M/S MITTAL PHARMA PVT. LTD.,JAIPUR vs. INCOME TAX OFFICER, WARD-1-2, JAIPUR

आयकर अपीलीय अधिकरण] जयपुर न्यायपीठ] जयपुर IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES (SMC), JAIPUR Jh Hkkxpan] ys[kk lnL;] ds le{k BEFORE: SHRI BHAGCHAND, ACCOUNTANT MEMBER vk;dj vihy la-@ITA No. 734/JP/2017 fu/kZkj.k o"kZ@Assessment Year : 2012-13 cuke M/s Mittal Pharma Pvt. Ltd., Income Tax Officer, Vs. 101-102, Film Colony, Dawa Ward 1(2), Bazar, Chaura Rasta, Jaipur. Jaipur. LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AABCM 5389 G vihykFkhZ@Appellant izR;FkhZ@Respondent fu/kZkfjrh dh vksj ls@ Assessee by : Shri P.C. Parwal (CA) jktLo dh vksj ls@ Revenue by : Smt. Poonam Roy (DCIT) lquokbZ dh rkjh[k@ Date of Hearing : 21/11/2017 mn?kks"k.kk dh rkjh[k@ Date of Pronouncement : 23/11/2017 vkns'k@ ORDER

PER: BHAGCHAND, A.M.

This is an appeal filed by the assessee emanates from the order of

the ld. CIT(A)-I, Jaipur dated 03/07/2017 for the A.Y. 2012-13, wherein

the assessee has raised following grounds of appeal: “1. The Ld. CIT(A) has erred on fact and in law in confirming the disallowance of Rs.6,99,639/- u/s 40(a)(ia) on account of non deduction of tax at source on interest paid to financial institutions. 1.1 The Ld. Commissioner of Income Tax (Appeals) has erred on facts and in law in confirming the above disallowance even when the

ITA 734/JP/2017_ 2 M/s Mittal Pharma P. Ltd. Vs ITO

recipient has included the income in its return and has paid the tax thereon.

1.2 The Ld. Commissioner of Income Tax (Appeals) has erred on facts and in law in confirming the entire disallowance of interest u/s 40(a)(ia) ignoring that in view of amendment made in this section w.e.f. 01.04.2015 which is to remove unintended hardship, only 30% of such amount can be disallowed by giving the effect of this amendment retrospectively.

1.3 The Ld. Commissioner of Income Tax (Appeals) has erred on facts and in law in not giving cognizance to the Form 26A issued by Chartered Accountant in case of M/s Religare Finvest Ltd. holding that the assessee has not filed application under Rule 46A.

medicines on wholesale basis. The assessee filed its return of income on

21/9/2012 declaring total income of Rs. 4,72,610/-. The case of the

assessee was selected for scrutiny assessment under CASS and the

assessment was finalized U/s 143(3) of the Income Tax Act, 1961 (in

ITA 734/JP/2017_ 3 M/s Mittal Pharma P. Ltd. Vs ITO

short the Act) at a total income of Rs. 17,94,630/- by making various

additions by the Assessing Officer. The ld CIT(A) has give part relief to

the assessee.

are against confirming the disallowance of Rs. 6,99,639/- made U/s

40(a)(ia) of the Act on account of non deduction of tax at source on the

interest paid to financial institutions and also not admitting the

certificate issued by the Chartered Accountant in the case of M/s

Religare Finvest Ltd. as per Rule 46A of the Income Tax Rules, 1962 (in

short the Rules). The ld CIT(A) has upheld the order of the Assessing

Officer on these issues by holding as under:

3.1.2 Determination: (i) I have duly considered the submissions of the appellant, assessment order and the material placed on record. During the year under consideration, the appellant has paid interest of Rs.4,93,992/- to Barclays Investment & Loan(l) Ltd. and Rs. 2,05,647/- to Religare Finvest Ltd. without deducting tax at source. The AO has invoked the provisions of section 40(a) (ia) r.w.s 194A(1) & 194(3) (iii) of the Act and has disallowed the sum of Rs. 6,99,639/- thereof. (ii) The first contention of the appellant that the provisions of section 40(a) (ia) of the Act are applicable where the interest remained payable on the close of the financial year whereas in the instant case under

