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Income Tax Appellate Tribunal, PUNE BENCH “B”, PUNE
Before: SHRI R.S. SYAL & SHRI S.S. VISWANETHRA RAVI
आदेश / ORDER PER R.S.SYAL, VP : This appeal by the assessee is directed against the order passed by the ld. CIT(A) on 16-02-2017 in relation to the assessment year 2013-14. 2. The first ground is against the confirmation of disallowance of Rs.2,24,653/- u/s.14A of the Income-tax Act, 1961 (hereinafter also called `the Act’) read with Rule 8D of the Income-tax Act Rules, 1962 (hereinafter also called `the Rules’). 3. Briefly stated, the facts of the case are that the assessee is engaged in the business as Civil Contractor. Though certain
2 ITA No.1011/PUN/2017
exempt income was earned, but the assessee did not offer any
disallowance u/s.14A of the Act. Applying the provisions of
section 14A read with Rule 8D, the AO computed the
disallowance at Rs.31,75,492/- having two components,
namely, interest part of Rs.29,50,839/- and other expenses at
0.50% of the average value of investments at Rs.2,24,653/-.
The assessee challenged the addition before the ld. CIT(A),
who, after considering the amount of Shareholders’ fund
available with the assessee to the tune of Rs.8,63,46,749/- as
against the investment in the securities amounting to
Rs.4,41,68,794/-, deleted the disallowance of interest. The
remaining amount of Rs.2,24,653/-, disallowed by the AO
under clause (iii) of Rule 8D(2) computed 0.50% of the
average value of the investments, was sustained. The assessee
has come up in appeal before the Tribunal.
We have heard both the sides and perused the relevant
material on record. It is seen that the ld. CIT(A) deleted the
disallowance of interest under Rule 8D(2)(ii) by considering
that the amount of Shareholders’ fund available with the
assessee was in excess of the amount of investments made in
the securities yielding exempt income. The other component
3 ITA No.1011/PUN/2017
of disallowance u/s.14A read with Rule 8D(2)(iii) was
sustained at 0.50% of the average value of the investments.
Since the disallowance sustained by the ld. CIT(A) is strictly
in accordance with the manner of computation of disallowance
as enshrined in Rule 8D(2), we are satisfied that no further
interference is warranted in the impugned order on this score.
The reliance of the ld. AR on the judgment in the case of
HDFC Bank Ltd. Vs. DCIT (2016) 383 ITR 529 (Bom.) is
misplaced. The issue in that case was qua the disallowance of
interest component on taxable securities that was held to be
not maintainable because of the assessee having sufficient
Shareholders’ fund vis-a-vis the amount of investment. As can
be seen, the ld. CIT(A) in the impugned order, has itself
applied the ratio decidendi laid down in the case of HDFC
Bank Ltd. (supra) for deleting the disallowance of the
component of interest expenditure which was disallowed by
the AO under Rule 8D(2)(ii) read with section 14A of the Act.
No proposition for not making disallowance at 0.5% of the
average value of investments, which is otherwise in
accordance with rule 8D(2)(iii) of the Rules, has been laid
4 ITA No.1011/PUN/2017
down in the case. We, therefore, uphold the impugned order
on this score.
The only other ground raised in this appeal is against the
confirmation of Rs.48,66,709/-. The facts of this ground are
that the assessee paid interest of Rs.1.50 crore to banks and
Rs.4.53 lakhs to others, at the rates ranging between 11.05% to
19%. The AO observed that the assessee made certain
loans/advances amounting to Rs.99,28,027/- without charging
interest, detailed as under :
Sl. Name of the party Loan/Advance Interest @12% No. p.a. i. Shri Vishram I. Jagtap Rs.11,11,669.00 Rs.1,33,400/- ii. Shri Sudhakar Mulay Rs.60,55,889.00 Rs.7,26,707/- iii. Shri Vikram S. Mulay Rs.1,15,39,413.00 Rs.13,84,730/- iv. Fortune Pharma Pvt. Rs.1,70,00,393.00 Rs.20,40,047/- Ltd. – O/B + given during the year Rs.4,40,38,354.00 Rs.52,84,602/- v. Hemant Constructions Rs.29,87,847.00 Rs.3,58,541/- Total Interest Rs.99,28,027/-
He computed the disallowance of interest at
Rs.99,28,027/- by applying interest rate of 12% on such
loans/advances. The ld. CIT(A) allowed part relief. The
assessee is in appeal challenging the confirmation of
disallowance to the tune of Rs.48,66,709/-.
