : 25.04.2018 उ�ोषणा क� तारीख/Date of pronouncement

-: 2 :- M/s.Prakash Asphalting & Toll Highways (I)Ltd. आदेश /O R D E R PER KUL BHARAT, J.M. : These two appeals by the Revenue pertaining to assessment

years 2010-11 and 2011-12 are directed against the orders of

CIT(A)-II, Indore, dated 2.12.2016 and 1.12.2016 respectively.

the appeals have been taken up together and are being disposed of

by this common order for the sake of convenience.

assessment year 2011-12.

I.T.A.No. 228/Ind/2017 – A.Y. 2011-12 :

under :-

“On the facts and in the circumstances of the case, the Ld.

CIT(A) erred in deleting the addition made by the AO of Rs.

1,00,97,137/- on account of disallowance of interest u/s 14A

without appreciating the facts and evidences brought into light

by the AO during assessment proceedings and remand

proceedings.”

-: 3 :- M/s.Prakash Asphalting & Toll Highways (I)Ltd. 5. Briefly stated, the facts of the case are that the case of the

assessee was reopened and the assessment u/s 143(3) of the

Income-tax Act was framed vide order dated 4th March, 2014. While

framing the assessment, the AO invoked the provisions of Section

14A and proceeded to make disallowance by applying the provisions

of Rule 8D of the Income Tax Rules, 1962, and, thus, made the

addition of Rs. 1,00,97,137/-. Aggrieved by this, the assessee

preferred the appeal before the Ld. CIT(A), who after considering the

submissions deleted the addition.

facts are identical as are in the assessment years 2008-09 and

2009-10. In the assessment year 2008-09 and 2009-10, the issue of

disallowance u/s 14A reached up to the stage of the Tribunal. The

Tribunal vide its order dated 30.09.2013 passed in I.T.A.No.

580/Ind/2012 for assessment year 2008-09, restored the matter

back to the file of AO for decision afresh. In pursuance to the order

of the Tribunal, the AO made enquiries and came to the conclusion

that the assessee has not made any investment out of borrowed

funds. The Ld. Counsel for the assessee further submitted that the

order pertaining to the assessment year 2008-09 was revised by the

-: 4 :- M/s.Prakash Asphalting & Toll Highways (I)Ltd. Learned Commissioner of Income-tax vide order dated 22nd March,

2017. This order of the Learned Commissioner of Income-tax

passed u/s 263 was challenged before the Coordinate Bench of this

Tribunal in I.T.A.No. 301/Ind/2017 and the order passed u/s 263

was quashed. The Ld. Counsel for the assessee, therefore,

submitted that this issue being identical is covered in favour of the

assessee in both the appeals.

the submission of the Ld. Counsel for the assessee.

the material available on record. We find that the Ld. CIT(A) has

given finding of facts from para 3.8 to 3.13, which are reproduced

as under :-

“3.8 Based on the similar facts the Hon'ble CIT (Appeal)-II

in the assessment year 2009-10 vide appeal No. IT-

784/1-12/9 dated 30.04.2015 have allowed the wrong

disallowance of Rs. 1,80,71,675/- made u/s 14A of the

Act with the finding that appellant’s had not used the

borrowed funds for making subject investments and it was

directed to delete the above addition.

-: 5 :- M/s.Prakash Asphalting & Toll Highways (I)Ltd. 3.9 The appellant further relied on following judgments

details as under :-

i) The Hon. Mumbai Tribunal in Avshesh Mercantile Pvt Ltd

Vs. DCIT has laid down following proposition, which support the argument which the assessee would like to advance that

intention of acquiring investment is important and revenue

cannot disregard the underlying intention. A copy of the

Judgment is attached for ready reference,

(a) Section 14A cannot be invoked if earning of exempt income is based on certain uncertainty and contingencies.

(b) If the investment has the potential of generating taxable

income like short term capital gain, disallowance U/s. 14A

could not be invoked.

(c) If during the year under consideration, the assessee has not

earned the exempt income, provision of sec.14A is not to be

invoked.

ii) In the case Reliance Utilities & Power Ltd (ITA No 1398 of 2008-order dated 9.1.2009 of Hon’ble Bombay High

Court), the assessee made investment of Rs.389.60 Crs. in

-: 6 :- M/s.Prakash Asphalting & Toll Highways (I)Ltd. shares on which tax free dividend income was received. It was

the case of the assessee that there were sufficient funds

available in the form of share capital (180 Crs.), reserve &

surplus (215 Crs) for making investment in shares. On the

other hand, case of revenue was that share capital and

reserves etc. had already been invested in acquiring in fixed

assets. The Tribunal found force in the contention of assessee.

