DCIT, C-V, LUDHIANA vs. M/S HERO CYCLES LTD., LUDHIANA

4. Vide ground no. 1 the grievance of the Department relates to the deletion of disallowance of Rs. 14,15,10,213/- made by the A.O. by invoking the provisions of Section 14A of the Income Tax Act, 1961. (hereinafter referred to as Act).

6. Being aggrieved the assessee carried the matter to the Ld. CIT(A) and furnished the written submission which have been reproduced by the Ld. CIT(A) at page no. 6 to 42 of the impugned order. The Ld. CIT(A) after considering the submissions of the assessee, deleted the disallowance made by the A.O. by observing in para 5.2 of the impugned order as under: 5.2 I have considered the observations of the Assessing Officer as made by him in para 4 of the assessment order while making the impugned addition. I have also considered written submissions filed by the assessee company through its learned AR vide letter dated 14.12.2017 on the issue under reference. I have further considered various judicial pronouncements relied upon by the learned AR of the assessee company including the orders of the Honourable IT AT, Chandigarh in the case of Assessee Company itself for A.Ys. 2008-09, 2009-10 and 2010- 11 and my own order in appeal No. 347/IT/CIT(A)-2/Ldh./2013-14 dated 09.08.2017 in the case of the assessee company itself for the A. Y. 2011- 12 as well as other material placed by him on record. On careful consideration of the rival contentions, it has been noticed that the issue under consideration is squarely covered in favor of the assessee company by the orders of the Honourable IT AT, Chandigarh in IT A No. 192/Chd/2013 for the A.Y. 2008-09 dated 29.10.2015, IT A No. 314/Chd/2013 for the A.Y. 2009-10 dated 16.02.2016 and & 758/Chd./2014 for the A.Y. 2010-11 dated 03.04.2017 and my own order in appeal No. 347/IT/CIT(A)-2/Ldh./2013-14 dated 09.08.2017 for the A. Y. 2011-12 in the case of the assessee company itself as the identical addition made by the Assessing Officer in A.Ys. 2008-09, 2009-10 & 2010- 11 was deleted by the Honorable jurisdictional IT AT. Not only this, I have also deleted identical addition made by the Assessing Officer in A. Y. 2011-12 vide my own order in appeal No. 347/IT/CIT(A)-2/Ldh./2013-14 dated 09.08.2017 in the case of the assessee company itself for the A.Y. 2011-12. As the facts of the case of the assessee company for the year under consideration as far as the addition under consideration is 4 concerned are identical to the facts of the case of the assessee company for the A.Ys. 2008-09, 2009-10, 2010-11 & 2011-12 and there is no material difference in the facts, the ratio of the decisions of Honorable IT AT, Chandigarh for the A.Ys. 2008-09, 2009-10 & 2010-11 and my own decision for the A. Y. 2011-12 is squarely applicable to the case of the assessee company for the year under consideration. So, respectfully following the orders of the Honourable IT AT, Chandigarh in the case of the assessee company itself for the Assessment Years 2008- 09, 2009-10 and 2010-11 (supra) and my own order in appeal No. 347/IT/CIT(A)-2/Ldh/2013-14 dated 09.08.2017 for the A.Y. 2011-12, the addition of Rs. 14,15,10,213/-made by the Assessing Officer in this case on account of disallowance of expenses by invoking provisions of section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 on the ground that the assessee company had made investment in shares/mutual funds, the income from which in the form of dividend or long term capital gains is exempt from tax under section 10 of the Act is directed to be deleted on the basis of same reasoning and logic as adopted by the Honourable IT AT, Chandigarh in the case of the assessee company itself for the Assessment Years 2008-09, 2009-10 and 2010-11 while deleting the identical addition in these years. In the result, the grounds No. 1, 2 and 3(a) to 3(m) of appeal taken by the assessee company are allowed.

8. The Ld. CIT DR reiterated the observations made by the A.O. and supported the assessment order.

9. In his rival submissions the Ld. Counsel for the Assessee at the very outset stated that this issue is covered in favour of the assessee vide earlier order of the ITAT in assessee's own case for the Assessment Year 2008-09 to 2011-12 copy of ITAT Order for A.Y. 2011-12 is placed in the paper book filed by the assessee. He accordingly submitted that the Ld. CIT (A) rightly deleted the disallowance made by the A.O. by following the earlier orders of the ITAT in assessee's own case, therefore there is no merit in the appeal of the Department.

5 appropriate to reproduce the findings of the ITAT in for the A.Y. 2008-09 wherein vide order dt.29/10/2015 given at para 8 to 10 which read as under:

10. As regards administrative expenses, it is a fact on record that the assessee himself had disallowed an amount of Rs.2,73,13,827/- on account of expenses incurred for earning tax free income and the Assessing Officer has nowhere recorded a finding as to why the disallowance so made by the assessee is not correct. Reliance is placed on the judgment of the Hon'ble Jurisdictional Punjab & Haryana High Court in the case of CIT Vs. Deepak Mittal (2014) 361 ITR 131 to the effect that in the absence of any satisfaction recorded by the Assessing Officer as to why the calculation made by the assessee is not correct, the disallowance made by him on account of 6 administrative expenses under Rule 8D of the Income Tax Rules is not as per law. In view of the above disallowance made by the Assessing Officer under section 14 of the Act read Rule 8D of the Income Tax Rules is deleted.

The aforesaid order has been followed by the ITAT in the Assessment Year's i.e. 2009-10 and 2011-12, we, therefore do not see any valid ground to interfere with the findings of the Ld. CIT (A) who rightly deleted the disallowance made by the A.O. by following the earlier orders of the ITAT in assessee's own case for the A.Y. 2010-11. Accordingly, Revenue appeal on ground No. 1 is dismissed.

12. The facts related to this issue in brief are that the A.O. during the course of assessment proceedings noticed that the assessee paid the commission of Rs.110234965/- to sole selling agents. The A.O. asked the assessee to reply on the following issues: (i) Terms and conditions of payment (ii) Details of services rendered (iii) Rate at which commission is paid (iv)The partners of Munjal Sales Corporation are related to the Directors of M/s Hero Cycles Ltd. Why this expense should not be considered as excessive? (v) What is the rationale of commission expenses when other selling expenses are incurred.

12.1 In response the assessee submitted its reply vide letter dated 06.02.2015. The assessee again submitted a second reply vide letter dated 10.02.2015 in response to show cause which is reproduced in 7 para 5.2 of the assessment order dated 03.03.2015. To avoid repetition the aforesaid submissions are not being reproduced herein.

12.2 The A.O. however was not satisfied from the submission of the assesse and made the addition of Rs. 89866194/- by observing in para 5.5.2, 5.6 & 5.7 as under:

5.5.2 Thus the issue being raised regarding the justification of Commission expenses being paid by the assessee to MSC leads clearly to the conclusion that the Commission expenses are highly exorbitant and unjustifiable. Therefore, the claim of the assessee that the whole of said expenses are to be allowed is rejected. The assessee in the Annexure 'XX' to the tax Audit Report states that the Net Profit/Turnover of the assessee Company is 5.89%. 5.6 Accordingly, the approximation of the justifiable amount of expenses to be paid by the assessee Company to the MSC are calculated by providing a Net Margin of 5.89% over the expenses of Rs. 1,92,35,783/- incurred by MSC which comes to= 1,92,35,783/- x 105.89% = 2,03,68,771/- 5.7 Thus the excess amount of Commission paid of Rs. 8,98,66,194/-(Rs. 11,02,34,965/- -Rs. 2,03,68,771/-) is disallowed and added back to the total income of the assessee as being the expenditure not wholly and exclusively for the purposes of business and is added back to the total income of the assessee."

13. Being aggrieved the assessee carried the matter to the Ld. CIT(A) and furnished the written submissions dt. 14.12.2017 which had been incorporated by the Ld. CIT(A) in para 6.1 at page no. 43 to 55 of the impugned order, for the cost of repetition, the same are not being reproduced herein.