5 ITA No.1011/PUN/2017
The detailed facts concerning the confirmation of
disallowance of interest at Rs.48.66 lakh are that the assessee
advanced interest free advances to the above referred 5
persons. Item No.1 is advance of Rs.11,11,669/- to Vishram I.
Jagtap. The assessee submitted that this interest free loan was
given to Vishram I. Jagtap, who was an employee of the
assessee company. The ld. CIT(A) observed that during the
year under consideration salary of Rs.75,000/- was paid to him
and in the next year he paid back advance of Rs.10.00 lakh. In
view of the fact that the amount of salary was too less
compared with the amount of advance, the ld. CIT(A) held
that the advances were given for non-business purposes,
against which the assessee has approached the Tribunal.
Having heard both the sides and gone through the
relevant material on record, it is seen as an admitted position
that Mr.Vishram I. Jagtap received salary from the assessee
amounting to Rs.75,000/-. The ld. CIT(A) also referred to
salary paid to him in earlier years as well although the amount
of salary was less. In view of the fact that the advance was
given to one of the employees of the assessee company, same
cannot be considered for non-business purposes. We,
6 ITA No.1011/PUN/2017
therefore reverse the impugned order on this score and hold
that the advance of Rs.11,11,669/- given to Mr.Vishram I.
Jagtap was for business purposes.
The second advance was given to Mr.Sudhakar Mulay
and Mr.Vikram S. Mulay amounting to Rs.60,55,889/- and
Rs.1,15,39,413/- respectively. The assessee company entered
into an agreement for purchase of plot of land for which
advances were given to the above parties and agreements were
also executed. The ld. CIT(A) observed that no such
agreements to sell were furnished before the AO and also no
reasonable cause was given for not producing such agreements
before him. He, therefore, did not accept the additional
evidence because the assessee had not made any request under
Rule 46A for admitting the same. Without taking any
cognizance of such agreements, he held that the amounts were
given for non-business purposes.
We find that the view point of the ld. CIT(A) that the
agreements to sell were not furnished before the AO is not
correct inasmuch as the assessee duly placed the same before
the AO. Once it is observed that the amounts of advance were
given to certain persons for purchase of land - be it capital or
7 ITA No.1011/PUN/2017
stock in trade – such advances have to be taken as given for
business purposes only. We, therefore, overturn the impugned
order on this score.
The next advance was given to M/s. Hemant
Constructions amounting to Rs.29,87,847/-. The assessee
submitted that M/s. Hemant Constructions was the sub-
contractor and the advance was given for executing the sub-
contract. The ld. CIT(A) observed that during the year under
consideration, M/s. Hemant Constructions carried out sub-
contract work of Rs.33,44,807/- and the payment was made
without adjusting the amount of outstanding advance of
Rs.29.87 lakh. He, therefore, held the advance as having been
given for non-business purposes.
Here again, we find the reasoning of the ld. CIT(A) as
not sustainable because he himself recorded in his order that
M/s. Hemant Constructions carried out sub-contract work for a
sum of Rs.33.44 lakh, which amount was received. The mere
fact that the advance given in the preceding year was not
adjusted does not make the advancement of loan for non-
business purposes. We need to see the substance of the
transaction. Once a particular advance is found to have been
8 ITA No.1011/PUN/2017
given in connection with the carrying on of business, the same
cannot be considered as given for non-business purposes. We,
therefore, reverse the view of the ld. CIT(A) on this score also.
