ACIT CORPORATE CIRCLE 2 , MADURAI vs. T.V.SUNDARAM IYENGAR & SONS LTD. , MADURAI

For AY 2010-11 Opening investment 6360.78 Opening Reserves & Surplus 26691.90 Closing investments 9291.71 Closing Reserves & Surplus 34020.67 -2761/Chny/2019 & 4 -:

2.2 The Ld.Counsel for the assessee stated that once the assessee has more interest free funds available with it, then, the investment in the books of accounts, on which, assessee has earned exempt income, no disallowance can be made. The ld.Counsel stated that similar is the position in AYs 2012-13, 2013-14 & 2014-15. The details are as under:

AY 2012-13 AY 2013-14 AY 2014-15 Opening investment 17531.21 15233.89 15491.88 Opening Reserves & Surplus 42040.33 45158.25 32307.04 Closing investments 15233.89 15491.88 15454.80 Closing Reserves & Surplus 45158.25 32307.04 32368.73 2.3 The ld.Counsel admitted that the assessee has earned exempt income in all these years amounting to Rs.5054.38 lakhs dividend income in AY 2012-13 and claimed exempt u/s.10(34) of the Act. In AY 2013-14 exempt income at Rs.62.82 Crs. approximately and claimed exemption u/s.10(34) of the Act and for the AY 2014-15 claimed exempt income of Rs.53.62 Crs. approximately. The Ld.Counsel for the assessee stated that once interest free funds are available with the assessee for making investments giving rise to exempt income, no disallowance can be made by the AO, until and unless, the AO establish direct nexus with the investments made out of interest bearing funds. The Ld.Counsel for the assessee took us through the assessment order for the AY 2010-11 and read out the entire assessment order and argued that there is no iota of any fact that the investment is made out of interest bearing funds in the instruments giving rise to exempt income. The ld.Counsel stated that once this is the position, presumption will go in favour of the assessee by the decision of the Hon’ble Bombay High Court in the case of CIT v. HDFC Bank Ltd., reported in [2014] -2761/Chny/2019 & 5 -:

366 ITR 505 (Bom). The Ld.Counsel for the assessee stated that in other years also the AO has not brought out any nexus in regard to investment made by the assessee for earning of exempt income. The investment is made out of interest free funds. Once this is the fact, the disallowance u/s.14A of the Act r.w.r.8D(2)(ii) of the Rules, cannot be made.

2.4 On the other hand, the ld.Sr.DR could not controvert the fact situation, but stated that the factual aspect of availability of funds, can be referred to the file of the AO for verification, because, at the appellate stage, there is no mechanism for verification of balance sheet filed by the assessee.

2.5 After hearing rival contentions and going through the fact situation, we find that the assessee has given complete details in regard to fund position as noted above, which is extracted from balance sheet for the AYs 2010-11, 2012-13, 2013-14 & 2014-15. The above reproduced statement shows that the assessee has enough surplus funds in the relevant current years to make investments and further, the opening investments at the start of each year, is much less than the available reserves and surplus, which proves that the investment is made out of assessee’s own fund and no portion of borrowing was used to make investment and particularly when the AO has not brought out any nexus. Hence, respectfully following the decision of the Hon’ble Bombay High Court in the case of HDFC Bank Ltd. (Supra), wherein, it is held as under:

We find that the facts of the present case are squarely covered by the judgment in the case of Reliance Utilities and Power Ltd. (supra). The finding of fact given by the ITAT in the present case is that the Assessee's own funds and other non-interest -2761/Chny/2019 & 6 -: bearing funds were more than the investment in the tax-free securities. This factual position is not one that is disputed. In the present case, undisputedly the Assessee's capital, profit reserves, surplus and current account deposits were higher than the investment in the tax-free securities. In view of this factual position, as per the judgment of this Court in the case of Reliance Utilities and Power Ltd. (supra), it would have to be presumed that the investment made by the Assessee would be out of the interest-free funds available with the Assessee. We therefore, are unable to agree with the submission of Mr.Suresh Kumar that the Tribunal had erred in dismissing the Appeal of the Revenue on this ground. We do not find that question (A) gives rise to any substantial question of law and is therefore rejected.