On appeal, the Hon’ble high court observed that there was no

evidence to show that share capital, reserves etc. were

invested in fixed assets and therefore finding of fact recorded

by tribunal was to be accepted. However, it is pertinent to note

the observations of the Hon’ble Court in para 10

“If there be interest free funds available to an assessee

sufficient to meet its investments and at the same time the

assessee had raised a loan it can be presumed that the

investments were from the interest free funds available.”

iii) In case of CIT Vs Lakhani Marketing INCL (2014) 272

CTR (P&H) 265, The Punjab & Haryana High Court held

“that Business expenditure-Disallowance under s. 14A-

-: 7 :- M/s.Prakash Asphalting & Toll Highways (I)Ltd. absence of dividend income-Findings recorded by the CIT (A)

as well as the Tribunal that the assessee has not earned any

dividend income from shares have not been shown to be

erroneous-Therefore, deduction of interest liability out of other

income cannot be disallowed under s. 14A”. The Hon’ble High

Court also considered the findings made in case of CIT vs.

Hero Cycles Ltd. (2010) 233 CTR (P&H) 74 reproduced

here. It is clear that the expenditure on interest was set off

against the income from interest and the investments in the

share and funds were out of the dividend proceeds.

In view of this finding of fact, disallowance under s.14A was

not sustainable. Whether, in a given situation, any expenditure

was incurred which was to be disallowed, is a question of fact.

The contention of the Revenue that directly or indirectly some

expenditure is always incurred which must be disallowed

under s. 14A and the impact of expenditure so incurred cannot

be allowed to be set off against the business income which

may nullify the mandate of s. 14A, cannot be accepted.

Disallowance under s.14A requires finding of incurring of

expenditure; where it is found that for earning exempted

-: 8 :- M/s.Prakash Asphalting & Toll Highways (I)Ltd. income no expenditure has been incurred, disallowance under

s.14A cannot stand. In the present case finding on this aspect,

against the Revenue, is not shown to be perverse.

Consequently, disallowance is not permissible. We have taken

this view earlier also in IT Appeal No. 504 of 2008, CIT vs

Winsome Textile Industries Ltd., decided on 25th Aug., 2009,

wherein it was observed as under: “The contention raised on

behalf of the Revenue is that even if the assessee had made

investment in shares out of its own funds, the assessee had

taken loans on which interest was paid and all the money

available with the assessee was in common kitty”, as held by

this Court in CIT vs Abhishek Industries Ltd. (2006) 205

CTR (P&H) 304: (2006) 286 ITR 1 (P&H) and therefore,

disallowance under s.14A was justified.

“We do not find any merit in this submission. Judgment of this

Court in Abhishek Industries (supra) 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

-: 9 :- M/s.Prakash Asphalting & Toll Highways (I)Ltd. nexus with the business. 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, s.14A could have no application.” iv) In case of CIT vs. Holcim India (P) Ltd. (2014) 272 CTR (Del) 282, the Hon’ble Delhi High Court held that the stand taken by the Revenue is confusing. Thus, counsel for the

Revenue was asked, to state in his own words, their stand

before the Court. The submission raised was that the shares

would have yielded dividend, which would be exempt income

and therefore, the CIT (A) had invoked s. 14A to disallow the

entire expenditure. The aforesaid submission does not find any

specific and clear narration in the reasons or the grounds given

by the CIT (A) to make the said addition.

“On the issue whether the assessee could have earned

dividend income and even if no dividend income was earned,

yet s. 14A can be invoked and disallowance of expenditure

can be made, there are three decisions of the different High

Courts directly on the issue and against the Revenue. No

contrary decision of a High Court has been shown. Income

-: 10 :- M/s.Prakash Asphalting & Toll Highways (I)Ltd. exempt under s. 10 in a particular assessment year may not

have been exempt earlier and can become taxable in future

years. Further, whether income earned in a subsequent year

would or would not be taxable, may depend upon the nature of

transaction entered into in the subsequent assessment year.

For example, long-term capital gain on sale of shares is

presently not taxable where security transaction tax has been

paid, but a private sale of shares in an off market transaction

attracts capital gains tax. It is an undisputed position that

assessee is an investment company and had invested by

purchasing a substantial number of shares and thereby

securing right to management. Possibility of sale of shares by

private placement etc., cannot be ruled out and is not an

improbability. Dividend may or may not be declared. Dividend

is declared by the company and strictly in legal sense, a

shareholder has no control and cannot insist on payment of

dividend. When declared, it is subjected to dividend

distribution tax. What is also noticeable is that the entire or

whole expenditure has been disallowed as if there was no

expenditure incurred by the assessee for conducting business.