The last advance was given by the assessee to Fortune
Pharma Pvt. Ltd. with closing balance at Rs.6,10,38,747/-. In
support of genuineness of the advance given for business
purposes, the assessee submitted that it was given out of
commercial expediency as the assessee and the debtor were
controlled by same board of directors under same
management. The ld. CIT(A) held that such advance to have
been given for non-business purposes.
Having heard both the sides and gone through the
relevant material on record, we find that the assessee failed to
show any business purpose for advance of Rs.6.10 crore given
to Fortune Pharma Pvt. Ltd. In the absence of the assessee
making out a case of loan having been given for business
purpose, we hold that the ld. CIT(A) was justified in treating
such advance as given for non-business purposes.
From the above discussion, it is clear that the assessee
failed to prove business purpose only in respect of advance
given to Fortune Pharma Pvt. for a sum of Rs.6.10 crore.
9 ITA No.1011/PUN/2017
The assessee’s contention before the ld. CIT(A) was that
the amount of interest free funds available with the assessee
should be considered to finance such advances in respect of
which the AO disallowed interest. While disposing of the
assessee’s ground u/s.14A read with Rule 8D(2)(ii), we noted
that the interest free funds available with the assessee were to
the tune of Rs.8.63 crore. Out of such interest free funds, the
assessee attributed Rs.4.41 crore towards investment made in
the form of shares/share application money of Fortune Pharma
Pvt., and capital contribution in a Joint Venture giving rise to
exempt income. Thus, a sum of Rs.4.41 crore got exhausted
while dealing with the disallowance u/s.14A thereby leaving
only a sum of Rs.4,21,77,655/- (Rs.8.63 crore – Rs.4.41
crore) available with the assessee as interest free funds. This
amount of balance interest free funds available with the
assessee at Rs.4.21 crore is less than the amount of Rs.6.10
crore as having been advanced to Fortune Pharma Pvt. Ltd.
which we have held above to be given for non-business
purposes. Considering this factual scenario, we hold that a
sum of Rs.1.89 crore (Rs.6.10 crore – Rs.4.21 crore) was
advanced for non-business purpose. We, therefore, direct to
10 ITA No.1011/PUN/2017
restrict the addition on such amount of advance only given for
non-business purpose. The AO is directed to compute the fresh
amount of disallowance after affording an opportunity of
hearing to the assessee.
In the result, the appeal is partly allowed for statistical
purposes. Order pronounced in the Open Court on 23rd February,
2022.
Sd/- Sd/- (S.S.VISWANETHRA RAVI) (R.S.SYAL) JUDICIAL MEMBER VICE PRESIDENT पुणे Pune; �दनांक Dated : 23rd February, 2022 Satish
आदेश क� ��त�ल�प अ�े�षत/Copy of the Order is forwarded to: 1. अपीलाथ� / The Appellant; 2. ��यथ� / The Respondent; 3. The CIT(A)-12, Pune 4. The Pr.CIT (Central), Nagpur िवभागीय �ितिनिध, आयकर अपीलीय अिधकरण, पुणे “B” / 5. DR ‘B’, ITAT, Pune गाड� फाईल / Guard file 6.
आदेशानुसार/ BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण ,पुणे / ITAT, Pune
11 ITA No.1011/PUN/2017
Date 1. Draft dictated on 21-02-2022 Sr.PS 2. Draft placed before author 22-02-2022 Sr.PS 3. Draft proposed & placed before the JM second member 4. Draft discussed/approved by Second JM Member. 5. Approved Draft comes to the Sr.PS/PS Sr.PS 6. Kept for pronouncement on Sr.PS 7. Date of uploading order Sr.PS 8. File sent to the Bench Clerk Sr.PS 9. Date on which file goes to the Head Clerk 10. Date on which file goes to the A.R. 11. Date of dispatch of Order. *