ITA 734/JP/2017_ 4 M/s Mittal Pharma P. Ltd. Vs ITO

consideration, the entire interest was paid and nothing remained payable. It may be mentioned that the issue is no more res integra as it was held by the Hon’ble Apex Court in the case of Palam Gas Services CIT [2017] 81 taxmann.com 43 (SC) that: “Section 40(a) (ia) of the Income-tax Act 1961 - Business disallowance - Interest etc. paid to a resident without deduction of tax at source (Scope of) - Whether word 'payable' occurring in section 40(a) (ia) not only covers cases where amount is yet to be paid but also those cases where amount has actually been paid - Held, yes [Para 15] [In favour of revenue] (head note)"

(iii) During the appellate proceedings, the appellant has filed a copy of Form 26A issued by a chartered accountant in the case of M/s. Religare Finvest Ltd. and in respect of Barclays Investment & Loan (India) Ltd., it was stated that a request has been made for issue of Form No. 26A. It is pertinent to mention here that the appellant did not file any such Form 26A in the case of M/s Religare Finvest Ltd. during the assessment proceedings and as such it becomes additional evidence at the appellate stage. The appellant has just filed the same without stating that the same is additional evidence and without making an application under Rule 46A of the IT Rules for admission of additional evidence. It may be mentioned that the law prescribed a procedure for filing additional evidence during the appellate proceedings and it is not a matter of right to tile the additional evidences at the appellate stage even without stating that these are additional evidence. In view of these facts, no cognizance could be given to the Form No. 26A filed by the appellant in the case of M/s Religare Finvest Ltd.

(iv) It was another contention of the appellant that vide Finance Act, 2014 an amendment has been made in section 40(a)(ia) of the Act w.e.f. 01.04.2015 whereby it was provided that 30% of any sum payable to a resident shall be disallowed if tax is not deducted at source under Ch.

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XVIIB as against the 100% disallowance presently made. The contention of the appellant that since the said amendment was intended to mitigate the hardships to the assessees, therefore, this amendment is retrospective in nature and thus the disallowance is to be restricted to 30% of the amount of interest under consideration has been examined very carefully and I do not find any merit thereof. Had the intention of the legislature was to make the said amendment retrospective in nature, then it should have stated so whereas as per the statute, the said amendment is effective from 01.04.2015 only. It may be mentioned that in the case of Gem Granites Vs CIT [2004] 141 Taxman 528 (SC), it was observed by the Hon'ble Apex Court that:

“12. Every statute is prima facie prospective unless it is expressly or by necessary implication made to have retrospective operation. [See: Keshavan Madhava Menon v. State of Bombay AIR 1951 SC 128, 130], There is nothing in the wording of the 1991 amendment to suggest that it was to operate retrospectively. Apart from the lack of any express words indicating such intention, there is nothing in the statute from which we can infer on any principle of interpretation that the intention of Parliament was to give the amendment retrospective effect.

(v) Therefore, looking to the totality of facts and circumstances, it is held that the AO was justified in invoking the provisions of section 40(a) (ia) of the Act and thus the disallowance of Rs. 6,99,639/- made is hereby upheld.”

as under:

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assigned our loan to Kotak Mahindra Bank Ltd. w.e.f. 05.02.2013 (PB 20) and therefore, the assessee was helpless in obtaining the certificate in Form 26A. However, considering that it is an NBFC who is regularly filing the return of income and the balance sheet of this company is filed to the AO vide letter dated 10.02.2013 (refer pages 2-3 of the assessment order), it should be presumed that it has included the interest income in their return and paid tax on the same as held by the Hon’ble ITAT Jaipur Bench in case of ACIT vs. Girdhari Lai Bargoti ITA No. 757/JP/2012 dated 10.04.2015 where relying on the decision of the Hon’ble Delhi High Court in case of CIT Vs. Tran Bharat Aviation Pvt. Ltd. 320 ITR 671 it was held that the recipient being an NBFC it is not possible that they are not assessed to tax and therefore, no disallowance u/s 40(a)(ia) can be made. Alternatively, AO be directed cause necessary enquires from Barclays Investment & Loan (India) ltd. to ensure that it has included the interest received from assessee in its income, paid tax thereon and filed the return of income.