-: 11 :- M/s.Prakash Asphalting & Toll Highways (I)Ltd. The CIT (A) has positively held that the business was set up

and had commenced. The said finding is accepted. The

assessee, therefore, had to incur expenditure for the business

in the form of investment in shares of cement companies and to

further expand and consolidate their business. Expenditure

had to be also incurred to protect the investment made. The

genuineness of the said expenditure and the fact that it was

incurred for business activities was not doubted by the AO and

has also not been doubted by the CIT (A). Tribunal was

therefore right in deleting the disallowance under s.14A”.

v) In case of CIT vs. Shivam Motors (P) Ltd. (2014) 272 CTR

(All) 277, Hon’ble Allahabad High Court held that if there is

any income which does not form part of the income under the

Act, the expenditure which is incurred for earning the income

is not an allowable deduction-For the year in question, the

assessee had not earned any tax-free income. Hence, in the

absence of any tax-free income, the corresponding expenditure

could not be worked out for disallowance. Therefore, Tribunal

was justified in upholding the decision of CIT(A) in deleting the

-: 12 :- M/s.Prakash Asphalting & Toll Highways (I)Ltd. disallowance under s. 14A and no substantial question of law

arises. Sec. 14A of the Act provides that for the purposes of

computing the total income under the chapter, 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.

Hence, what s.14A provides is that if there is any income

which does not form part of the income under the Act, the

expenditure which is incurred for earning the income is not an

allowable deduction. For the year in question, the finding of

fact is that the assessee had not earned any tax-free income.

Hence in the absence of any tax-free income, the corresponding

expenditure could not be worked out for disallowance. The

view of the CIT (A), which has been affirmed by the Tribunal.

vi. The Hon’ble ITAT Jabalpur Bench has also given same

finding in case of ACIT Vs. Ramesh Singh (2014)23 ITJ

245 “there is no dispute to the well settled proposition that

interest bearing funds are required to be utilized for business

purposes and in case of any diversion of such interest bearing

-: 13 :- M/s.Prakash Asphalting & Toll Highways (I)Ltd. funds to non-business purposes, disallowance in warranted

u/s 36(1)(iii) of the Act. However, Hon’ble Supreme Court in

case of S.A.Builder Ltd. Vs CIT (2007) 8 ITJ 101(SC) : (2007)

288 ITR 1 have observed that before disallowing interest, AO is

required to see business expediency. As assessee has advance

to its sister concern as per the business requirements, the

matter is restored back to the AO keeping in view the

proposition laid down by Hon’ble Supreme court in case of S.A.

Builder Ltd. Vs CIT”. g. There is no doubt that SPV was formed for the each BOT projects taken by the group. The appellant company is also in

the business of infrastructure development and road

construction. The testimony of its engagement in the BOT

projects of Road is that NHAI being the apex body in

infrastructure development being satisfied allotted to it the

contract. Had it not been in the business of road construction,

the NHAI would not have prequalified it for the tender.

Therefore it is beyond dispute that appellant is in business of

construction. The Company also enjoys deduction u/s 80IA

which further amplify its business character being engaged in

-: 14 :- M/s.Prakash Asphalting & Toll Highways (I)Ltd. road construction and infrastructure development projects

business. If there is a condition being imposed by the NHAI to

form a separate company in view of the reason that JV is not a

person in the eye of the law unlike a company or partnership

and therefore if an assessee form a separate company and

hold a controlling stake (nearly 50%) in the same together with

another shareholder, it cannot be said that this was not the

business of the Company. The pith and substance of the

amount being given is subscription to the Company’s share

capital which too was engaged in business of construction, it

cannot be said that it was other than business.”

3.10 Thus, it was further submitted that there was no

justification to have invoked 14A qua the amount of interest

expenditure claimed by the assessee. Section 14A(I) puts a

embargo on AO to first satisfy at threshold, where there is any

expenditure incurred for the purpose of earning any income

which does not form part of total income. If the investment is

made in shares without any borrowings there against, one

cannot attribute it to the borrowed funds thereby disallowing

legitimate expenditure. The predecessor AO in its assessment

-: 15 :- M/s.Prakash Asphalting & Toll Highways (I)Ltd. order has not disputed the business purpose of interest

expenditure claimed and considered it as allowable U/s 36(1)

(iii). Therefore there has to be a close nexus between expenditure

and exempt income (Refer SC Decision in Wallfort and Bombay

HC in Godrej Case). There is ample availability of interest free

funds as on 31st March, 2010, in the form of equity Rs.

