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Income Tax Appellate Tribunal, MUMBAI BENCH “G”, MUMBAI
Before: SHRI RAVISH SOOD & SHRI N.K. PRADHAN
ORDER PER N.K. PRADHAN, A.M.
This is an appeal filed by the Revenue. The relevant assessment year is 2011-12. The appeal is directed against the order of the Commissioner of Income Tax (Appeals)-13, Mumbai [in short ‘CIT(A)’] and arises out of the assessment completed u/s 143(3) the Income Tax Act 1961, (the ‘Act’).
The 1st ground of appeal
Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A) erred in ignoring the decision of Hon'ble Supreme Court in the case of ACIT vs. Tulip Star Hotels Ltd. dated 06.05.2012 and deleting the disallowance of Rs.33,08,31,052/- made by the Assessing Officer u/s. 36(1)(iii) of the Income Tax Act".
Briefly stated, the facts of the case are that the assessee had given advance share application money of Rs.25,00,00,000/- (out of which Rs.300,00,000/- is provided as NPA) and interest-free loans of Rs.272,90,81,533/- crores (out of which Rs.35,40,81,533/- is provided as NPA) out of the interest-free funds available with it. The assessee had earned interest income of Rs.61,82,27,140/- and incurred interest expense of Rs.94,90,58,192/- during the year out of which it has already disallowed interest expenditure of Rs.19,08,96,715/- u/s 14A in the return of income filed. In response to a query raised by the AO to explain why the excess of interest paid over interest received should not be disallowed in view of the provisions of section 36(1)(iii) of the Act, the assessee filed a reply vide letter dated 16.12.2013 stating as under :
“There cannot be any disallowances u/s 36(1)(iii) as the company has sufficient non- interest bearing fund available in the form of Share Capital, Reserve and Surplus and Share Application Money on which no interest is payable and hence, interest bearing fund has not been utilized for giving loans and advances on which no interest has been received.”
However, the AO was not convinced with the above reply of the assessee and following the order of the Supreme Court in the case of ACIT v. Tulip Star Hotels Ltd. dated 06.05.2012 and the assessment order for the AYs 2008-09, 2009-10 & 2010-11, disallowed Rs.33,08,31,052/- u/s 36(1)(iii) of the Act.
In appeal, the Ld. CIT(A) deleted the above disallowance made by the AO by observing as under :
“I have considered the submission made by the appellant and the reasons recorded by the AO. It is seen from the assessment order that the AO has simply disallowed the excess of interest paid by the appellant over the interest earned by it by observing that excess interest paid by the appellant can be attributed to those loans and advances which have been utilized for advancing interest free loans. There is no quantification of interest-free loans given by the appellant in the assessment order. In view of these facts, it can be inferred that the disallowance made by the AO is primarily on account of similar disallowance made in the case of the appellant from A.Y. 2008 - to A.Y. 2010 - 11. It is seen from the submission made by the appellant that gross amount of interest free funds available with the appellant as on 31.03.2011 is Rs.2411,75,11,878/- out of which interest free advances given in form of share application money/loans are Rs.262,50,00,000/- only and loans classified as NPA are Rs.35,40,81,533/-. Thus, after giving interest free advances given in form of share application money/loans, the appellant is still having interest free funds amounting to Rs.2149,25,11,878/- with it. Therefore, in view of decision of the jurisdictional High Court in the cases of Reliance Utilities and Power Ltd. (313 ITR 340) and HDFC Bank Ltd. in appeal no. 330 of 2012 vide order dated 23.07.2014, there is no case for disallowance of any interest u/s. 36(1)(iii) of the I.T. Act. It will not be out of place mention that similar interest disallowance made by the AO in A.Y. 2008-09 to 2010-11 has been deleted by the ITAT vide its decisions in and ITA No. 4416/Mum/2014 dated 22.05.2016 and ITA No. 6454/Mum/2016 dated 19.09.2018. In view of this, disallowance of Rs.33,08,31,052/- made by the AO u/s. 36(1)(iii) of the I.T. Act is directed to be deleted.”
Before us, the Ld. Departmental Representative (DR) supports the order of the AO by relying on the decision in Tulip Star Hotels Ltd. (supra). On the M/s Sprit Infrapower Ld. counsel for the assessee relies on the order of the Ld. CIT(A).
We have heard the rival submissions and perused the relevant materials on record. The reason for our decision are given below.
As rightly noted by the Ld. CIT(A), the gross amount of interest-free funds available with the assessee as on 31.03.2011 is Rs.2411,75,11,878/- out of which interest-free advances given in form of share application money/loans are Rs.262,50,00,000/- only and loans classified as NPA are Rs.35,40,81,533/-. Accordingly, after giving interest-free advances in the form of share application money/loans, the assessee is still having interest-free funds amounting to Rs.2149,25,11,878/- with it. In the case of Reliance Utilities & Power Ltd. (supra), the Hon’ble Bombay High Court has held that : -
“10. If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd. (supra) had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. (supra) where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcomber's case (supra) the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the overdraft account of the assessee and in such a case it should be presumed that the taxes were M/s Sprit Infrapower paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle therefore would be that if there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that investments would be out of the interest-free fund generated or available with the company, if the interest-free funds were sufficient to meet the investments.”
