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Facts
The assessee, M/s Rana Sugars Limited, faced disallowances by the AO for AYs 2010-11 and 2011-12 concerning interest on advances to sister concerns (Section 36(1)(iii)), expenses related to exempt income (Section 14A), and royalty payments treated as capital expenditure. The CIT(A) provided partial relief on these issues, against which the Revenue filed appeals. Additionally, the assessee filed appeals for both assessment years with an inordinate delay of 1862 days.
Held
The Tribunal dismissed the Revenue's appeals, upholding the CIT(A)'s findings that the assessee had sufficient interest-free funds for advances, the Section 14A disallowance could not exceed exempt income, and royalty payment for brand usage was a revenue expenditure. The Tribunal also dismissed the assessee's appeals due to the significant and unconvincing delay in their filing.
Key Issues
Whether interest disallowance u/s 36(1)(iii) was warranted despite sufficient interest-free funds; whether disallowance u/s 14A could exceed exempt income; whether royalty payment for brand usage was a revenue or capital expenditure; and whether the inordinate delay in filing the assessee's appeals should be condoned.
Sections Cited
36(1)(iii), 14A, 143(3), Rule 8D
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “B” BENCH CHANDIGARH.
Before: HON’BLE SHRI RAJPAL YADAV & HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM
आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member) 1. These are cross-appeals for Assessment Years (AY) 2010-11 and 2011-12. First, we take up revenue’s appeal for AY 2010-11 which arises out of the order of Learned Commissioner of Income Tax (Appeals)-1, Chandigarh [CIT(A)] dated 08-05-2018 in the matter of an assessment framed by Ld. Assessing Officer (AO) u/s 143(3) of the Act on 28-02-2013. The issues that fall for our consideration are – (i) Interest disallowance u/s 36(1)(iii) for Rs.540.98 Lacs; (ii) Disallowance u/s 14A for Rs.7.58 Lacs; (iii) Disallowance of royalty payment for Rs.25.60 Lacs. Having heard rival submissions and upon perusal of case records, our adjudication would be as under. The assessee being resident corporate assessee is stated to engaged in the business of sugar, alcohol, spirit and power generation. 2. Interest disallowance u/s 36(1)(iii) for Rs.540.98 Lacs 2.1 The Ld. AO, upon perusal of assessee’s financial statements, noted that the assessee made advances of Rs.45.08 Crores to 5 associated entities as tabulated in para 2.0 of the assessment order. Therefore, invoking the provisions of Sec.36(1)(iii), Ld. AO proceeded to compute the interest expenditure disallowance. It was alleged by Ld. AO that the moneys were borrowed by the assessee at higher interest rates. The funds diverted to its sister concerns were not related to any business consideration or commercial expediency. Finally, Ld. AO applied interest rate of 12% on these advances and computed interest disallowance of Rs.540.98 Lacs and made additions accordingly. 2.2 The Ld. CIT(A) rendered factual finding in respect of each of the borrowers. Upon perusal of ledger of M/s R.J.Texfab Ltd., it was observed that substantial outstanding to the extent of Rs.23.99 Crores out of Rs.27.97 Crores was opening balance but no such disallowance was made by Ld. AO in AY 2009-10. The funds advanced during the year were not out of loan funds but amounts received from another entity by the name of M/s Ascent Township Pvt. Ltd. None of the entry represented transfer of interest bearing funds to this entity and therefore, no such disallowance could be made against this entity. The advance made to M/s Ajudhia Sugar Mills was out of current account and made out of non-interest bearing funds and therefore, the disallowance with respect to this entity could not be made. Simialrly, the advances given to M/s Flawless Traders (P) Ltd. were out of current account and not out of borrowed funds. However, the disallowance for other two entities was confirmed since the amounts were given out of borrowed funds. In other words, the addition was partially confirmed. Aggrieved, the revenue is in further appeal before us. 2.3 We find that Ld. CIT(A) has rendered factual finding with respect to each of the borrowers. The substantial advances made to M/s R.J. Texfab Ltd. were made in earlier years but no such disallowance was made in AY 2009-10. The funds advanced during the year were not out of loan funds but the same were sourced out of amounts received from another entity. The advances made to other two entities were out of current account and not out of interest-bearing funds. These factual findings remain uncontroverted before us. The perusal of assessee’s financial statements would reveal that it has interest free funds in the shape of share capital and free reserves which are sufficient enough to cover the advances so made by the assessee. In such a case, unless nexus of borrowed funds vis-à-vis advances is established by Ld. AO, a legal presumption would arise in assessee’s favor that the funds were advanced out of free funds as available with the assessee. Therefore, no fault could be found in the adjudication of Ld. CIT(A), on this issue. 2.4 The Ld. CIT-DR has made a reference to certain final order of SEBI in QJA/GR/CFID/CFID-SEC3/30713/2024-25 dated 27-08-2024 to submit that penalties have been imposed on the assessee for diversion of funds to other entities and loss of interest caused to the shareholders of the assessee company. However, we find that the whole case of Ld. AO is based on the allegation that interest bearing funds were diverted for non-commercial purposes and accordingly, Ld. AO has made interest disallowance u/s 36(1)(iii) on the ground that the borrowed funds were not used wholly and exclusively for the purpose of assessee’s business. The genuineness of loans was not germane to the impugned issue and the same has never been questioned by Ld. AO. In fact, it is an admitted fact that the advances have been diverted by the assessee for non-business purposes which has led to impugned disallowance in the hands of the assessee. The case of the assessee is based on the facts that it has sufficient interest free sources to make these advances and therefore, no such disallowance is called for. The Ld. CIT(A) has rendered factual finding that these advances were not given out of interest bearing funds. The Ld. AR has also demonstrated that the assessee has sufficient interest free funds which could be utilized for non-business purposes also. Therefore, this order, in our considered opinion, do not render any assistance to the case of the revenue. Moreover, the scope of assessment could not be enhanced by Ld. CIT-DR in the second appeal. This being so, this plea of Ld. CIT-DR do not find our concurrence. 2.5 The corresponding grounds of revenue’s appeal stand dismissed.