2.6 As the issue is squarely covered in favour of the assessee and the AO has not brought out the nexus that the assessee has made investments in the instrument given to rise to exempt income out of interest bearing funds, we presume that the investment came out of available interest free funds.

Hence, we delete the disallowance and allow the appeals of the assessee on this issue.

Consequently, the appeal filed by the assessee is partly allowed for statistical purposes.

1.1. That the order of the learned Commissioner of Income Tax (Appeals) [CIT (A)'] is contrary to the facts and circumstances of the case and against the principles of equity and natural justice.

1.2. The learned CIT (A) erred in not appreciating the fact that the contents of the course of higher study for which admission was obtained, included specialization in various technical fields connected with Automobile Engineering and Management Studies which was done with the intention to add immense value to the company in future as the Appellant is engaged in the business of Automobile Engineering, distribution of Motor vehicles, Spare Parts, Accessories and petroleum products and Lubricants.

1.3. The learned CIT' (A) erred in not appreciating the fact that upon completion of the study they would return to serve the company or any of its Group/ Associate Companies and they have entered into a written agreement in that regard.

1.4. The learned CIT(A) erred in upholding the disallowance made by the Assessing Officer merely because the employee/trainee happens to be the relative of the Director and considering the same as expenditure of personal nature.

4.1 At the outset, the Ld.Counsel for the assessee stated that the authorities lower overlooked that all the persons were deputed for higher studies only after taking the large business interest of the assessee company into consideration and its large number of associated companies.

He argued that the authorities below overlooked the contents of the course of higher study, for which, permission was obtained, including specialization -2761/Chny/2019 & 8 -: in various technical fields connected with automobile engineering and management studies. The assessee made a claim, because, acquisition of such advanced knowledge in these technical fields will be immensely valued in the field of business of the assessee company. It was contented that company sponsored the persons and deputed them for higher study on the understanding that on completion of advanced study, they would return to India and serving the company or in any of its group/associated company promoted by the group concern in a position of responsibility. According to the ld.Counsel, such deputation by employer is a matter of common occurrence and in the interest of business and economical manner. He stated that this is a business expediency and business expenditure accordingly, allowable u/s.37 of the Act. However, the ld.Counsel stated that this issue is covered against the assessee by the decision of the Tribunal in the assessee’s own case for the AY 2010-11 in dated 03.07.2015, wherein, the Tribunal has confirmed the disallowance by observing in Para No.5, which is as under:

-2761/Chny/2019 & 9 -:

4.2 When these facts are confronted to ld.Sr.DR, he stated that the issue is covered in the assessee’s own case by the decision of the co-ordinate Bench and hence, no different view can be taken as the facts and circumstances are exactly identical and the Ld.Counsel for the assessee could not distinguish the facts of the case for the AY 2011-12.

4.3 After hearing both the sides and going through the facts of the case, we noted that this issue is exactly identical and there is no change in facts in these two years also, what was before the ITAT in AY 2010-11 in and hence, taking the issue as covered, we decide the issue against the assessee. This issue in both the appeals of the assessee is dismissed.

5. The next common issue in these two appeals in & 2760/Chny/2019 for the AYs 2012-13 & 2013-14 is as regards to the disallowance of foreign travel expenses by the AO and confirmed by the Ld.CIT(A). The facts and circumstances are exactly identical in both the years and also raised identical worded grounds and hence, we take the facts from AY 2012-13 and decide the issue. The grounds raised by the assessee reads as under:

4.1. The learned CIT (A) erred in confirming the disallowance made by the Assessing Officer by overlooking the fact that the expenses incurred were in connection with the travel of the Consultant for the purposes of Business Promotion. 4.2.The learned CIT(A) erred in upholding the disallowance made by the Assessing Officer merely because the consultant happens to be the relative of the Director and considering the same as expenditure of personal nature. 4.3.The learned CIT (A) erred in assuming that the expenses incurred have no relationship with the business of the company.