13.1 The Ld. CIT(A) after considering the submissions of the assessee, remand report of the A.O. and counter comments of the assessee deleted the addition by observing in para 6.2 of the impugned order as under: 6.2 I have considered the observations of the Assessing Officer as made by him in para 5 of the assessment order while making the impugned addition. I have also considered written submissions filed by the assessee company 8 through its learned AR vide letter dated 14.12.2017 on the issue under reference. I have further considered various judicial pronouncements relied upon by the learned AR of the assessee company including the orders of the Honourable ITAT, Chandigarh in the case of Assessee Company itself for A.Y. 2010-11 and my own order in appeal No. 347/IT/CIT(A)-2/Ldh/2013-14 dated 09.08.2017 in the case of the assessee company itself for the A.Y. 2011-12 as well as other material placed by him on record. On careful consideration of the rival contentions, it has been noticed that the issue under consideration is squarely covered in favor of the assessee company by the order of my learned predecessor in office in Appeal No. 54/IT/CIT(A)-2/2013-14 dated 09.06.2014 for the A. Y. 2010-11 as well as by the order of the Honourable ITA T, Chandigarh in ITA No. 758/Chd./2014 for the A.Y. 2010-11 dated 03.04.2017 in the case of the assessee company itself as the identical addition made by the Assessing Officer in A.Y. 2010-11 was deleted by the learned CIT(A)-2, Ludhiana and Honorable jurisdictional ITAT. I have also deleted identical addition made by the Assessing Officer in A.Y. 2011-12 vide my order in appeal No. 347/IT/CIT(A)-2/Ldh./2013-14 dated 09.08.2017 in the case of the assessee company itself for the A.Y. 2011-12. As the facts of the case of the assessee company for the year under consideration as far as the addition under consideration is concerned are identical to the facts of the case of the assessee company for the Assessment Years 2010-11 and 2011-12 and there is no material difference in the facts, the ratio of the decisions of the learned CIT(A)-2, Ludhiana and Honorable IT AT, Chandigarh for the A.Y. 2010-11 and my own decision in the case of the assessee company for the A. Y. 2011-12 is squarely applicable to the case of the assessee company for the year under consideration. So, respectfully following the orders of the learned CIT(A)-2, Ludhiana and Honourable ITAT, Chandigarh in the case of the assessee company itself for the A.Y. 2010-11 (supra) and my own decision in the case of the assessee company for the A.Y. 2011-12, the addition of Rs.8,98,66,194/- in this case on account of disallowance out of commission paid by the assessee company to M/s Munjal Sales Corporation on the ground that the commission paid is excessive is directed to be deleted on the basis of same reasoning and logic as adopted by the learned CIT(A)-2, Ludhiana and Honourable IT AT, Chandigarh in the case of the assessee company itself for the A.Y. 2010-11 and by me in A.Y. 2011-12 while deleting the identical addition in Assessment Years 2010-11 and 2011-12. In the result, the grounds No. 6(a), 6(b), 6(c) of appeal taken by the assessee company are allowed.

9 submitted that this issue is squarely covered by the earlier order of the ITAT for the preceding A.Y. 2010-11 in order dt. 03/04/2017 which has been followed by the ITAT in AY 2011-12 vide order dated 15.64.2021 in ITA No. 1493/Chd./2017.

10 Since the facts for the year under consideration are similar to the facts involved in the A.Y. 2010-11, so respectfully following the aforesaid referred order dt.03/04/2017 in in assessee's own case, we are of the view that the Ld. CIT (A) was fully justified in deleting the addition made by the A.O. by following the earlier order of the ITAT. We do not see any merit in this ground of the departmental appeal. Accordingly, Revenue’s appeal on this ground is dismissed.

18. The next issue vide ground no.(iii) relates to the deletion of disallowances of interest made by the A.O. under section 36(1) (iii) of the Act.

11 20. Being aggrieved the assessee carried the matter to the Ld. CIT (A) and furnished the written submissions which had been incorporated in paras 7.1 of the impugned order.

20.1 The Ld. CIT(A) after considering the submission of the assessee, deleted the disallowances made by the A.O. under section 36(1)(iii) of the Act by following the earlier order of the ITAT in forthe A.Y. 2010-11 dt. 03/04/2017. The relevant findings given by the Ld. CIT (A) in para 7.2 of the impugned order read as under: 7.2 I have considered the observations of the Assessing Officer as made by him in para 6 of the assessment order while making the impugned addition. I have also considered written submissions filed by the assessee company through its learned AR vide letter dated 14.12.2017 on the issue under reference. I have further considered various judicial pronouncements relied upon by the learned AR of the assessee company including the orders of the Honourable ITAT, Chandigarh in the case of Assessee Company itself for A.Y. 2010-11 and my own order in appeal No. 347/IT/CIT(A)-2/Ldh./2013-14 dated 09.08.2017 in the case of the assessee company itself for the A.Y. 2011-12 as well as other material placed by him on record. On careful consideration of the rival contentions, it has been noticed that the issue under consideration is squarely covered in favor of the assessee company by the order of my learned predecessor in office in Appeal No. 54/IT/CIT(A)-2/2013-14 dated 09.06.2014 for the A.Y. 2010-11 as well as by the order of the Honourable ITAT, Chandigarh in ITA No. 758/Chd./2014 for the A.Y. 2010-11 dated 03.04.2017 in the case of the assessee company itself as the identical addition made by the Assessing Officer in A.Y. 2010-11 was deleted by the learned CIT(A)-2, Ludhiana and Honorable jurisdictional ITAT. I have also deleted identical addition made by the Assessing Officer in A. Y. 2011-12 vide my order in appeal. No. 347/IT/CIT(A)- 2/Ldh/2013-14 dated 09.08.2017 in the case of the assessee company itself for the A.Y. 2011-12. As the facts of the case of the assessee company for the year under consideration as far as the addition under consideration is concerned are identical to the facts of the case of the assessee company for the Assessment Years 2010-11 and 2011-12 and there is no material difference in the facts, the ratio of the decisions of the learned CIT(A)-2, Ludhiana and Honorable ITAT, Chandigarh for the A.Y. 2010-11 and my own decision in the case of the assessee company for the A.Y. 2011-12 is squarely applicable to the case of the assessee company for the year under consideration. So, respectfully following the orders of the learned CIT(A)-2, Ludhiana and Honourable ITAT, Chandigarh in the case of the assessee company itself for the A.Y. 2010-11 (supra) and my own decision in the case of the assessee company for the A.Y. 2011-12, the addition of Rs.40,22,065/- in this case on account of disallowance of interest by invoking provisions of section 36(1)(iii) of the Act on the ground that the assessee company has debit balance with sister concerns namely M/s Hero Exports and M/s Hero Motors Limited which has been treated as interest free loan/advance allegedly out of borrowed funds for non-business purposes is directed to be deleted on the basis of same reasoning and logic as 12 adopted by the learned CIT(A)-2, Ludhiana and Honourable ITAT, Chandigarh in the case of the assessee company itself for the A. Y. 2010-11 and by me in A. Y. 2011-12 while deleting the identical addition in Assessment Years 2010-11 and 2011-12. In the result, the ground No. 4 of appeal taken by the assessee company is allowed.

19. The facts in the present case, we find, are identical to that in assessment year 2009-10. In the impugned year the loan given is Rs.50 crores,Rs.10 Crore being advanced in the preceding year, while the profit of the assessee for the impugned year is Rs.342.98 crores. Clearly the assessee had enough and sufficient own funds to give the impugned loan and following the decision of the I.T.A.T. in assessee’s case for assessment year 2009- 10 it can be safely presumed that the loan had been given out of the own funds of the assessee and, therefore, called for no disallowance to be made on account of interest. Further has held by the I.T.A.T. in assessment year 2009- 10, the Assessing Officer cannot sit in the arm chair of the assessee and decide the rate of interest at which the loan ought to have been given and moreover the Hon'ble Supreme Court has also deleted the addition made on account of notional interest earned in assessee’s case. In view of the same, the disallowance made amounting to Rs.55,57,069/- on account of differential interest charged from M/s Hero Motors Ltd. is thereby deleted. The ground of appeal No.8 raised by the assessee is, therefore, allowed in above terms.

14 23. Before us, Ld. counsel for the assessee contended that identical issue had been dealt with by the I.T.A.T., Chandigarh Bench in assessee’s case for assessment year 2009-10 in dated 16.2.2016 wherein the disallowance made had been deleted on account of the fact that the assessee had enough own funds for the purpose of investing in the capital work-in-progress. The I.T.A.T. following the decision of the I.T.A.T., Chandigarh Bench in the case of DCIT Vs. Samrat Forgings Ltd. in dated 24.5.2012 had deleted the disallowance made. The relevant findings of the I.T.A.T. at para 22-23 of the order are as under: “22. We have heard the learned representatives of both the parties, perused the findings of the authorities below and considered the material available on record. On perusal of the order of the I.T.A.T., Chandigarh Bench in the case of Samart Forgings Ltd. (supra), we see that similar issue has been decided by the I.T.A.T. at page 9 of the said or, which reads as under : 9.The provisions of the main section and the proviso are in relation to the amount of interest payable on capital borrowed. The first juncture thus to be seen is whether the assessee had borrowed any capital for the purposes of investment in capital asset for extension of existing business or profession. In the facts of the present case, there is no finding by the Assessing Officer in respect of the borrowals made by the assessee for the purposes of investment in capital work-in-progress. The Assessing Officer noted that the assessee had shown capital work-in- progress in its Balance Sheet and consequently computed disallowance in view of the provisions of proviso to section 36(1)(iii) of the Act. The CIT(Appeals) has given the finding that no loan had been raised by the assessee company for the purchase of furnace or for the construction of building. The said finding of the CIT(Appeals) has not been controverted by the learned D.R. for the Revenue. Further, the CIT(Appeals) has also noted that the total investment made by the assessee during the year on capital work-in-progress was Rs. 42.46 lacs spent on furnace and Rs. 33.23 lacs on the building as against the net profit of the assessee for the year at Rs. 1.97 crores. In view of the above said facts and circumstances, we find no merit in the disallowance made by the Assessing Officer. Upholding the order of the CIT(Appeals), we dismiss Ground No. 1 raised by the Revenue.