Disallowance u/s 14A for Rs.7.58 Lacs 3.1 Since the assessee made investment in mutual funds which would yield exempt income, Ld. AO proceeded to make disallowance u/s 14A. By applying Rule 8D, Ld. AO computed aggregate disallowance of Rs.7.58 Lacs which was interest disallowance u/r 8D(2)(ii) for Rs.7.03 Lacs and indirect expense disallowance u/r 8D(2)(iii) for Rs.0.55 Lacs. 3.2 The Ld. CIT(A) directed Ld. AO to restrict the impugned disallowance to the extent of exempt income of Rs.68,386/-, inter-alia, by followingthe decision of Hon’ble Punjab & Haryana High Court in the case of M/s Empire Packaging Pvt. Ltd. (ITA No.415 of 2015). Aggrieved, the revenue is in further appeal before us. 3.3 We find that aforesaid adjudication is in line with settled legal position that the disallowance u/s 14A r.w.r. 8D could not exceed exempt income. Therefore, we see no reason to disturb the adjudication of Ld. CIT(A).
Disallowance of royalty payment for Rs.25.60 Lacs 4.1 The assessee paid royalty of Rs.25.60 Lacs which was claimed as revenue expenditure. The Ld. AO opined that the same was capital in nature since the expenditure gave enduring benefit to the assessee’s business. The royalty was an intangible asset and accordingly, the claim was denied. 4.2 The Ld. CIT(A) noted that the payment was made by the assessee pursuant to license-cum-manufacturing agreement between the assessee with M/s John Distillers Pvt. Ltd. wherein the assessee only gets a right to use the brand only. The ownership of the brand was not transferred to the assessee. The agreement was for a fixed period and the payment represent payment for use of trademark which could not be used except for sale of IMFL. No absolute right accrued to the assessee and no enduring benefit resulted to the assessee from this transaction. It was mere right to use the brand and not to acquire the brand. Therefore, the expenditure was revenue outgo. Aggrieved, the revenue is in further appeal before us. 4.3 The findings given by Ld. CIT(A) remain uncontroverted before us. From analysis made by Ld. CIT(A), it is quite clear that the impugned payment is in revenue field. The Ld. AO has erred in observing that the impugned payment represent intangible asset for the assessee. Rather this is an expenditure for the assessee incurred during the course of its business in trading activities. Therefore, we see no reason to interfere in the adjudication of Ld. CIT(A). The corresponding grounds of revenue’s appeal stand dismissed. The revenue’s appeal stands dismissed.
Revenue’s appeal for AY 2011-12 (ITA No.1049/Chandi/2018) In AY 2011-12, the issues that fall for our consideration are – (i) Interest disallowance u/s 36(1)(iii); (ii) Disallowance u/s 14A; (iii) Disallowance of royalty payment. The Ld. AO has made similar additions / disallowances in this year. The impugned appellate order is on similar lines. Facts being pari-materia the same, taking the same view, we confirm the adjudication of Ld. CIT(A). The revenue’s appeal stands dismissed.
Assessee’s Appeals for AYs 2010-11 and 2011-12 Both these appeals have been filed with an inordinate delay of 1862 days. The appeals ought to have been filed by 07-07-2018 whereas the appeals have been filed on 12-08-2023. In the condonation petition, it has been stated that a search was conducted on assessee on 16-02-2018 and key persons resigned which significantly impacted the assessee’s operations. Between 2018 to 2022, the assessee changed its tax consultants 3 times and none of the consultants identified the impugned orders as passed by Ld. CIT(A). Further, the management was too much involved in handling other matters. Upon perusal of the same, we hardly find any reasonable cause for late filing of both these appeals. The plea raised in condonation petition do not convince us to admit these appeals with such an inordinate delay. This being so, these appeals stand dismissed at their very threshold for want of condonation of inordinate delay. Conclusion 7. All the appeals stand dismissed. Order pronounced on 04-08-2025.