-2761/Chny/2019 & 10 -: 5.1 The brief facts of the case are that the assessee claimed a sum of Rs.5,27,794/- under the head ‘foreign travel expenses’ in regard to expenditure incurred towards foreign travel of one Ms.Anitha Raajyalaxmi Ratnam, who is sister of the Director of the assessee company Mr.Srinath Raja. The assessee before the AO could not produce any evidence that this business tour expenses or for the purpose of business of the assessee and accordingly, following the decision of the Hon’ble Madras High Court in the case of D.B. madan v. CIT, reported in (Mad) 261 ITR 193 and also in the case of CIT v. T.S.Hajee Moosa & Co., reported in (Mad) 153 ITR 422, disallowed the claim of the assessee by the AO. The Ld.CIT(A) also confirmed the action of the AO by following his predecessor order for the AY 2011-12 in wherein, the foreign travel expenses of Director of assessee’s sister Ms.Anitha Raajyalaxmi Ratnam, was confirmed. Aggrieved the assessee is in appeal before the Tribunal.

5.2 We have heard the rival contentions and gone through the facts and circumstances of the case. Before us, the Ld.Counsel for the assessee only made bald submission that the assessee has spent money towards travel expenditure of Consultants of the assessee company and for this, he relied on the decision of the Hon’ble Calcutta High Court in the case of JK Industries Ltd. v. CIT reported in [2011] 335 ITR 170 (Cal). Now, we noted that the Hon’ble Madras High Court has categorically held that expenses on foreign travel, wife of Director of assessee’s company, the assessee has to show that the expenditure is incurred for the business purpose. Here, even -2761/Chny/2019 & 11 -: now, on a query from the Bench, the ld.Counsel could not produce any evidence or explain how the business expenditure incurred for foreign travel of sister of Director of the assessee company that Ms.Anitha Raajyalaxmi Ratnam, is for the purpose of business. He failed to do so. In the absence of any evidence, we have no alternative except to confirm the addition. The similar are the facts in regard to AY 2013-14 in and the Ld.Counsel for the assessee, could not distinguish the fact situation and hence, taking a consistent view, we dismiss this issue of the assessee’s appeal.

5.1.The learned CIT (A) erred in disallowing the medical expenses paid to the spouse of Shri. K. Mahesh, the Whole Time Director of the company disregarding them as that of personal nature. 5.2. The learned CIT (A) failed to appreciate the fact that Shri Mahesh had been in employment with the Company since 01.12.1965 and the terms of appointment of the company included medical expenses incurred for self and family.

6.1 Brief facts of the case are that the AO from the return of income noticed that the assessee has claimed medical expenses paid in foreign currency for an amount of Rs.9,74,968/- incurred towards medical -2761/Chny/2019 & 12 -: treatment of one Ms.Shirmathi Mahesh relative of the Director of the assessee company. The assessee company was specifically asked to explain with evidences that the medical expenses incurred is for the purpose of business and not in the nature of personal expenses. The assessee company could not furnish any explanation. The AO relied upon the decision of the Hon’ble Madras High Court in the case of CIT v. TIAM House Service Ltd. (Mad) reported in 243 ITR 695, noted that ‘medical expenses of advisor to company met by company as decided by Board of Directors’, is not deductible expenses. Because, this is not in the nature of business expenditure. Hence, the AO noted that the medical expenses incurred by the assessee company amounting to Rs.9,74,968/- towards treatment of Ms.Shirmathi Mahesh relative of the Director of the assessee company, are personal in nature or not incidental to the business of the assessee company and hence, disallowed. Aggrieved, the assessee preferred an appeal before the Ld.CIT(A).

