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Income Tax Appellate Tribunal, MUMBAI BENCH “F”, MUMBAI
Before: SHRI C.N. PRASAD, HONBLE & SHRI N.K. PRADHAN, HONBLE
(A.Y: 2014-15) C.O.No. 158/MUM/2019 M/s. Vakrangee Limited O R D E R PER C.N. PRASAD (JM) 1. This appeal and cross objection is filed by the Revenue and assessee against the order of the Learned Commissioner of Income Tax (Appeals)–52, Mumbai [hereinafter in short “Ld.CIT(A)”] dated 19.01.2018 for the A.Y. 2014-15.
2. The Revenue in its appeal has raised the following grounds: -
1. "On the facts and circumstances of the case and in law, the Id CIT(A) erred in directing the AO to delete the disallowance u/s 14A of the IT Act r.w.r. 8D(ii) of ₹.38,93,170.
2. "On the facts and circumstances of the case and in law, the Id CIT(A) erred in directing the AO to delete the disallowance u/s 14A of the IT Act r.w.r. 8D(ii) relying upon the decision in the case of Reliance utilities and HDFC Bank even though the assessee could not submit the fund flow to establish as to how the investments have been made from its own surplus funds because the assessee has also made investments in various assets out of its available funds.
3. "On the facts and circumstances of the case and in law, the Id CITfA) erred in directing the AO to not to add the disallowance u/s 14A of the IT Act to the book profit of the assessee within the provision of section 115JB of the IT Act when this issue is squarely covered in favour of revenue by the decision of 'F' bench of ITAT, Mumbai in the case of Viraj Profiles Ltd. (2016) 156 ITD 72, Mumbai"
At the time of hearing, Ld. Counsel for the assessee submitted that tax effect on the issues in the present appeal of the Revenue is ₹.12,02,990/- which is below ₹.50 Lacs and in view of the CBDT Circular No. 17/2019 dated 08.08.2019 in F.No.279/Misc.142/2007-ITJ (Pt), the (A.Y: 2014-15) C.O.No. 158/MUM/2019 M/s. Vakrangee Limited appeal of the Revenue is not maintainable. A statement showing the calculation of tax on the issue in Revenue’s appeal was furnished.
Ld. DR agreed with the above submission of the Ld. Counsel for the assessee.
We have heard the submissions, perused the grounds of appeal of the assessee and the statement of tax calculation furnished by the assessee. We find that the tax effect in this appeal is less than ₹.50 Lakhs and therefore the appeal of the Revenue is not maintainable on account of low tax effect in view of the CBDT Circular No. 17/2019 dated 08.08.2019. Hence Revenue’s appeal is dismissed.
5. Coming to the cross objection filed by the assessee, the following grounds have been raised: - “1. The Ld. CIT(A) has erred in law and in facts in confirming the disallowance of interest expenditure u/s. 36(1)(iii) of the Act amounting to Rs. 4,64,90,714/-.
2. The Ld. CIT(A) has erred in law and in facts in partly confirming the disallowance made by the assessing officer u/s. 14A r.w.r. 8D(2) of the Rules.
3. The Ld. CIT(A) ought to have held that the disallowance u/s.40(a)(ia) of the Act amounting to Rs. 26,93,736/- was incorrect and unjustified.
4. The Ld. CIT(A) ought to have held that disallowance of service tax liability u/s. 43B of the Act amounting to Rs. 9,96,256/- was incorrect and unjustified.
(A.Y: 2014-15) C.O.No. 158/MUM/2019 M/s. Vakrangee Limited 5. The Ld. CIT(A) ought to have held that disallowance of interest on service tax and VAT amounting to Rs. 5,16,923/- was incorrect and unjustified. 6. The Ld. CIT(A) ought to have appreciated that book profits u/s. 115JB of the Act cannot be enhanced by invoking S.14A and rule 8D.”
Ground No.1 of grounds of Cross objection of the assessee relates to the disallowance made u/s. 36(1)(iii) of the Act. The Assessing Officer while completing the assessment noticed that assessee debited huge expenses in the form of finance cost amounting to ₹.77.87 Crores against various borrowings availed by the assessee. He also noticed that assessee has given certain interest free advances for purchase of capital goods, assets etc., to certain parties. Assessee was required to explain as to why proportionate interest expenses should not be disallowed u/s.36(1)(iii) of the Act. Assessee contended that amounts borrowed by the assessee were utilized for the purpose of the business and therefore no proportionate interest is liable to be disallowed u/s. 36(1)(iii) of the Act. It was also contended that both interest free funds as well as the borrowings on which interest was paid were available with assessee in its common pool and since the advances were given from out of common pool no part of interest is liable for disallowance. However, not convinced with the submissions of the assessee the Assessing Officer referring to various case laws disallowed proportionate interest on capital work in (A.Y: 2014-15) C.O.No. 158/MUM/2019 M/s. Vakrangee Limited progress and long term loans and advances amounting to ₹.103.15 Crores and worked out the disallowance of interest u/s. 36(1)(iii) of the Act at ₹.4,64,90,714/. On appeal the Ld.CIT(A) sustained the disallowance.