23. Since no distinguishing facts were brought to our notice during the course of hearing, respectfully following the order of the Coordinate Bench, we allow this ground of appeal

24. The facts in the present case are identical to that in the preceding year. The investments made in capital work-in-progress in the impugned year amounted to Rs.6,06,85,936/-. The profits earned by the assessee during the impugned year amounted to Rs.342.98 crores. Thus the assessee had sufficient funds for the purpose of making 15 investment in the capital work-in-progress and the decision rendered in assessee’s case for assessment year 2009-10 will, therefore, squarely apply in the present case also following which we hold that no disallowance of interest on account of investment made in capital work-in progress is warranted and disallowance made to the extent of Rs.2,78,564/- is, therefore, directed to be deleted. Ground No.9 of assessee’s appeal is, therefore, allowed in the above terms.

16 This observation of the Hon'ble IT AT was also noted by the Hon'ble Punjab and Haryana High Court in the case of Power Drugs Ltd. Vs. CIT (2011) 62 DTR(P&H) 276. Keeping in view the aforesaid decisions of the Hon'ble ITAT and Hon'ble Jurisdictional High Court, it is held that the case of M/s Abhishek Industries Ltd. is not applicable where any amount was not advanced as loan. In the instant case, the undisputed fact is that no amount of debit balance is on account of any loan given by the appellant to M/s Hero Exports Ltd. or to M/s Hero Motors Ltd. This fact had been stated by the appellant during the course of assessment proceedings. The same was not controverted by the AO. The AO merely held that in view of the fact that the three companies are group concerns and in view of the fact that huge amounts were outstanding from both M/s Hero Exports Ltd. and M/s Hero Motors Ltd. the same is in the nature of interest free advance. This observation of the AO is not based on proper appreciation of facts as discussed in the findings above. The total sales to M/s Hero Exports Ltd. were of the amount of Rs.68.55 Crores out of which the appellant had received more than Rs.42.00 Crores. Thus about 2/3rd of the payments on account of sales made to M/s Hero Exports Ltd. were actually received by the appellant during the year. Keeping in view the aforesaid factual and legal position, I hold that the AO was not justified in disallowing the proportionate interest expenditure on debit balance outstanding in the names of group companies. These grounds of appeal are accordingly allowed.”

36. We do not find any infirmity in the order of the learned CIT (Appeals) as it is an undisputed f act that the assessee was making constant sale and purchases from these two concerns and amounts of money coming and going were on account of regular business of the assessee. During the course of business if some amount remains at the debit of the other company, the Assessing Officer cannot just presume it to be in the nature of loans and advances. Here also, the observations of the Delhi High Court in the case of Dalmia Cement Ltd. (supra) is pertinent, whereby it was held that it is not the prerogative of the Department to dictate the terms of the business and Revenue cannot impose its view on the businessman when to give any money and when to receive it back. The transactions are going on with the sister concerns on regular business. Steps are being made and even if some amount remains at the debit, the Assessing Officer cannot consider the same as loan and cannot make addition under section 36(1)(iii) of the Act on the same.”

43. Since the facts of the present case are identical to that in assessment year 2009-10 and no distinguishing facts were brought to out notice, the decision of the I.T.A.T. in assessment year 2009-10

17 squarely applies to the present case also following which we confirm the order of the Ld. CIT (Appeals) in deleting disallowance made u/s 36(1)(iii) of the Act of Rs.2,09,66,994/-. 23.1 It is noticed that the ITAT in AY 2011-12 in vide order dated 15.6.2021 in assessee's own case on similar facts followed the aforesaid order for AY 2010-11. So respectfully following the aforesaid referred order in assessee's own case for the preceding assessment year i.e; 2010-11 in &758/Chd/2014 dt. 03/04/2017, we do not see any valid ground to interfere with the decision given by the Ld. CIT (A). Accordingly, Revenue’s appeal on this ground is dismissed.

in this appeal of assessee read as under:

1. That the learned CIT(A)-2 while deleting the disallowance made u/s 14A/Rule 8D by the AO has erred in not deleting the disallowance suo-moto wrongly made by the appellant amounting to Rs. 3,97,31,691/- ignoring the followings:- i) That the investments were made out of own funds. ii) That there was decrease in the investments as compared to last year. iii) That for making disallowance u/s 14A / Rule 8D if any, only the investment yielding the exempt income were to be considered, iv) That the AO failed to record any satisfaction in respect of disallowance to be made.

2. That the Ld. CIT(A)-2 has erred in confirming the net disallowance of interest u/s 36(1)(iii) amounting to Rs. 8,39,55,267/- on advances made to M/s Munjal Hospitality Pvt. Ltd & M/s Hero Exports Pvt. Ltd ignoring the following. i) That advance to Munjal Hospitality Pvt. Ltd, is subsidiary company was for commercial expediency. ii) That advance to Hero Exports Pvt. Ltd was an old one and no disallowance was made in the past. iii) That the advances were out of own funds.

3. That the learned CIT(A)-2 has erred in not deleting the suo-moto disallowance of interest amounting to Rs. 22,86,36,462/- wrongly made by the appellant ignoring the facts that legally no disallowance was 18 called for as the advance had been made to the subsidiary company namely Munjal Hospitality Pvt. Ltd in the interest of business and for commercial expediency.

26.1 The Ld. AR submitted that during assessment proceedings the assessee raised the issue of suo-moto disallowance before the assessing officer vide letter dated 10.2.2015. The AO reproduced this letter in the assessment order at pages 2 to 15 of assessment order. The relevant para of reply letter at pages 2 & 3 of assessment order on the issue reads as under: "It is submitted that in the return filed, the assessee company has already considered interest expenditure at Rs. 10282974/- in relation to this income under rule 8D and accordingly same has been added back in the statement of taxable income. Since the Hon'ble P & H High Court and jurisdictional ITAT in orders for earlier years has categorically held after going through detailed submissions of assessee company that it has not borrowed any funds for investments purposes, hence no disallowance on account of interest on proportionate basis is called for. In fact assessee has not borrowed any funds for brought forward as well as fresh investments made during the year. Similarly the assessee company has also considered disallowance for indirect expenditure Rs. 29448717/-ie, at the rate of half percent as per rule 8D. However it is contended that in view of findings in earlier years disallowance of indirect expenditure at one-half percent of average investments is not justified. In the light of facts of this case department has made disallowance of Rs. 50000/- up to AY2006-07 which was also confirmed in appeals. In AY 2007-08 disallowance of Rs. 200000/- was confirmed. In this regard, detailed submissions regarding applicability of Section 14A read with Rule 8D to the facts of this case with the relevant details/evidence source of funds available and utilised with the company on the dates of transactions, has already been filed separately at pages 439 to 966." The AO considered the assessee's reply vide para 4.2 to 4.6.1 at pages 16 to 21 and ignoring the assessee's submissions rather made a further disallowance of Rs. 14,15,10,213/- on his own assumptions and 19 presumptions u/s14A without considering the provisions in right perspective vide para 4.7 of the Assessment order.

26.2 It is further submitted that assessee raised this issue of suo-moto disallowance in the appeal before CIT(A) vide written submissions duly reproduced in the order. The Ld. CIT (A) after due consideration of assessee's submissions and ITAT orders in the case of the assessee company for the A.Ys. 2008-09, 2009-10, 2010-11 & 2012 decided the appeal in favour of the assessee as under: "the addition of Rs. 14,15,10,213/- made by the Assessing Officer in this case on account of disallowance of expenses by invoking provisions of section 14A of the Act read with Rule 8D of the Income Tax Rules, 1962 on the ground that the assessee company had made investment in shares/mutual funds, the income from which in the form of dividend or long term capital gains is exempt from tax under section 10 of the Act is directed to be deleted on the basis of same reasoning and logic as adopted by the Honourable IT AT, Chandigarh in the case of the assessee company itself for the Assessment Years 2008-09, 2009-10 and 2010-11 while deleting the identical addition in these years. In the result, the grounds No. 1, 2 and 3(a) to 3(m) of appeal taken by the assessee company are allowed." However the Ld. CIT(A) ignored the submissions made by appellant for deletion of suo-moto disallowance by applying the same reasoning and logic as adopted by the Honourable ITAT, Chandigarh in the case of the assessee company itself for the Assessment Years 2008-09, 2009- 10 and 2010-11 and also AY 2011-12.