“the disallowance of whole of the amount of expenditure results into undue hardship and therefore In order to reduce the hardship, it is proposed that in case of non-deduction or non-payment of TDS on payments made to residents as specified in section 40(a)(ia) of the Act, the disallowance shall be restricted to 30% of the amount of expenditure claimed. ”

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The Finance Minister while introducing the amendment in para 207 of the Budget Speech has stated as under: - “207. Currently, where an assessee fails to deduct and pay tax on specified payments to residents, 100 percent of such payments are not allowed as deduction while computing his income. This has caused undue hardship to taxpayers, particularly where the rate of tax is only 1 to 10%. Hence, I propose to provide that instead of 100 percent, only 30% of such payments will be disallowed. ”

From the above it can be noted that the amendment made by FA (No.2) Act, 2014 w.e.f. 01.04.2015 is to remove unintended and undue hardship and therefore this amendment should be give retrospective effect as per the various decisions stated above. It is also submitted that the Hon’ble Supreme Court in case of CIT Vs. Vatika Township Pvt. Ltd. 109 DTR 33 has held that legislations which modify accrued rights or which impose obligations or impose new duties or attach a new disability have to be treated as prospective unless the legislative intent is clearly to give the enactment a retrospective effect. However, if legislation confers a benefit on some persons but without inflicting a corresponding detriment on some other person or on the public generally and where to confer such benefit appears to have been the legislators object, then the presumption would be that such legislation, giving it a purposive construction, would warrant it to be given a retrospective effect. Therefore even in a case it is held that the disallowance u/s 40(a)(ia) is warranted, same should be restricted to only 30% of the amount of interest paid. Reliance is placed on the following cases where it is held that any amendment made in the Act which is intended to remove unintended and undue hardship should be given retrospective effect. Ld AR relied on the following case laws:

ITA 734/JP/2017_ 9 M/s Mittal Pharma P. Ltd. Vs ITO

(i) Shri Rajendra Yadav vs. ITO (Jaipur Trib) ITA No.895/JP/2012 pronounced on 29.01.2016. (ii) Allied Motors Pvt. Ltd. vs. CIT 224 1TR 677 (SC) (iii) CIT vs. Alom Extrusions Ltd. 319 ITR 306 (SC) In view of above, the disallowance confirmed by the Ld. CIT(A) be directed to be deleted or alternatively be restricted to 30% of the amount disallowed in case of Barclays Investment & Loan (India) Ltd.

authorities below.

payable has been decided by the Hon'ble Supreme Court in the case of

Palam Gas Ltd. Vs M/s Palam Gas Services Vs CIT in Civil Appeal No. 5512 of 2017 order dated May, 03rd, 2017, therefore, this pleading is

dismissed. As far as retrospectivity of amendment in Section 40(a)(ia) of

the Act is concerned, I hold that it was a substantive change in law.

Every substantive change in statute is prospective except where it is

expressly made retrospectively. Thus only pleading of ld. A.R. that

certificate submitted for M/s Religare Finvest Ltd. was not considered by

the ld. CIT(A) is remains to be considered. In view of various decisions

of the Courts, this plea is allowed. The certificate produced needs

consideration. In the interest of justice and equity, this issue is restored

back to the file of the Assessing Officer for verification. The certificate

issued by the C.A. in the case of M/s Religare Finvest Ltd. shall be

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considered by A.O. and of found in order, relief shall be allowed. As

regarding the difficulty in submitting certificate from Barclays

Investment & Loan (India) Ltd. is concerned, I am of the view that the

assessee shall be provided one more opportunity to submit the same.