6.1 The above decision is upheld by the Hon’ble Supreme Court in CIT v. M/s Reliance Industries Ltd. (CA No. 10 of 2019) observing that :
“The High Court has noted the finding of the Tribunal that the interest-free funds available to the assessee were sufficient to meet its investment. Hence, it could be presumed that the investments were made from the interest-free funds available with the assessee.”
6.2 The contention of the Ld. DR that the decision in Tulip Star Hotels Ltd. (supra) is to be considered is rejected on the ground that it related to the reconsideration of the decision in the case of S.A. Builders Ltd. v. CIT (2007) 288 ITR 1, wherein the following observations were made :
“…..Where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion ordinarily be entitled to deduction of interest on its borrowed loans.”
6.3 We find that in the instant case, the ratio laid down by the Hon’ble Bombay High Court in Reliance Utilities & Power Ltd. (supra), which is confirmed by the Hon’ble Supreme Court is squarely applicable. Therefore, following the same we dismiss the 1st ground of appeal.
The 2nd ground of appeal
Whether on the facts and in the circumstances of the case and in law, Ld. CIT(A) erred in ignoring the decision of Hon'ble Supreme Court in the case of ACIT Vs. Tulip Star Hotels Ltd. dated O6.05.2012 and the decision of Hon'ble High Court in the Case of Godrej & Boyce Co. Ltd. ITXA No. 626/10 & WP 758/10 dated 12.08.2010 and deleting the disallowance of Rs.39,57,36,740/- made by the Assessing Officer u/s. 14A of the Income Tax Act.
The AO noted that the assessee has shown dividend income of Rs.21,88,22,976/-. In the computation of income, the assessee has claimed the said dividend income as exempt u/s 10(34) of the Act and suo motu disallowed an amount of Rs.19,08,96,715/- u/s 14A r.w. Rule 8D of the Income Tax Rules, 1962 (the Rules). However, the AO computed a disallowance of Rs.58,66,33,455/- consisting of Rs.45,82,11,048/- under Rule 8D(2)(ii) and Rs.12,84,22,407/- under Rule 8D(2)(iii). As the assessee had disallowed Rs.19,08,96,715/- in its computation of income, the AO restricted the disallowance to Rs.39,57,36,740/-.
In appeal, the Ld. CIT(A) held as under :
“I have considered the submission made by the appellant and the reasons recorded by the AO. In view of the decisions of the jurisdiction tribunal and other decisions quoted by the appellant, I am agreement with the submission of the appellant that net interest expenditure of Rs.33,16,74,921/- only should be considered for the purpose of disallowance under Rule 8D(2)(ii). In view of the decision of Special Bench, ITAT, Delhi in the case of Vireet Investment (P) Ltd. (supra), I am also in agreement with the submission of the appellant that only those investments should be considered for purpose of making disallowance which have yielded exempt
M/s Sprit Infrapower income during the year. The AO is directed to recalculate the disallowance under Rule 8D(2)(ii) accordingly.
So far as disallowance under Rule 8D(2)(iii) is concerned, the AO has computed the amount disallowable as per Rules at Rs.12,84,22,407/-. However, it is seen from the submission of the appellant that net administrative expenditure claimed by the appellant is Rs.7,10,484/- only because out of gross administrative expenditure of Rs.17,98,784/- debited to the P&L a/c., the appellant has suo motu disallowed amount of Rs.10,88,300/-. In view of these facts, the disallowance under Rule 8D(2)(iii) is directed to be restricted to Rs.7,10,484/-, the actual expenditure claimed by the appellant.”
Before us, the Ld. DR supports the order passed by the AO. On the other hand, the Ld. counsel submits that the disallowance be restricted to the one amounting to Rs.19,08,96,715/- filed by the assessee before the AO. Also the Ld. counsel relies on the order of the CIT(A).
We have heard the rival submissions and perused the relevant materials on record. In the case of Vireet Investment (P.) Ltd. (supra), the Special Bench of the Tribunal has held that “only those investments are to be considered for computing average value of investment which yielded exempt income during the year.” Therefore, the Ld. CIT(A) has rightly directed the AO to re-calculate the disallowance under Rule 8D(2)(ii) accordingly.
As recorded by the Ld. CIT(A), the assessee has claimed net administrative expenditure of Rs.7,10,484/- only because out of gross administrative expenditure of Rs.17,98,784/- debited to the profit and loss account, it has suo motu disallowed an amount of Rs.10,88,300/-. We find that the Ld. CIT(A), considering the facts of the case, has rightly directed the AO to M/s Sprit Infrapower Rs.7,10,484/-. Thus, the 2nd ground of appeal is dismissed.
In the result, the appeal filed by the Revenue is dismissed.
Order pronounced through notice board under rule 34(4) of the Income Tax (Appellate Tribunal) Rules, 1963.