26.3 In the course of hearing, the Ld. Counsel for the Assessee has furnished the written submissions on the issue of suo-moto disallowance and further calculations to show the excess disallowance made in the return filed which are as under: "That the CIT(A) has erred in not deleting the suo-moto disallowance wrongly made by the appellant amounting to Rs. 3,97,31,691/- The details of the suo-moto disallowance are filed on page 8 of the paper book which are as under:-

20 8D(2)(ii) Rs. 1,02,82,974/- 8D(2)(iii) Rs. 2,94,48.717/- Total Rs. 3.97,31,691/-

The issue has been dealt with by the A.O on pages 2 - 23 of the order and the CIT(A) has dealt with this issue on pages 7-43 of the order. The CIT(A) has deleted the disallowances on the basis of availability of own funds and also taking into consideration the suo-moto disallowance made by the assessee. Though the investments made by the appellant have not been taken correctly by the A.O which appear on page 22 of the order in as much as he has considered all the investments irrespective of the fact whether they yielded any exempt income or not. The correct investments for making disallowance under rule 8D(2)(ii) and rule 8D(2)(iii) are those investments which have yielded exempt income. The Ld. Counsel for the Assessee has filed details of the investments which yielded exempt income and are outstanding in the Balance Sheet as on 31.03.2011 and 31.03.2012 Total investments as per Balance Sheet: - As on 31.03.2012 – Rs. 7,69,98,92,132 As on 31.03.2011- Rs. 8,70,73,62,564 Investment yielded exempt income and outstanding: -As on 31.03.2012 Rs. 1,32,09,28,068 -As on 31.03.2011 Rs. 2,34,36,86,413 Average of investments yielded exempt income =(1, 32,09,28,068+2,34,36,86,413)/2 Rs. 1,83,23,07,240 Disallowance @ 0.5% Rs. 91,61,536/- as against Rs. 2,94,48,717/- suo- moto disallowed made by assessee. The appellant is entitled to the following relief:- i) Suo-moto disallowance made under rule 8D(2)(ii) Rs. 1,02,82,974 ii) Suo-moto disallowance made under rule 8D(2)(iii) (Rs. 2,94,48,717-91,61,536) Rs. 2.02,87,181 Total Relief (1,02,82,974 + 2,02,87,181) Rs. 3,05.70,155

Only those investments are to be considered which have yielded exempt income for making disallowance under rule 8D(2)(ii) and rule 8D(2)(iii) (ACB India Ltd vs. ACIT 374 ITR 108 Del). In nutshell the submissions are that no disallowance is called for under rule 8D(2)(ii) because of availability of own funds and the disallowance under rule 8D(2)(iii) would work out to Rs. 91,61,536/- i) As regards the disallowance made by the assessee suo-moto under rule 8D(2)(ii) of Rs. 1,02,82,974 / - , the same is not sustainable as the assessee's own funds are much more than the investments. ii) As regards the disallowance made by the assessee suo-moto under rule 8D(2)(iii), the same is to be restricted to Rs. 91,61,536/- as against Rs. 2,94,48,717/- and the assessee is entitled to a relief of Rs. 2,02,87,181/—. iii) The appellant is thus entitled to a total relief of (Rs. (1,02,82,974 + 2,02,87,181) Rs. 3,05,70,155/-.

26.4 It is also brought to our notice that on identical facts the Hon'ble ITAT vide para 31 to 34 of the order dated 15.6.2021 in & CO 4/2018 for AY 2011-12 restored the issue of suo-moto disallowance made under section 14A r.w.r 8D of the Income Tax Rules, 1962 to the file of the AO. 26.5 Subsequently in the set aside proceedings initiated as per directions of the ITAT for AY 2011-12 the AO passed an order u/s 143(3)/254 dated 21.03.2023 the copy of which is placed on record whereby the AO allowed the partial relief by deleting the suo-moto disallowance made u/r 8D(2)(ii) on account of interest in the return filed but confirmed the disallowance made under Rule 8D2(iii) which was wrongly calculated at 0.5% of average of all the investments instead of investments which have yielded exempt income. The para 8 to 10 of the AO's order are reproduced as under: "8. The ratio laid down by the ITAT in the assessee's own case for the A Y 2008- 09 to 2011-12 is totally applicable to the facts of the instant case. Therefore, no disallowance under rule 8D(2)(ii) is called for as per the material on records 9. Further, as regards the disallowance made u/s 14A rw Rule 8D2(iii), the assessee has stated that in view of the various judicial rulings relied upon before hon'ble bench, the same is to be restricted to 0.5% of average of the investments which have yielded exempt income. In this regards, the relevant rule 8D(2)(iii) is reproduced hereunder, "An amount equal to one half percent of the average of the value of the investments, income from which shall not form part of the total income, as 22 appearing in the balance sheet of the assessee on the first day and last day of the previous year."

10. As per this rule, the average of the value of the investments, which will not form part of the total income is to be taken and not the investments which have actually yielded exempt income as the assessee has done in its submissions filed before the I TAT and during the course of set aside proceedings. The AO, in his order u/s 143(3) as well as in order u/s 154 has correctly computed the disallowance u/s 14 r w Rule 8D(2)(iii) of the Act at Rs. 2,45,56,827/- which is the same as computed by the assessee in its return of income by taking 0.5% of the average of the value of the investments, which will not form part of the total income. Due to the unambiguous provisions of the statute and the facts of the instant case, the assessee gets no relief on this issue."

ii) Sajjan India Ltd vs. Additional CIT (2018) 89 Taxmann.com 21 (Mum) Whether only those instruments/securities which yielded exempt income during previous year relevant to impugned assessment year shall be considered for computing disallowance under section 14A read with rule 8D - Held, yes - Whether mandate of Act is to tax real income and tax can only be levied under authority of law and thus, if, after verification disallowance falls below disallowance under section 14A offered by assessee in return of income, revenue cannot charge tax on income which never was income of assessee chargeable to tax - Held, yes [Para 5] iii) ACB India Ltd v ACIT, 374 ITR 108 (Del) For purpose of section 14A, instead of taking into account total investment, investment attributable to dividend was required to be adopted an thereafter disallowance was to be arrived.

25 i) Anand Concast Ltd vs. DCIT A.Y. 2014-15 dated 08.02.2018 (Chd) "10. We do not agree with the same. It is well settled, having been decided on a number of occasions by the Hon'ble Supreme Court and many other Courts of our country, that the object of the income tax proceeding is to determine the taxable income of the assessee and tax payable thereon fairly and as per law only. Article 265 of the Constitution of India also provides in express terms that no tax can be collected without the authority of law. Moreover, even the Central Board of Revenue now called as the Central Board of Direct Taxes had issued a circular in 1955, guiding Assessing Officer's that they should assess the taxable income and compute tax liability of the taxpayers in accordance with law only and should not take undue advantage of the ignorance of the assessees. Therefore any claim of the assessee should be decided on the touchstone of law and not on the basis of claim made by the assessee. The Hon'ble Supreme Court in the case of Kedarnath Jute Manufacturing Co. Ltd. vs. CIT, 82 ITR 363 (SC) has observed that whether the assessee is entitled to a particular deduction or not will depend on the provisions of law relating thereto and not the view which the assessee may take. Similarly in the case of CIT vs. India Discount Co. Ltd., 75 ITR 191 (SC), it was observed by the Hon'ble Supreme Court that it is well established that a receipt which in law cannot be regarded as income cannot become so merely because the assessee wrongly credited it to the profit and loss account . Thus, in our considered view, if the assessee is able to show that the disallowance made by it had been wrongly made, then the assessee has a legal right to resile from its return so long as he is able to demonstrate that the disallowance was not in accordance with law and requisite facts in this regard are placed on record. ii) CBDT Circular No. 14 of 1955 As per the circular the officer of the department must not take advantage of ignorance of an assessee as to his rights and information. It is one of their duties to assist tax payer in every reasonable way, particularly in the matters of claiming and securing reliefs and in this regard the officers should take the initiative in guiding a taxpayer where proceedings or other particulars before them indicate that some refund or relief is due to the assessee.

26 34.1 The appellant also placed reliance on the judgment of the Hon'ble Jurisdictional Punjab & Haryana High Court in the case of CIT Vs. Deepak Mittal (2014) 361 ITR 131 to the effect that in the absence of any satisfaction recorded by the Assessing Officer as to why the calculation made by the assessee is not correct, the disallowance made by him on account of administrative expenses under Rule 8D of the Income Tax Rules is not as per law.

35. We have carefully considered the contentions advanced by Ld. AR and Ld. DR and impugned order passed by the Ld. CIT(A). While deciding ground no. 1 of revenue's appeal vide para 9 of this order on the issue of disallowance u/s 14A we have followed ITAT orders in assessee's own case for the Assessment Years 2008-09 to 2011-12 whereby it was held that as the assessee's own funds are much more than the investments therefore the Ld. CIT (A) rightly deleted the disallowance of Rs. 14,15,10,213/- made by the A.O. by following the earlier orders of the ITAT in assessee's own case. But the Ld. CIT(A) has not given any directions to delete the suo-moto disallowance of Rs. 1,02,82,974/- made under rule 8D(2)(ii) as per submissions made by appellant before him.

35.1 Since we have upheld the findings of Ld. CIT(A) in the appeal filed by the revenue, by following the same reasoning therefore we hold that in such circumstances suo-moto disallowance of Rs. 1,02,82,974/- made u/s 14A read with rule 8D(2)(ii) in the return filed is also to be deleted. Moreover, the AO has also deleted identical disallowance made suo-moto in return vide order passed in the proceedings restored by the ITAT in AY 2011-12 after due consideration of order passed by the ITAT for the AYs 2008-09 to 2011-12.