6.2 The Ld.CIT(A) after taking Remand Report from the AO dismissed this grounds of appeal confirming the action of the AO in making disallowance of medical expenses. Aggrieved, assessee came in appeal before the Tribunal.

6.3 Before us, the Ld.Counsel for the assessee stated that Ms.Shirmathi Mahesh, Director of the assessee company and as per the terms of his appointment, included medical expenses for self and family as in the case of other executives and employees of the company and terms of -2761/Chny/2019 & 13 -: remuneration fixed by the Board of Directors and as approved by the Members of the company. The Ld.Counsel for the assessee explained that for the year ended 31.03.2012, an amount of Rs.9,74,968/- was incurred in foreign currency towards medical treatment of Ms.Shirmathi Mahesh, who is spouse of whole time Director of the assessee company. The main argument of the Ld.Counsel for the assessee was that the same should have been allowed as the same is based on the terms of his appointment, includes medical expenses for self and family. On the other hand, the Sr.DR heavily relied on the assessment order and the order of the Ld.CIT(A).

6.4 We have heard the rival contentions and gone through the facts and circumstances of the case. We noted that this issue has been decided by the Hon’ble Madras High Court in the case of CIT v. TIAM House Service Ltd. (supra), wherein, the following question was decided:

‘Whether, on the facts and in the circumstances of the case, the Income tax Appellate Tribunal was right in holding that the medical expenditure to the extent of Rs.2,54,994/- incurred on by an employee should be allowed as a valid business expenditure in the hands of the assessee under section 37 of the Income tax Act, 1961?”

The Hon’ble Madras High Court relied on the decision of the Hon’ble Supreme Court in the case of Gordon Woodroffe Leather Manufacturing Co. v. CIT reported in [1962] 44 ITR 551, wherein, certain tests laid down by the Hon’ble Supreme Court were that the payment should have been made as a matter of practice which affected the quantum of salary. There should be expectation by the employee for payment of medical expenses. The sum of money was expended on the ground of commercial expediency and in -2761/Chny/2019 & 14 -: order to facilitate indirectly the carrying on of the business of the assessee.

If any one of the tests was not satisfied that medical expenditure incurred on by an employee should not be allowed as a valid business expenditure in the hands of the assessee under section 37 of the Income Tax Act, 1961.

Based upon the above points, the High court held that the expenditure in connection with the payment of Medical expenses met out by the company even though, the same had been spelt out in the letter of appointment cannot be regarded as sufficient for treating the expenditure as business expenditure.

6.5 In view of the above decision of the Hon’ble Madras High Court in the case of CIT v. TIAM House Service Ltd. (Supra), wherein, the decision of the Hon’ble Supreme Court was followed. We are of the view that these expenses incurred towards medical expenses of the relative of the Director of the assessee company in foreign currency amounting to Rs.9,74,968/- are personal in nature and not in relation to any business connection.

Hence, the lower authorities have rightly disallowed the same and we confirm the same.

2.1. The learned CIT (A) erred in wrongly assuming that M/S 'T'VS Srichakra Ltd is a subsidiary company. He has failed to appreciate the fact that M/ s 'T'VS Srichakra Ltd is an Associate Company and is only a supplier of materials to the Appellant.

2.2. The learned CIT (A) failed to appreciate the fact that the amount was advanced to them charging a proper interest to ensure uninterrupted supply of goods. The 'Advance was however returned back by the said company.

2.3. The learned CIT(A) failed to appreciate the fact that although no interest is chargeable on such advances, the company has charged interest at 11% and received a sum of Rs.1,45,36,607/- and has been offered to tax.

2.4. The learned CIT (A) erred in assuming that the interest charged on advances should match with interest paid on borrowings.