Therefore, this issue is also restored to the file of Assessing Officer. The

ground is partly allowed for statistical purposes.

relating to disallowance of interest paid on the borrowed funds and also

making the interest free advances to M/s Ravi Associates. The ld CIT(A)

has dealt these issues in his order by holding as under:

3.2.2 Determination:

(i) I have duly considered the submissions of the appellant, assessment order and the material placed on record. It is an undisputed fact that as on 31.03.2012, the appellant was having share capital of Rs. 7,50,200/- and Reserves of Rs. 14,62,377/- i.e. it was having 22,12,577/- of its own interest free funds whereas it has shown investment in equity shares of M/s Salasar Buildhome Pvt. Ltd. to the tune of Rs. 33.50 Lac. It was the contention of the appellant that it has made application for allotment of equity share of M/s Salasar Buildhome Pvt. Ltd. during the FY 2009-10 and the equity shares were not issued till date and by mistake, in the balance sheet as on 31.03.2012, the same was shown as investment and the provisions of section 14A of the Act were not applicable on share application money as it could not yield any income. I find merit in the contention of the

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appellant as in the case of Rainy Investment Pvt. Ltd. vs. ACIT 56 SOT 0061 (Mum.) as relied upon by the appellant, it was held by the Hon’ble ITAT, Mumbai that share application money being incapable of yielding any tax-free income, same would have to excluded in working out disallowance under rule 8D. Therefore, I do not find any justification for the AO to invoke the provisions of section 14A of the Act and hence, the disallowance of Rs. 4,63,951/- made by the AO is hereby deleted.

(ii) However, it was noted earlier in this order that as on 31.03.2012, the appellant was having its own interest free funds to the tune of Rs. 22,12,577/-whereas it has shown investment in equity shares of M/s Salasar Buildhome Pvt. Ltd. to the tune of Rs. 33.50 Lac meaning thereby that borrowed funds to the tune of Rs. 11,37,423/- were used for making share application money. During the course of hearing, the appellant was asked whether there was any business purpose or commercial expediency in making application for the allotment of equity shares of M/s Salasar Buildhome P Ltd but no satisfactory explanation could be furnished. Further, it was stated by the appellant that the equity shares were not even allotted till date. Therefore, these facts clearly establish that the appellant has utilized borrowed funds to the extent of Rs. 11,37,423/- for non business purposes or without any commercial expediency and thus in view of the Hon'ble Apex Court decision in the case of S A Builders 288 ITR 1 (SC), the proportionate interest is to be disallowed u/s 36( 1)(iii) of the Act. The appellant has paid interest @ 12% and thus a sum of Rs. 1,36,491/- is being disallowed u/s 36(1) (iii) of the Act, accordingly.

The ld. CIT(A) has further held as under: 3.3.2 Determination:

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(i) I have duly considered the submissions of the appellant, assessment order and the material placed on record. It is an undisputed fact that the appellant was neither having business transactions with M/s Ravi Associates, a proprietorship concern of one of its Director, Shri Ravindra Prashad Gupta nor any commercial expediency was shown by the appellant for advancing such interest free advances. The contention of the appellant that the said amount was given out of its own interest free funds has no merit and is accordingly, hereby rejected as its interest free funds were not even sufficient to make share application for the equity shares of M/s Salasar Buildhome P Ltd, as discussed in the earlier ground of appeal. Further, on a perusal of the account of M/s Ravi Associates as appearing in the books of accounts revealed that there were continuous transactions throughout the year under consideration. The contention that it has neither charged nor paid any interest from/to M/s Ravi Associates and therefore, the disallowance made by the AO is to be deleted is also of no avail as it was noted that the AO has computed day today interest after taking into account the debit/credit balance i.e. after charging interest on debit balances and allowing interest on credit balances. During the appellate proceedings, the appellant could not controvert these findings of the AO, as recorded in the assessment order. (ii) Therefore, in view of the above discussion and looking to the facts and circumstances of the case, it is held that the AO was justified in making disallowance of Rs. 1,42,790/- u/s 36(1) (iii) of the Act and hence the same is hereby sustained.

as under:

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Salasar Buildhome Pvt. Ltd. Thus, the investment is made in commercial expediency. Therefore, in view of the decision of Hon’ble Supreme Court in SA Builders 288 ITR 1, no disallowance out of the interest can be made. Further, when in earlier years, no disallowance is made, the same cannot be made in the subsequent years as held by the Hon’ble Supreme Court in case of Munjal Sales Corporation vs. CIT & ANR. (2008) 298 ITR 298 where it is held that “once it was found that interest free loans granted by assessee to its sister concerns in August/September, 1991, continued upto asst. yr. 1997-98 and that the said loans were advanced out of its own funds for business purposes and that the interest paid thereon did not exceed the rate prescribed under s. 40(b)(iv), assessee was entitled to deduction under s. 36(l)(iii) r/w s. 40(b)(iv) for asst. yrs. 1993-94 to 1997-98”. In this case also, when the amount was given no disallowance was made and therefore, in the subsequent year, without any change in the facts and circumstances, the disallowance u/s 36(1)(iii) cannot be made.

Otherwise also, assessee is having interest free funds (PB 22-24) 4. in the form of share capital (Rs. 7,50,200/-), reserves and surplus (Rs.14,62,377/-) and the sundry creditors (Rs.33,34,531/-) aggregating to Rs. 55,47,108/-. Out of which, amount advanced to M/s Salasar Buildhome Pvt. Ltd. is Rs.33,50,000/- only. Thus, the interest free fund available is more than the interest free advance given. The interest expenditure of Rs. 28,73,401/- incurred by the assessee on short term borrowing of Rs.47,36,284/- and Long term loan Rs. 1,07,60,791/- aggregating to Rs. 1,54,97,075/- as on 31.03.2012. These loans are invested in stock and trade

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receivable of Rs. 98,79,984/- and Rs. 79,49,513/- respectively aggregating to Rs. 1,78,29,497/-. Thus, the entire loan was utilized for the purpose of the business of the assessee and not in giving interest free advances. Hence, no part of interest expenditure incurred by the appellant can be attributed towards giving of advance to M/s Salasar Buildhome Pvt. Ltd. It is a settled law that if there are funds available both interest free and over draft and/or loans taken, then a presumption would arise that advance/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. For this, reliance is placed on the following judicial precedents:-

(i) CIT vs. Max India Ltd. (2016) 141 DTR 145 (P&H) (HC)

Merely because the interest free funds with the assessee have decreased during any period, it does not follow that the funds borrowed on interest were utilized for the purpose of investing in assets yielding exempt income. If even after the decrease, the assessee has interest free funds sufficient to make the investment in assets yielding the exempt income, the presumption that it was such funds that were utilized for the said investment remains. Natural course of business would suggest that the assessee would utilize the funds to the maximum advantage which in cases such as these would lead to making investments for the operational assets first out of interest bearing funds. Presumption as regards the utilization of interest free funds and borrowed funds in a mixed pool ought to be in favour of the assessee. Finding, therefore, that the assessee had sufficient interest free funds to make the investment yielding tax free returns cannot be faulted. Tribunal was justified in holding that no expenses is attributable to the exempted income as the Revenue had failed to establish a direct nexus between the expenses incurred and the income earned.

(ii) CIT vs. Karnataka State Industrial & Infrastructure Development Corpn. Ltd. (2016) 237 Taxman 240 (Kar.) (HC)

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Assessee was a State Government undertaking engaged in financing industrial units. It had made investment in securities on which it earned tax free dividend income. AO observed that though 75 per cent of investments were made through funds given by State Government, 25 per cent of investments were made out of mixed pool of funds and therefore 25 per cent of interest expenditure was taken as indirect expenditure liable for disallowance u/s 14A read with Rule 8D. As amount of disallowance exceeded amount of exempt income itself, AO adopted a sum of 5 per cent of indirect expenditure together with 0.5 per cent of average investments under Rue 8D(2)(iii) as disallowance under section 14A read with Rule 8D. It was held that since AO failed to establish direct nexus between borrowed funds and tax free investments, no disallowance could be made towards interest u/s 14A read with Rule 8D.

(iii) CIT vs. Suzlon Energy Ltd. (2013) 354 ITR 630 (Guj.) (HC)

Where assessee had own interest free funds many times over the investment made in Indian subsidiaries and further, there was no direct nexus between interest bearing borrowed funds and such investment, no disallowance of interest expenditure could be made u/s 14A.