27 36. As regards suo-moto disallowance of Rs. 2,94,48,717/- made under rule 8D(2)(iii) we have considered the contention of Ld. AR and objection of LD. DR. By following judgement of Hon'ble Delhi High Court in the case of PCIT(central) v. Era Infrastructure (India) Ltd. [2022] 141 taxmann.com 289 (Delhi) we upheld that amendment made by Finance Act, 2022 to section 14A by inserting a non-obstante clause and Explanation will take effect from 1-4-2022 and cannot be presumed to have retrospective effect. Therefore objection of Ld. DR is overruled as in this case assessment year involved is 2012-13. As far as the contention of Ld. AR that the suo-moto disallowance under rule 8D(2)(iii) is to be restricted at 0.5 percent only for those investments which have yielded exempt income the assessee has placed reliance on the judgement of Hon'ble Delhi High Court in the case of Cargo Motors P. Ltd. vs. Deputy Commissioner of Income Tax 145 Taxmann.com 641 (Delhi) and other judgements wherein it is held that only those investments are to be considered for computing average value of investments which yielded exempt income during the relevant assessment year. For deletion of excessive disallowance made in return the assessee's reliance is on ITAT Chandigarh Bench order in the case of Anand Concast Ltd vs. DCIT A.Y. 2014-15 dated 08.02.2018 (Chd) wherein Coordinate bench has held that if the assessee is able to show that the disallowance made by it had been wrongly made, then the assessee has a legal right to resile from its return so long as he is able to demonstrate that the disallowance was not in accordance with law and requisite facts in this regard are placed on record. Considering this preposition of law and respectfully following the aforesaid Judgement of Hon'ble Delhi High Court in the case of Cargo Motors P. Ltd. vs. Deputy Commissioner of Income Tax 145 Taxmann.com 641 (Delhi) the facts of which are identical to the facts of present case we direct that only those investments to be 28 considered for computing average value of investments which yielded exempt income during the assessment year and accordingly AO is directed to check the calculation furnished by the Ld. Counsel for the assessee before the ITAT and delete the excessive disallowance made under rule 8D(2)(iii).

29 7.2 The assessee was also issued show cause in this regard on 26.02.2015 to which the assessee submitted its reply dated 27.02.2015 as below: 7.3 "Regarding advance given to M/s Munjal Hospitality Pvt. Ltd (earlier known as Ve Care Consultancy) is a fully owned subsidiary company of the assessee. The statement of account, as per list of loans & advances, has already been filed at Page 438 along with letter dated 18/12/2014. All these amounts have been advanced from the "Main Unit" only of Assessee Company Photocopies of relevant pages of the bank accounts from where the payments to M/s. Munjal Hospitality Pvt. Ltd. were made are enclosed. No amount either owned or borrowed relating to C.R. Division has been advanced or utilized for these purposes. The separate balance sheet of both these units has already been filed. As already explained that the amounts advanced to M/s Munjal Hospitality Pvt. Ltd and to M/s Hero Exports Pvt. Ltd are for the expansion of business activities on which no interest was charged by the company. The advances have been made as a commercial expediency for the business purposes. The shareholder funds as per the Balance Sheet of Main Unit are much more than the amount advanced to subsidiary company for its business activities. As confirmed by the Hon'ble Supreme Court in the case of S.A. Builders Lid v Commissioner of Income Tax (Appeals), 288 ITR I where it has been held as under- "In order to decide whether interest on funds borrowed by the assessee to give an interest free loan to a sister concern (e.g., a subsidiary of the assessee) should be allowed as a deduction under section 36(1) (Hi) of the Income-tax Act, 1961, one has to enquire whether the loan was given by the assessee as a measure of commercial expediency The expression "commercial expediency" is one of wide import and includes such expenditure as a prudent business man incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency To consider whether one should allow deduction under section 36(1)(ii) of interest paid by the assessee on amounts borrowed by it for advancing to a sister concern, the authorities and the courts should examine the purpose for which the assessee advanced the money and what the sister concern did with the money. That the borrowed amount is not utilized by the assessee in its own business but had been advanced as interest free loan to its sister concern is not relevant. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point of view whether the amount was advanced for earning profits

30 Once it is established that there was nexus between the expenditure and purpose of the business (which need not necessarily be the business of the assessee itself) the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profits." However it is further submitted that in the computation of taxable income, the company had inadvertently considered the disallowance of total interest paid by the Main Unit at Rs. 23,89,46,685/-which on the facts of the case is allowable as per decision of Hon'ble Supreme Court as referred above. In view of the above, it is therefore prayed that the interest relating to advance to these parties may not be disallowed. To this extent the disallowance made in the computation of taxable income may be rectified by reducing the total income."

7.3 The reply of the assessee is carefully considered and is found to be untenable. The assessee, as mentioned above has granted loans and advances to other parties and charged interest ranging from 12% to 15% on the same. The same is also evident from the reply dated 06.05.2014 submitted by the assessee and the submissions pertaining to loans and advances given. Thus, there can be no rationale for the interest free advances to a sister concern. Had these advances been given to any other party in the open market, it would have fetched interest as high as 15%. Thus there is no business prudence in an interest free advance to sister concern. 7.4 Reliance is placed on the decision on Hon'ble High Court of Punjab & Haryana in the case of CIT vs. Abhishek Industries Ltd. where the Hon'ble High Court held that- "Once it is born out from the record that the assessee had borrowed certain funds on which liability to pay interest is being incurred and on the other hand, certain amounts had been advanced to sister concerns or others without carrying any interest and without any business purpose, the interest to the extent the advance had been made without carrying any interest is to be disallowed under section 36(1)(ii) of the Act." 7.5 For the assessee's argument that interest only from one unit should be considered, it can be said that the theory of mixed funds is an established legal principle based on the recent decisions of the jurisdictional High Court as well as the jurisdictional IT AT. Thus, the total interest expense of the whole unit needs to be considered. Reliance is also placed on the decision dated 26.6.2011 in the case ofACIT Vs. M/s Kisco Casting, Proprietor Circle, M/s Khanna Iron and Steel Corpn Khanna in IT A No. 32/Chd/2011. In this case the Hon'ble IT AT Chandigarh held as under:

31 "8. In view of the above ratio laid down by the Hon'ble Punjab & Haryana High Court, the onus is upon the assessee to show in all such cases of mixed funds that the advances were made out of its own funds of share capital or out of mixed funds. Mere claim of having made the advances out of its own funds is not sufficient to discharge the onus and interest relatable to such sums advanced interest free are to be disallowed. The onus is not upon the revenue to show nexus between the borrowers and the advances made by the assessee. 7.6 It has repeatedly been held by various Courts that whenever there is a diversion of funds for non-business purposes and at the same time there are interest bearing borrowing, the interest paid on borrowed funds should not be allowed as an item of expenditure to the extent of the funds diverted. It was held in the case of CIT Vs. Orissa Cement Ltd. 258 ITR 365 (Del) that the court cannot shut its eyes to reality. Had the advances not been made, borrowings would have been less. Similar was the view held in the case of CIT Vs. HP Sugar Factory Put. Ltd. (All)187 ITR 363.

7.7 The assessee has relied on the decision of the Apex Court in the case of SA Builders. The facts in the two cases are completely different. The subsidiary company of the assessee, M/s Munjal Hospitality Ltd. is engaged in Real Estate business while the assessee is engaged in Manufacturing of bicycles. The two are completely unrelated. Moreover if M/s Munjal Hospitality Ltd. was in need of funds, it could have borrowed from the banks or the market. The very intention behind diverting funds from parent company M/s Hero Cycles Ltd. is to reduce the profits and taxability of the parent company 7.8 Thus, based on the arguments above, there can be no rationale in the huge interest free advance to M/s Hero Exports and M/s Munjal Hospitality Ltd. Thus, the interest free advance needs to be disallowed u/s 36(1)(iii) Also, it has been seen that the advances have been given specifically out of loans raised during the year Thus there is a direct nexus and the average rate of 7.5% as calculated above cannot be adopted in this case. As per the Annexure pertaining to borrowed funds in the Annual Report, fresh loans and debentures have been taken at an interest rate of around 1111.25%. Also, unsecured loans from Hero Steels has been taken at a rate of 10.75%. In addition there are unsecured borrowing from various banks during the year. The rate of interest has not been provided by the assessee. From the websites of the banks, it was found that unsecured loans are provided by these banks at rates of over 15%. Hence for the calculation of disallowance of interest, it would be conservative and rational to adopt the rate of interest as 11.25%. 7.8.1 Disallowance of interest on advance to M/s Munjal Hospitality Ltd. Date Amount No. of Days Disallowance @ 11.25% 9/5/2011 925000000.00 210 59871575.34 9/27/2011 250000000.00 187 14409246.58

9/27/2011 1150000000.00 187 66282534.25 9/27/2011 1500000000.00 187 86455479.45 9/28/2011 240000000.00 186 13758904.11 12/1/2011 5000000.00 122 188013.70 12/7/2011 285000000.00 116 10189726.03 Total 25,11,55,479.45

7.8.2 Disallowance of interest on advance to Hero Exports

Date Amount No. of Days Disalowance @ 11.25% 01/04/2011 546100000.00 365 6,14,36,250 Thus, total disallowance works out to Rs. 31,25,91,729/-. Less: Disallowance already made by the assessee: Rs. 22,86,36,462/ Disallowance to be made: Rs. 8,39,55,267/-