Before us Ld. Counsel for the assessee submits that assessee has made advances from out of common pool of funds where both interest free funds as well as borrowals were in common pool of funds. Ld. Counsel for the assessee referring to Profit and Loss Account and balance sheet of the assessee company submitted that assessee was having ₹.804.95 Crores towards share capital, reserves and surplus and money received against share warrant as against which the assessee has made investment i.e. capital work in progress of ₹.48.11 crores and there was increase in long term loans of ₹.31.03 Crores. Ld. Counsel for the assessee submitted that these investments in capital work in progress and long term loans were made out of assessee’s common pool and surplus funds and therefore no disallowance is required u/s. 36(1)(iii) of the Act. Reliance was placed on the decision of the Mumbai Bench of the Tribunal in the case of ACIT v. M/s. Veto Electropowers India Pvt. Ltd., in ITA.No. 4931/Mum/2017 dated 05.04.2019 and the decision of the Hon'ble Bombay High Court in the case of CIT v. Reliance Utilities and Power Ltd. [313 ITR 340] and the decision of the Hon'ble Supreme Court in the case
(A.Y: 2014-15) C.O.No. 158/MUM/2019 M/s. Vakrangee Limited of CIT v. Reliance Industries Limited in Civil Appeal Nos. 10 to 13 of 2019 dated 02.01.2019.
Ld. DR vehemently supported the orders of the authorities below.
We have heard the rival submissions, perused the orders of the authorities below and the case laws relied on. On a perusal of the balance sheet, we find that assessee had sufficient interest free own funds to the extent of ₹.804.95 Crores in the form of share capital, reserves and surplus and money received against share warrant and the assessee made investment in work in progress at ₹.48.11 crores and also increase in long term loans and advances to the extent of ₹.31.03 crores. Therefore, undoubtedly the assessee is having its own interest free funds more than the amount of advances given to various parties and the investments shown in capital work in progress.
In the case of CIT v. Reliance Utilities and Power Limited (supra) identical issue has come up before the Hon'ble Jurisdictional High Court as to whether there can be any disallowance u/s. 36(1)(iii) of the Act when the assessee has interest free funds more than the investments and when assessee paid interest on borrowals utilized for investments. The Hon'ble Jurisdictional High Court held as under: - (A.Y: 2014-15) C.O.No. 158/MUM/2019 M/s. Vakrangee Limited “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 over draft account of the assessee and in such a case it should be presumed that the taxes were 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 over draft 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. In this case this presumption is established considering the finding of fact both by the C.I.T. (Appeals) and I.T.A.T.
11. Considering the above, in our opinion, there is no merit in this appeal which is accordingly dismissed.”
The Hon'ble Supreme Court in the case of the CIT v. Reliance Industries Limited (supra) while answering the question “Whether the High Court is correct in holding that interest amount being interest referable to funds given to subsidiaries is allowable as deduction under section 36(1)(iii) of the Income Tax Act, 1961 (for short “the Act”) when the interest would not have been payable to banks, if funds were not provided to subsidiaries”, it has been held as under: -
(A.Y: 2014-15) C.O.No. 158/MUM/2019 M/s. Vakrangee Limited “Insofar as the first question is concerned, the issue raises a pure question of fact. 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. The Tribunal has also followed its own order for Assessment Year 2002-03. In view of the above findings, we find no reason to interfere with the judgment of the High Court in regard to the first question. Accordingly, the appeals are dismissed in regard to the first question.”
In the case on hand also undoubtedly the assessee is having sufficient interest free funds much more than the investments made by the assessee in capital work in progress and also in providing long term loans and advances to various parties. In the circumstances, the presumption is that the assessee has made investments from out of its interest free funds only and therefore there cannot be any proportionate disallowance u/s. 36(1)(iii) of the Act. Thus respectfully following the said decisions, we direct the Assessing Officer to delete the disallowance made u/s. 36(1)(iii) of the Act. This ground is allowed.