2.5. The learned CIT (A) failed to appreciate that the issue is pending before the Hon'ble ITAT in ITA 554/CHNY-2016.

8.1 Brief facts of the case are that during the year ended 31.03.2012, the following advances were made to TVS Srichakra Ltd. i.e. supplier of goods to the assessee company:

Date of Advance Amount Paid (in Rs.) 14.11.2011 4,00,00,000 08.03.2012 2,00,00,000 31.03.2012 9,00,00,000 Total 15,00,00,000 The assessee charged interest @ 11% amounting to Rs.1,45,36,667/-.

According to the AO, the interest rate charged is on lower side and interest paid to bank was charged at 11.75% by the bank. Hence, the AO made disallowance of interest of diversion of borrowed funds to subsidiary company at lower rate of interest by 0.7% and thereby, added a sum of Rs.9,91,159/-. Aggrieved, the assessee preferred an appeal before the Ld.CIT(A). The Ld.CIT(A) confirmed the action of the AO simply sat without discussing anything on merits.

8.2 Aggrieved, the assessee came in appeal before the Tribunal. -2761/Chny/2019 & 16 -:

8.3 We have heard the rival contentions and gone through the facts and circumstances of the case. Before us, the Ld.Counsel for the assessee stated that during the previous year 2011-12 relevant to AY 2012-13, the assessee has advanced money to TVS Srichakra Ltd., who was supplier of the assessee company and the money was advanced charging proper interest to avoid uninterrupted supply of goods. It was explained that the assessee charged 11% interest on such advances, even though, no interest is chargeable. The Ld.Counsel for the assessee stated that these advances are for supply of goods to avoid uninterrupted supply of goods. The assessee charged interest @ 11%. Otherwise, these are not loans or advances rather advances in lieu of supply of goods. The Ld.Counsel for the assessee also filed statement of funds and stated that the assessee has available funds with it in the shape of surplus funds and given the following details:

Statement to show surplus funds AY 2012-13 31.03.2011 Particulars Profit for the year before taxes 11918.56 Add: Depreciation 2150.06 14068.62 Less: Taxes paid -3472.62 Less: Dividend & Dividend Tax -6107.29 Balance 4488.71 Less: Investments made during the year in companies 656 Balance Surplus 3832.71 Amount Lent to TVS Srichakra 1500 (issue on diversion) Opening investment 17531.21 Opening Reserves & Surplus 42040.33 Closing investments 15233.89 Closing Reserves & Surplus 45158.25 -2761/Chny/2019 & 17 -:

8.4 In view of the above, the Ld.Counsel for the assessee stated at the best, the matter can be referred back to the file of the AO for verification of the actual availability of surplus funds. Since, assessee has filed these details before us as the assessee is having surplus funds with it for making advance to TVS Srichakra Ltd., according to us, in such situation, no disallowance has been made in view of the decision of the Hon’ble Bombay High Court in the case of CIT v. Reliance Utilities and Power Ltd., reported in (2009) 313 ITR 340 (Bom).

8.5 Accordingly, we remit this issue back to the file of the AO with the above directions. This issue is allowed for statistical purposes.

Hence, we need not re-produce the same.

9.1 Brief facts of the case are that the AO during the course of assessment proceedings, noticed that the assessee company has debited a sum of Rs.25.40 Crs. as transport and freight charges for the relevant FY 2013-14 relevant to this AY 2014-15. The AO from information supplied by the -2761/Chny/2019 & 18 -: assessee, noticed that the assessee has not deducted TDS in respect to the following divisions:

TVS Division Rs. 6,99,25,501 Sundaram Motors Division Rs. 71,12,914 Madras Auto Service Division Rs. 1,15,15,070 Total Rs. 8,85,53,485 9.2 According to the AO, the assessee has submitted that Form No.26Q i.e. quarterly return of TDS for all the four quarters which were due on or before 15th July, 15th October, 15th January in respect of first three quarters of the FY and for the last quarter on or before 15th June, but actually these declarations were filed in the month of August, 2017, almost after a lapse of around two years from the due date. Since, the assessee has not complied provisions of Sec.194C(6) & (7) of the Act r.w.r.31A of the Income Tax Rules, 1962, and accordingly, invoked provisions of Sec.40(a)(ia) of the Act, made disallowance. Aggrieved, the assessee preferred an appeal before the Ld.CIT(A), the Ld.CIT(A) deleted the addition by holding as under:

I have considered the arguments advanced by the Assessing Officer in the assessment order and the submissions made by the authorized representative on this issue. There is no dispute that the appellant has filed TDS statements required u/s.194C(6) & (7) r.w.rule 31A but with a huge delay. Circular 19 of 2015 dated 27.11.2015 at para No.43.8, reiterates the fundamental position of law under this section that non-furnishing or incomplete furnishing of the required information in Form No.26Q shall make the deductor liable for penalty u/s.271H of the Income Tax Act, !961. As per section 194C(6) no deduction of TDS shall be made from any sum credited or paid or likely to be credited or paid during the relevant previous year to the account of contractor in course of business of plying, hiring, leasing goods carriages, where such contractor owns 10 or less goods carriages at any time during the previous year and furnishes a declaration to that effect along with his Permanent Account Number to the person paying or crediting such sum. Section 194C(7) requires the deductor to furnish the same to the prescribed authority, in the prescribed format, within the required due dates as explained under Rule 31A of the Income Tax Rules. In this case, the appellant complied with the provisions contained u/s.194C (6) & (7) r.w.Rule 3IA. However, there is a huge delay in filing such TDS statements. In view of the compliance, although belated, the Assessing Officer was legally not correct to disallow the amount u/s 40(a)(ia) of the Act.

-2761/Chny/2019 & 19 -:

However, it was open for the Assessing Officer to initiate and levy penalty u/s.271H. in view of the legal position, the disallowance u/s.40(a)(ia) for violation of provisions u/s 194C(6) & (7) are deleted. Accordingly, the related grounds at point No.2.1. to 7.6 are allowed.

9.3 Aggrieved, now the Revenue is in appeal before us. Before us, the Ld.Counsel for the assessee filed copy of judgement of the Hon’ble Madras High Court in the case of Dilip Kumar v. ACIT reported in [2019] 111 taxmann.com 52 (Madras), wherein, it has been held that the TDS related documents are not submitted on time or at the time of filing of TDS returns, fine can be imposed for late submission, but the assessee will entitled to claim deduction u/s.194C(7) of the Act. The Hon’ble Madras High Court has considered this issue and finally held that procedural law as prescribed under provisions of Sec.194C(7) of the Act, cannot take any benefit, which will accrue to the assessee u/s.194C(7) of the Act, and for this, it was recorded in Para No.14, which is as under:

“14. Even assuming that the assessee had not furnished the particulars as required under Sub-Section (7) of Section i94C of the Act in the prescribed form, the maximum that could be done is to impose a fine of Rs.200/- for every day of such noncompliance. Therefore, this procedural law, as prescribed under Sub-Section (7) of Section 3 94C of the Act cannot take away the benefit, which will accrue to the assessee under Sub-Section (7) of Section 194C of the Act. For the above reasons, we are inclined to remand the matter to the Assessing Officer for a fresh consideration”.

9.4 We noted that the Ld.CIT(A) has given exactly the same findings that there are penal provisions for the lapse, no disallowance can be made by invoking provisions of Sec.40(a)(ia) of the Act, and accordingly, respectfully following the decision of the Hon’ble Madras High Court in the case of Dilip Kumar v. ACIT (supra) and we dismiss this appeal filed by the Revenue.

ITA Nos.2758-2761/Chny/2019 & 20 -: 10. In the result, appeals filed by the assessee in 2761/Chny/2019 are partly allowed for statistical purposes and appeal filed by the Revenue in ITA No.2754/Chny/2019 is dismissed.

Order pronounced on the 22nd day of June, 2022, in Chennai.