Interest expense as per P&L A/c Rs.38,91,69,331/- Less: Interest added back u/s 36(1)(iii) in the computation Rs.22,86,36,462/- Less: Interest added back u/s 14A as per Rule 8D(2)(ii)

33 in annexure IX of Audit Report Rs. 1,02,82,974/- Total Rs. 15,02,49,895/- Hence, the total disallowance of interest is restricted to interest expense claimed of Rs. 15,02,49,895/- 42. Being aggrieved the assessee carried the matter to the Ld. CIT (A) and furnished the written submissions which have been incorporated in para 8, 8.1 and 8.2 of the impugned order which reads as under:

8. Vide grounds No. 5(a) and 5(b) of appeal, the assessee company had challenged the action of the Assessing Officer in making an addition of Rs.8,39,55,267/- in this case on account of disallowance of interest by invoking provisions of section 36(1) (iii) of the Act on the ground that the assessee company has given loan/advance to M/s Hero Exports (P) Limited and M/s Munjal Hospitality (P) Limited allegedly out of borrowed funds and that too for non-business purposes. The reasons for making the impugned addition have been given in detail in para 7 of the assessment order. The main reason for making the impugned addition was that the assessee company has given loan/advance to M/s Hero Motors out of borrowed funds and that too for non business purposes. 8.1.1n support of grounds No. 5(a) and 5(b) of appeal, the assessee company through its learned AR has filed written submissions vide letter dated 14.12.2017, the relevant paras of which read as under- Ground No. 5 a) That the Ld. ACIT has wrongly disallowed the interest / 36(1(1), by holding that there is direct nexus, bring amount advanced to M/s. Hero Exports & M/s. Munjal Hospitality P. Ltd, by wrongly applied the Interest rate @11.25% at Rs. 312591729/-. b) That the Ld. ACIT has wrongly failed to consider the assessee's letter dated 27/2/2015 for allowing the interest disallowed u/s 36(1)(iii) being amount paid to. M/s. Munjal Hospitality P Ltd, a wholly owned subsidiary company. 1. The company has given an advance of Rs. 435.50 Crore on different dates in Sept 2011 & Dec 2011 to its fully owned subsidiary company M/s Munjal Hospitality Private Limited for expansion of its activity in hotel business and a brought forward advance ofRs. 54.61 crores given to another group company M/s Hero Exports Pvt. Limited for the purpose of expansion in real estate activities. Statements of loan accounts are enclosed. 2. These advances have been given by the main unit of the company only Photocopies of relevant pages of the bank accounts of main unit from where the payments to M/s Munjal Hospitality Pvt. Ltd. were made, was filed with the AO. Photocopy of same is enclosed. The borrowings made by independent unit of company called as CR 34 Division were exclusively for its business purposes and no portion of same utilised to give above advances.

3. As stated above M/s. Munjal Hospitality Pvt. Ltd (MHPL) is a fully owned subsidiary company of the assessee company and M/s Hero Exports Pvt. Limited is a group company. These advances were made as a commercial expediency for business purposes, as the subsidiary company has purchased the hotel project which was in progress. Different activities were undertaken to carry on this project during the year e.g. appointment of consultants for the hotel project, renewal of license for hotel, visits of interior designers, consultations for selecting the JV partners etc. The assessee company is holding the entire share capital of MHPL. Since the assessee company has given advance to its wholly owned subsidiary company as a commercial expediency for business purposes, hence no interest was charged. Further, in the previous years, no such disallowance was made in the case of M/s Hero Exports.

5. The amounts advanced to both above concerns have been given from Main Unit where the total interest was Rs. 23,89,46,685/- but the Ld. AO has calculated the interest at Rs. 31,25,91,729/- for these transactions. He has not established any nexus of amounts borrowed and amount invested in above two concerns and he considered entire interest paid including the interest paid by CR. Division of company for this purposes.

8. It is submitted that the assessee company is one of the largest manufacturers of bi-cycles. The company has its main units for manufacturing bicycles, bicycle components and Auto Rims &

35 components at its works at Hero Nagar, G. T Road, Ludhiana and at Village Mangli, Chandigarh Road, Ludhiana, The company has also an independent unit called CR. Division for manufacturing CR. Strips situated at Sua Road, Hero Nagar, GT Road, Ludhiana 9. Separate balance sheets of both these units along with relevant annexures were filed before AO. Photocopies of same are enclosed at Pages 7 to 22 It is clearly evident from these balance sheets that both Main units as well as CR Division of company have raised loans independently to meet their long term und working capital requirements & accordingly the respective units in their books of accounts enteral! the financial charges separately. No borrowing made by CR Division has been utilised or diverted for advances given to above concerns 10. The AO objected to interest free amounts advanced to wholly owned subsidiary company / sister concern by holding that since assessee itself is charging interest on advances given to other parties there is no rationale for interest free advances to sister concerns. There is no business prudence in an interest free advance to sister concern. In assessment order AO discussed the issue at pages 36 to 40. He placed reliance on P&H High court Judgment in the case of CIT v. Abhishek Industries Limited. He failed to consider this judgment in right perspective wherein jurisdictional high court itself held that only in cases where advances to sister concerns have been given without any business purposes interest is to be disallowed. He also placed reliance on certain other judgments without considering assessee's contention that amounts have been advanced as a commercial expediency for business purposes to the subsidiary Out of total interest paid by Main Unit at Rs. 23,89,46,685/-, the Ld. AO has also disallowed part of interest expenditure under Rule &D(2) at Rs. 1,02,82,974/- which the Ld. AO had increased to Rs. 14,94,23,439/-. Thus he worked out total disallowance of interest at Rs. 46,60,37,233/- whereas the total interest paid by company on borrowings from banks/institutions of "Main Unit" is only at Rs.23,89,46,685/- as mentioned in above paras which also includes interest paid by CR Division (an independent unit of company) at Rs. 15,02,22,646/- on the borrowings made by it exclusively for its business purposes except for Rs. 49,42,046/ It clearly indicates that AO has worked out disallowance hypothetically only on his own assumptions & surmises without considering the submission made by the assessee company that no interest is disallowable in given facts & circumstances and apex court decision in the case of S.A. Builders Ltd v Commissioner of Income Tax (Appeals), 288ITR 1 relied upon before him.

36 He also failed to consider assessee's letter dated 27.2.2015 wherein it was contended that interest amounting to Rs.23,89,46,685/has been disallowed in the computation of income under a wrong notion which is fully allowable in view of Supreme Court judgment in the case of S.A. Builders Ltd as relied upon before him, and prayed to reduce total income to that extent. Copy of letter is enclosed at Pages... 244 To 246. Further it was also contended that since all these amounts advanced to the subsidiary/sister company are from the bank accounts of "Main Unit" of Assessee Company. No funds either owned or borrowed relating to CR. Division, an independent unit of company, has been diverted or utilized for the purpose of making these advances. Hence the interest paid by CR Division is exclusively for business purposes.

11. The AO while calculating the disallowance has considered the entire interest debited to the P & L account at Rs.389169331/- for this purpose, in spite of the fact that the interest paid by the other independent unit of the company i.e. CR Division at Rs. 15,02,22,646/is exclusively for business purposes, which includes interest paid to banks Rs. 145388538/- and interest on excise duty Rs. 4831601/ This interest is directly attributable to the business activity of that independent unit as per separate accounts maintained by it. This issue has attained already finality in AY 2004-05 where CIT (A) under similar circumstances and facts held that interest paid by the independent unit of company called CR division is not to be included for disallowance u/s 14A. The revenue has not challenged these findings of CIT (A) before Hon'ble ITAT and High Court while contesting disallowance u/s 14A. The same decision also holds good for the purposes of section 36(1)(iii).

To consider whether one should allow deduction under section 36(1 )(11) of interest paid by the assessee on amounts borrowed by it for advancing to a sister concern, the authorities and the courts should examine the purpose for which the assessee advanced the money and what the sister concern did with the money. That the borrowed amount is not utilized by the assessee in its own business but had been 37 advanced as interest free loan to its sister concern is not relevant. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point of view whether the amount was advanced for earning profits Once it is established that there was nexus between the expenditure and purpose of the business (which need not necessarily be the business of the assessee itself) the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can he compelled to maximize his profits.

14. In view of the above submissions and judgments of Apex Court, it is therefore prayed that no portion of interest paid relating to advances made to subsidiary company /sister concern, is disallowable. The assessee company had filed the letter for "correction of amount" disallowed in the Computation of taxable income. Reference may be made to following case law i) CIT Vs. Bharat Aluminium Co Limited 303 ITR 256 (Del) ii) Orissa Rural Housing Development Corporation Ltd. v. ACTT 343 ITR 316 (ORR) iii) M/s Andhra Pradesh Industrial Development Corporation Limited Vs Deputy Commissioner of Income Tax, Circle-1 (1). Hyderabad ITA 548/HYD/2017 dated 7.9.2017 Pages 431 to 438

The AO is bound to compute the correct income for assessment, irrespective of incorrect disallowances made by the assessee in computation. Refer CBDT Circular No. 14 (XL 35) dated 11/04/1955 that department must not take advantage of ignorance of assessee to collect more tax than what is legitimately due. Also refer 349ITR 336 (Mum), 223 Taxman 157 (Guj), 81ITR 303 (Del). Therefore it is prayed that disallowance made by the AD may please be deleted and also to allow the amount of interest at Rs. 228636462/- considered as disallowance, under a wrong notion in the computation of taxable income which is incurred for business purposes and accordingly total income may be reduced by Rs. 228636462/-.