(iv) Hon’ble ITAT in case of Vijay Industries for A.Y. 06-07 in ITA No. 673/JP/15 order dated 17.06.2016 where also the disallowance of interest made by AO was set aside by the Hon’ble ITAT but again AO made the disallowance which is confirmed by CIT(A) but considering the fact that assessee has sufficient reserve and surplus to make investment in shares and in the absence of direct nexus between interest bearing funds and investment in shares, the disallowance made by the lower authorities was deleted. In deleting the disallowance, Hon’ble ITAT placed reliance on the decision of Bombay High Court in case of CIT Vs. Reliance Utilities and Power Ltd. 313 ITR 340 and also on various other decisions cited by the assessee.

(v) DCIT vs. Maharashtra Seamless Ltd. (2011) 52 DTR 005 (DeI.)(Trib.)

In this case CIT(A) deleted the disallowance on the ground that assessee had maintained that interest expenditure was incurred in respect of borrowing on cash credit limits utilized for normal business

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purpose of the assessee & no part of borrowed funds has been utilized for making investment in tax free bonds & that the AO had not established any nexus between the borrowed funds & the investment in tax free bonds. These findings of CIT(A) was held justified & it was held that where funds are mixed & it is not possible to ascertain as to whether investment in tax free bonds was out of assessee’s own fund, the AO did not establish nexus between borrowed funds & the investment in tax free bonds, in such cases apportionment on pro rata basis was improper in the absence of any thing brought by the AO to rebut the assessee’s stand that the investment in tax free bonds had been made out of the funds of the shareholders. In view of the above, the disallowance of Rs. 1,36,491/- made by the Ld. CIT(A) be directed to be deleted.

The ld AR has further submitted as under:

(i) The AO observed that assessee has debited interest on borrowing at Rs. 28,73,401/- but it has made interest free advance to M/s. Ravi Associates, a proprietary concern of its director, Shri Ravindra Prasad Gupta. The advances given are without any commercial expediency. No business transaction is carried out with M/s. Ravi associates. Accordingly, he calculated interest @ 12% and thereby, disallowed interest expense u/s 36(l)(iii) of Rs. 1,42,790/-.

(ii) The Ld. CIT(A) held that neither having transactions with M/s Ravi Associates nor any commercial expediency was shown for advancing such interest free advances. The contention of the assessee that the amount was given out of its own interest free funds has no merit as its interest free funds were not sufficient to make share application for equity shares of M/s Salasar Buildhome Pvt. Ltd. He further stated that assessee did not controvert the findings of the AO. Accordingly, he confirmed the disallowance.

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(iii) At the outset, we may point out that the assessee is having current account with Ravi Associates and wherever amount is required in the business amount is received from Ravi Associates and wherever amount is required by Ravi Associates the same is given to them (PB 27-31). Therefore, no interest is charged. It may be noted that in subsequent years, assessee has received advance from Ravi Associates on which no interest was paid. Even during the year, assessee has received the amount from Ravi Associates between 30.05.2011 to 20.09.2011. Thus, the amount advanced and received from M/s Ravi Associates is because of commercial expediency due to meet the exigencies of business as per the principle laid down by the Hon’ble Supreme Court in case of S A Builders (supra) and therefore, no disallowance u/s 36(1) (iii) can be made.

(iv) It is also submitted that as stated in Ground No. 2 above, the interest free fund available after considering the interest free advance given to M/s Salasar Buildhome Pvt. Ltd. would be Rs. 21,97,108/-. This amount is much more than the interest free advance given to M/s Ravi Associates. Therefore, also no disallowance is justified in view of the decisions referred above.

In view of the above, the addition confirmed by the Ld. CIT(A) be directed to be deleted.

authorities below.

pleadings and factual aspects raised by both the sides. I am of the

ITA 734/JP/2017_ 19 M/s Mittal Pharma P. Ltd. Vs ITO considered view that both these issues needs a fresh look at the level of

the Assessing Officer, therefore, in the interest of justice and equity, the

issues raised in grounds No. 2 and 3 of the appeal are restored back to

the file of the Assessing Officer to be decided de novo.

adjudication. Hence, the same stand dismissed.

statistical purposes only. Order pronounced in the open court on 23/11/2017.

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