5,89,35,000/- and reserves amounting to Rs. 79,50,36,303/-,

the sum total of these comes to Rs. 85,39,71,303/-. Hence as

these funds were available for the investment in shares and

mutual funds stood at Rs. 38,83,12,641/-.This clearly shows the

availability of non interest bearing funds is abundantly

available.

3.11 The Secured loans on the same date stood at Rs. 44.15

Crs. which is secured by either current assets or fixed assets.

My attention was drawn that none of these loans were taken

to acquire investment as the auditors have certified in their

report in para 16 of CARO Report attached with audited

financial statement which is a mandatory disclosure of the

loan by which asset they are secured. It has been submitted

-: 16 :- M/s.Prakash Asphalting & Toll Highways (I)Ltd. that a glance the Secured Loan as on 31.3.2011 in Audited

Balance Sheet Schedule -3 would give automatic conclusion

that borrowed funds were not used for acquiring investment. It

was argued that the Secured Loans were taken and used for

mobilizing/creation of the assets. A close view of the Audited

Balance Sheet as on 31.3.2011 shows gross fixed asset at Rs.

108.45 Crs whereas the secured loans are only Rs. 44.15

Crores. However, it has been claimed that after taking the net

fixed assets stand at Rs. 79.63 Crs. Therefore, the Financial

Statement itself broadly suggests that no interest bearing fund

were used for investment in shares/mutual fund and internal

accrual were sufficient for investment.

3.12 Thereafter the appellant submitted and I reproduced the

same for clarity:-

“ that if cherubs for investment in shares are given from CC/OD

revolving facility account which is in the nature of a revolving

loan account, it cannot be said that loan fund was used.

Business receipts are credited to the same and expenditure is

debited in this account concurrently. It is submitted that in a

-: 17 :- M/s.Prakash Asphalting & Toll Highways (I)Ltd. combined account one to one correspondence of every outgo

with the inflow cannot be established. In a chest various rupee

are being dumped and while payment is made, there can be no

distinction as to which rupee notes are used whether given by customer ram, given by bank etc. Once it is being mixed in a

common hotchpotch there is no mechanism to distinguish.

Therefore it is humbly prayed that disallowance of interest

expenditure made by the Ld. A.O. invoking Section 14A read

with rule 8D be deleted by appreciation of following factual

and legal position;

a. There are ample interest free funds available for investment in

shares. A table showing year wise accruals are testimony to

the same. b. The intention of investment was not to earn dividend. There

has been no dividend during the period of holding is a

testimony to that proposition. Also the objective of investment

was to sit in management to influence decision making of that

company and fetch construction contract and also to gain

capital appreciation in value of shares by selling the same

-: 18 :- M/s.Prakash Asphalting & Toll Highways (I)Ltd. when execution risk is overcome. Therefore even presuming

that the same was out of borrowed funds, it is clearly

manifested that there has been no dividend but the income

from acquiring contract was offered to tax. Also capital gains

on sale of shares were offered to tax. Therefore in the peculiar

facts and circumstances, it is demonstrated by the assessee

by actually offering the income to taxation then it cannot be

said that shares were intended to earn income which is tax

exempt. c. If the investment has a potential to earn non exempt income

14A cannot be invoked. d. The visit to 14A (2) or (3) is permissible only when the claim of

the assessee has been held to be incorrect by showing cogent

reason. Satisfaction or dissatisfaction is to be supported by

valid reasons.”

3.13 After a detailed examination and analysis of the balance sheet, the various judicial decision cited by the appellant including the appellant’s own case decided by the jurisdictional bench of I.T.A.T. for assessment year 2008-09, the consequential appeal effect order passed by the AO and my predecessor’s order for assessment year 2009-10, I am inclined to hold this

-: 19 :- M/s.Prakash Asphalting & Toll Highways (I)Ltd. issue in favour of the appellant. This ground of appeal is accordingly allowed. ” 9. From the order of the Ld. CIT(A), it is evident that the Ld. CIT(A) has examined the factual aspects of the case. The Revenue has not rebutted the finding by placing any contrary material on record. Therefore, we do not see any reason to interfere with the orders of the Ld. CIT(A). 10. In the result, both the appeals of the Revenue are dismissed. The order pronounced in the open court on 25.04.2018.

Sd/- Sd/- (मनीष बोरड) (कुल भारत) लेखा सद�य �या�यक सद�य (MANISH BORAD) (KUL BHARAT) ACCOUNTANT MEMBER JUDICIAL MEMBER

Indore; �दनांक Dated : 25/04/2018 CPU/SPS Copy to: Assessee/AO/Pr. CIT/ CIT (A)/ITAT (DR)/Guard file. By order Private Secretary/DDO, Indore