8.2 In support of grounds No. 5(a) and 5(b) of appeal, the assessee company through its learned AR has filed further submissions vide letter dated 07.02.2018, the relevant paras of which read as under- In continuation of my Appeal Notes, I am annexed herewith copy of order of Hon'ble Punjab & Haryana High Court in the case of Principle CIT Ludhiana v Holy Faith International P Ltd dated 24/7/2017, in respect of deletion of disallowance of interest expenditure on amount advanced to subsidiary company and held that - "Commercial expediency in advancing loan does not arise only on account of there being transactions directly between holding company and subsidiary company. The two companies may even be in a different line of business. It would make no difference. It would still be commercially expedient for one Group Company to advances amounts to another group company."

"8.3 I have considered the observations of the Assessing Officer as made by him in para 6 of the assessment order while making the impugned addition. I have also considered written submissions filed by the assessee company through its learned AR vide letters dated 14.12.2017 and 07.02.2018 on the issue under reference. I have further considered various judicial pronouncements relied upon by the learned AR of the assessee company including that in the case of M/s S.A. Builders as well as other material placed by him on record. On careful consideration of the rival contentions, I do not find any force in the contentions of the learned AR of the assessee. In fact by disallowing the interest in the computation, the assessee company has 39 itself admitted that the amounts to M/s Munjal Hospitality (P) Limited and M/s Hero Exports (P) Limited have been given out of borrowed funds. The details filed by the assessee company also prove beyond doubt that the loans/advances under reference have been given out of borrowed funds and have direct nexus between the borrowed funds and amount advanced. Moreover, the funds advanced to M/s Munjal Hospitality (P) Limited and M/s Hero Exports (P) Limited has been stated to be utilized for the expansion of business which is still in progress. It means, the new business of the assessee company has not yet been come into existence and as such the interest expenses incurred by the assessee company on the funds advanced for expansion of business cannot be allowed as revenue expenses even otherwise. It is not the case of the assessee company that the funds have been given out of own interest free funds. It has also not been established on record that the borrowed funds of other unit have not been utilized for giving advances under reference. The assessee company has also not filed any documentary evidence to prove its version. The judicial pronouncements relied upon by the learned AR of the assessee company has altogether different facts from the facts of the case of the assessee company and has no application in the case of the assessee company. Under such circumstances, the action of the Assessing Officer in making an addition of Rs.8,39,55,267/- in this case on account of disallowance of interest by invoking provisions of section 36(1)(iii) of the Act on the ground that the assessee company has given loan/advance to M/s Hero Exports (P) Limited and M/s Munjal Hospitality (P) Limited allegedly out of borrowed funds and that too for non-business purposes cannot be said to be unjustified. Having said so, the addition of Rs.8,39,55,267/- made by the Assessing Officer in this case on account of disallowance of interest by invoking provisions of section 36(1)(iii) of the Act on the ground that the assessee company has given loan/advance to M/s Hero Exports (P) Limited and M/s Munjal Hospitality (P) Limited allegedly out of borrowed funds and that too for non-business purposes is upheld. In the result, the ground No. 5(a) and 5(b) of appeal taken by the assessee company are dismissed."

1. The facts are that M/s Munjal Hospitality Ltd. is a 100% subsidiary of Hero Cycles Ltd. The total capital amounting of Rs. 51,00,000/- is contributed by the directors of Hero Cycles Ltd. M/s Munjal Hospitality is in real estate business and wanted to set up a commercial complex and a hotel in Gurgaon. The assessee company advanced a sum of Rs. 435.50 cr. during the year under consideration. The amount was advanced partly out of own funds, partly out of proceeds received on liquidation of investments and partly out of term loans raised by the main unit of the company. Though the advance was given to the subsidiary company on account of commercial expediency for business purposes and no disallowance was called for but by mistake the appellant disallowed an interest of Rs. 22,86,36,462/-on the said loan. The A.O on page 39 of the order calculated the disallowance of interest at Rs. 25,11,55,479/- ignoring the submissions that no disallowance is called for if the interest free advance is given to a 100% subsidiary for business purposes and that there are host of judgments on this issue. Reliance is placed on the case law already filed before your Honour and further case law which is being filed now. The landmark judgments on this issue are Hero Cycles ltd. v/s CIT (2015) 379 ITR 347 (SC), S A Builders ltd. v/s CIT (2007) 288 ITR 1 (SC) and Munjal Sales Corp Vs. CIT(2008) 298 ITR 298 (SC). All this case law is directly on the issue of allowability of interest on loans given to a subsidiary company for business purposes.

2. There is a further disallowance of interest of Rs. 6,14,36,250/- on advance ofRs. 54.61 cr. to Hero Exports on page 39 of AO's order. It was submitted before the lower authorities that this advance to Hero Exports is an old balance and no disallowance of interest was made in the immediately preceding year when the advance was made. Reliance is placed on the case law at serial no. 22, 23, 24. The Hon'ble P&H High Court in the case of CIT vs. Max India Ltd has clearly held that if no disallowance of interest has been made in the past, no disallowance can be made in the succeeding assessment year.

3. The total disallowance of interest made by the A.O is as under:- a) Munjal Hospitality Ltd. 25,11,55,479 b) Hero Exports Ltd. 6,14,36,250 Total 31,25,91,729 Less disallowed by assessee 22,86,36,462 Further disallowance by AO 8,39,55,267

41 That since the assessee had claimed an interest of Rs. 15,02,49,895/- so the disallowance was restricted to this amount by the A.O in the computation of income. Ground No. 3 This ground is against CIT(A)'s order in not deleting the suo-moto disallowance of interest amounting to Rs. 22,86,36,462/- on advance to subsidiary company namely Munjal Hospitality Pvt. Ltd. The appellant can challenge the suo-moto disallowance if wrongly made. Kindly refer to the case law separately filed. As submitted above M/s Munjal Hospitality Pvt. Ltd. is a 100% subsidiary of M/s Hero Cycles Ltd and the appellant had given an advance of Rs. 435.50 cr. to carry on the business by the subsidiary company for setting up a hotel and a commercial complex. The total amount advanced to the subsidiary company was invested by the subsidiary company in the fixed assets and work in progress for the purposes of carrying on the business. This is apparent in the Balance Sheet of the company (Refer page 6 of PB). No disallowance of the interest can be made if the advance is given to a subsidiary company on account of commercial expediency. Copy of various judgments is being filed in support of assessee's claim. It is thus humbly prayed that this amount of disallowance made by mistake may kindly be deleted.

ii) Regarding another advance of 54.61 crore was made to sister concern M/s Hero Exports Pvt. Ltd. for the real estate business on which also no interest was charged by the company. Ld. AR at the very onset submitted that this advance was given in the earlier year and no disallowance was made in the immediately preceding year when advance was made. His argument was that if no disallowance of interest was made in past, no disallowance can be made in succeeding year. For this he relied on judgement of Hon'ble P&H High Court in the case of CIT v Max India Limited. iii) The appellant made advance to MHPL partly out of proceeds received on liquidation of investments and partly out of the term loans raised by the main unit of the company. Appellant filed a chart showing source of funds utilised for advance to MHPL, a copy of which was also filed during the course of hearing. As chart filed summary of funds utilized emerges as under:

Out of proceeds received on liquidation of investments 09.05.2011 Rs. 92.50 crore 12.07.2011 Rs. 28.50 crore 121.50 Crore Out of loans raised 314.00 Crore Total amount advanced 435.50 Crore iv) The AO vide para 7.8.1 considered the entire amount of Rs. 435.50 crore for calculation of disallowance without establishing any nexus of amounts borrowed and amounts advanced to MHPL and calculated disallowance for advance made to MHPL at Rs. 25.11 crore which far exceeded the amount actually paid for loan raised for advancing the amount to the MHPL. In the ITR filed the appellant suo-moto considered disallowance Rs. 22,86,36,462/-out of the total interest expenditure of Rs. 238949192/- incurred by the main unit of the company. The AO has made the calculations on his assumptions and presumptions without any basis. Even on the amount advanced to M/s Hero Exports Pvt. Ltd. no disallowance for interest was made in the immediately proceedings years. Therefore the further disallowance of Rs. 8,39,55,267/-made in the assessment order is contrary to the facts and is not justified. The appellant has filed a chart in paper book giving the details of interest paid and the disallowance made in the ITR filed. v) The Ld. AR argued during the course of hearing that no disallowance of interest expenditure for advances given to wholly owned subsidiary company as a commercial expediency for the business purposes is called for in view of the Hon'ble Supreme Court decision in the case of S.A. Builders Ltd v Commissioner of Income Tax (Appeals), 288 ITR I where it has been held as under- "In order to decide whether interest on funds borrowed by the assessee to give an interest free loan to a sister concern (e.g., a subsidiary of the assessee) should be allowed as a deduction under 45 section 36(1)(iii) of the Income-tax Act, 1961, one has to enquire whether the loan was given by the assessee as a measure of commercial expediency The expression "commercial expediency" is one of wide import and includes such expenditure as a prudent business man incurs for the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as business expenditure if it was incurred on grounds of commercial expediency To consider whether one should allow deduction under section 36(1)(ii) of interest paid by the assessee on amounts borrowed by it for advancing to a sister concern, the authorities and the courts should examine the purpose for which the assessee advanced the money and what the sister concern did with the money. That the borrowed amount is not utilized by the assessee in its own business but had been advanced as interest free loan to its sister concern is not relevant. What is relevant is whether the amount was advanced as a measure of commercial expediency and not from the point of view whether the amount was advanced for earning profits Once it is established that there was nexus between the expenditure and purpose of the business (which need not necessarily be the business of the assessee itself) the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profits." However it is further submitted that in the computation of taxable income, the company had inadvertently considered the disallowance of total interest paid by the Main Unit at Rs. 23,89,46,685/-which on the facts of the case is allowable as per decision of Hon'ble Supreme Court as referred above. In view of the above, it is therefore prayed that the interest relating to advance to these parties may not be disallowed. To this extent the disallowance made in the computation of taxable income may be rectified by reducing the total income." vi) The appellant has raised another contention that company was having a separate unit named CR Division. This unit was running a steel mill having independent business in cold rolled steel strips with separate set of customers vendors separate bank accounts separate books etc.

This division made its borrowings exclusively for its business and incurred total interest expenditure of Rs. 15,02,22,456/-. Before the AO the appellant also filed balance sheet of this division. For calculating disallowance of interest the AO has not considered the appellant's submissions that the amounts advanced to MHPL was given only from the main unit of the appellant company. The interest expenditure

46 incurred by the separate independent division of the company called CR Division which has no correlation with the amounts advanced to MHPL. Appellant also filed relevant pages of bank statements of main units from where payments were made. vii) Regarding suo-moto disallowance the appellant submitted that while filing return of income the appellant under wrong notion of law made disallowance of Rs. 22,86,36,462/-. In written submissions Ld. AR submitted that no disallowance of the interest can be made if the advance is given to a subsidiary company on account of commercial expediency. He filed host of judgments in support of assessee's claim and prayed that this amount of disallowance made by mistake may be deleted.

47 However it is further submitted that in the computation of taxable income, the company had inadvertently considered the disallowance of total interest paid by the Main Unit at Rs. 23,89,46,685/-which on the facts of the case is allowable as per decision of Hon'ble Supreme Court as referred above. In view of the above, it is therefore prayed that the interest relating to advance to these parties may not be disallowed. To this extent the disallowance made in the computation of taxable income may be rectified by reducing the total income."

b) The Hon'ble Delhi ITAT in the case of Moonrock Hospitality (P) Ltd vs. ACIT [2022] 139 taxmann.com 78 (Delhi - Trib.)/[2022] 94 ITR(T) 185 (Delhi - Trib.)[22-09-2021] held as under: "14. I find, the Hon'ble Bombay High Court in the case of Reliance Communications Infrastructure Ltd. (supra) has held that where the assessee, for furthering its business had utilized borrowed funds for making investments in its subsidiary company and for making interest free advances to a related company, no disallowance of interest paid on borrowed funds could be made. I find, the Hon'ble Supreme Court in the case of Hero Cycles (P.) Ltd. (supra) has held that once it is established that there is nexus between expenditure and purpose of business, Revenue cannot justifiably claim to put itself in the arm chair of businessman or in position of Board of Directors and assume role to decide how much is reasonable expenditure having regard to circumstances of case. The various other decisions relied on by the Id. Counsel for the assessee in the case law compilation also supports the case of the assessee to the proposition that where interest free advances made to a wholly owned subsidiary company, no disallowance of interest paid on borrowed fund could be made. Since, in the instant case, admittedly, the assessee has extended funds to its wholly owned subsidiary company for the purpose of business, therefore, in view of the decisions cited supra, I hold that no interest paid on borrowed funds could have been disallowed u/s 36(1)(iii) of the IT Act, 1961. I, therefore, set aside the order of the CIT(A) and direct the AO to delete the disallowance of Rs. 10,88,438/-. The grounds raised by the assessee are accordingly allowed.

15. In the result, the appeal filed by the assessee is allowed." c) The Hon'ble Pune ITAT in the case of Kumar Housing Corporation (P) Ltd vs. ITO (2024) 167 Taxmann.com 259 (Pune - Trib.) also held as under: "

by the assessee are accordingly allowed.

21. In the result, the appeal filed by the assessee is allowed." d) The Hon'ble Delhi ITAT in the case of Sujan Luxury Hospitality (P) Ltd vs. ACIT (2025) 174 Taxmann.com 197 (Del - Trib.) held as under: "

7. We have heard both the parties and perused the materials available on record. The Ld. CIT(A) deviated from its predecessor dated 13.10.2016 order for AY 2012-13 on the ground that FFC had reported profits in the current year. However, the Hon'ble Apex court in the case of S.A. Builders Ltd. v. CIT [2007] 158 Taxman! 74/288 ITR 1 (SC) has defined commercial expediency as under:- "an expression of wide import and includes such expenditure as a 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" 7.1. Thus, the Hon'ble Apex Court has given a very wide import to the expression 'commercial expediency'. In this case, as noted by the Assessing Officer as well as the Ld. CIT(A) that the assessee company had signed a specific agreement with the FFC and had submitted that the profitability of its associate FFC would impact the financial status and the business of the assessee concern. The Ld. CIT(A) took a very narrow view of the expression "commercial expediency" by observing from the financials of the FFC that it had earned profit during the year and therefore, it was out of scope of commercial expediency. We have carefully considered the same but do not agree with it. The transition of FFC from loss making to marginal profit was only during the year and that it would not per-se end the reguirement of 'commercial expediency'. This is best left to the assessee to judge its reguirement of commercial expediency unless the Assessing Officer makes it out a case that commercial expediency is no longer reguired. The commercial expediency does not mean the support by a holding company to its associate concern only when the associate concern is in a loss. Moreover, the Ld. CIT(A) observed that the loan from the holding company to its subsidiary FFC during the year had increased from Rs.2.60 Crores to 4.18 Crores which prima facie shows that the subsidiary was in need of more funds during the year. Moreover, that in pursuance of the management agreement entered by the assessee with the associate concern, the assessee had earned consultancy and service fee of Rs.77,88,894/-. Therefore, we do not agree with the order of the Ld. CIT(A) and direct the Assessing Officer to delete the disallowance of interest made by the Assessing Officer in respect of 50 the loan given by the assessee company to M/s FFC. Accordingly, ground no. 1 and 1.1 of the assessee are allowed." e) The Hon'ble Bombay High Court in the case of Pr. CIT vs. Videocon Industries Ltd [2025] 175 taxmann.com 239 (Bombay) [14-02- 2024] held as under: "In the instant appeal, the revenue contended that the interest- bearing loan from Central Bank of India was diverted to a subsidiary as interest-free share application money, and hence the related interest and upfront fee should be disallowed.

The assessee on the other hand explained that the loan was advanced for acquiring share capital in its subsidiary in the telecom sector, which was a commercially sound and strategic business decision. The assessee emphasized that investment in shares was part of its business and cited Supreme Court rulings in S.A. Builders 288ITR 1 (SC), CIT v. Srishti Securities (P.) Ltd. (2010) 321 ITR 498 (Bom), and Reliance Communications Infrastructure Ltd. (2012) 207 Taxman 219 in support of its claim.

7. Since both the CIT(A) as well as the ITAT had come to a factual finding and the law is also clear that if an assessee for commercial expediency and in the normal course of its business activities takes loan to invest in shares of its subsidiary, the interest paid on these advances utilized is allowable expenditure under Section36(1)(iii) of the Act."

52.2 The appellant's case is squarely covered by the judgement of the Hon'ble Supreme Court. Therefore, we are not inclined to agree with the findings of the Ld. CIT(A) and direct the Assessing Officer to delete

51 the disallowance of interest Rs. 8,39,55,267/-made in the Assessment order in respect of the loans given by the appellant company to M/s Munjal Hospitality Pvt. Ltd. and M/s Hero Exports Pvt. Ltd. We also agree with the argument of Ld. AR that since no disallowance of interest was made for loan given to M/s Hero Exports Pvt. Ltd. in the immediately preceding year when the loan was made, no disallowance can be made in this year in view of the judgement of the Hon'ble Punjab & Haryana High Court in the case of CIT vs. Max India Ltd. 398 ITR 209 (P&H). We also hold that the suo-moto disallowance of Rs. 228636462/- made by the appellant mistakenly in the return also deserves to be deleted in view of the detailed discussions made above. Accordingly, ground no.2 and 3 of the assessee are allowed.