Ground No.2 of the Grounds of Cross objection relates to the disallowance made u/s. 14A r.w. Rule 8D of the Act. It is the submission of the Ld. Counsel for the assessee that the assessee has shown income from dividend of ₹.96,952/- and from sale of investment of ₹.33,350/- aggregating to ₹.1,30,302/-. Ld. Counsel for the assessee relying on the decision of the Hon'ble Supreme Court in the case of PCIT v. State Bank
(A.Y: 2014-15) C.O.No. 158/MUM/2019 M/s. Vakrangee Limited of Patiala [99 Taxmann.com 286] submits that the disallowance u/s. 14A of the Act cannot exceed exempt income.
Ld. DR vehemently supported the orders of the authorities below.
We observe that in the decision of the Hon'ble Supreme Court in the case of PCIT v. State Bank of Patiala (supra) the Special Leave Petition filed against the decision of the Hon'ble Punjab and Haryana High Court in the case of PCIT v. State Bank of Patiala has been dismissed by upholding the order of the Hon'ble High Court in holding that amount of disallowance u/s. 14A of the Act shall be restricted to amount of exempt income only and not a higher figure. We respectfully following the said decision direct the Assessing Officer to restrict the disallowance u/s. 14A r.w. Rule 8D of I.T. Rules only to the extent of exempt income earned by the assessee during the relevant Assessment Year. This ground is partly allowed.
Coming to the Ground No.3 of the grounds of cross objection relating to disallowance made u/s. 40(a)(ia) of the Act for non-deduction of tax at source in respect of professional fees and payments made towards advertisements u/s. 194H and u/s. 194C of the Act respectively, Ld. Counsel for the assessee submits that whether there can be any disallowance u/s. 40(a)(ia) of the Act when the assessee was not treated
(A.Y: 2014-15) C.O.No. 158/MUM/2019 M/s. Vakrangee Limited as an assessee in default u/s. 201(1) of the Act for non-deduction of tax, as per second proviso to section u/s. 40(a)(ia) has been decided by the various Benches of the Tribunal in the following cases: - (i) Country Club Hospitality & Holidays Ltd v. Addl. CIT in ITA.No. 1504 & 1654/Hyd/2012 dated 27.04.2018. (ii) Vishu International v. DCIT & Vice-versa in ITA.No. 488 & 621/Hyd/2013 dated 12.11.2014 (iii) Filatex Fashions Ltd v. ACIT in ITA.No. 268/Hyd/2017 dated 11.01.2019
Ld. Counsel submits that in the above cases it has been held that when the assessee was not held as defaulter u/s. 201(1) of the Act there cannot be any disallowance u/s. 40(a)(ia) of the Act.
Ld. Counsel for the assessee further submits that since it is a purely a legal ground the same may be admitted and adjudicated. On the other hand, the Ld. DR opposing the submissions of the assessee stated that this ground is not raised before the Ld.CIT(A) by the assessee and therefore may not be entertained at this stage.
On hearing both the sides, we are of the view that since this is purely a legal ground the same is admitted and disposed off as under: -
(A.Y: 2014-15) C.O.No. 158/MUM/2019 M/s. Vakrangee Limited 19. In the case of Country Club Hospitality & Holidays Ltd v. Addl. CIT in ITA.No. 1504/Hyd/2012 dated 27.04.2018 the Hyderabad Bench of the Tribunal held as under: - “8. As regards Grounds of appeal
Nos.3 to 6, brief facts are that on verification of the details filed by the assessee, the AO observed that the assessee has not made TDS from various payments totaling to Rs.5,21,75,632. He therefore, disallowed the same u/s 40(a)(ia) of the Act. On appeal, the CIT (A) has deleted the disallowance with a direction to the AO to verify whether the payment towards the expenditure, was actually paid or payable and to allow the same if it is found to have been actually paid, before 31st of March i.e. the end of the relevant accounting year. For giving such a direction, the CIT (A) followed the decision of the Special Bench of the ITAT, Visakhapatnam in the case of Merilyn Shipping & Tran sport vs. ACIT in ITA No.477/Viz/2008. The AO, while passing the consequential order, has verified the details and has allowed relief to the extent of Rs.5,01,61,399/-. In the grounds of appeal, the assessee’s argument is that the CIT (A) ought to have deleted the disallowance by himself, instead of directing the AO to verify the claim of the assessee. Further, in the additional ground of appeal No.10, the assessee is claiming that if the assessee has not been treated as an “assessee in default” u/s 201(1), no disallowance u/s 40a(ia) can be made.
9. We find that the Hon'ble Supreme Court in the case of Palam Gas Service vs. CIT reported in (2017) 81 Taxmann.com 43 (S.C) has held that irrespective of the amount being paid, the same is disallowable u/s 40a(ia) if no TDS has been made. Therefore, the decision of the CIT (A) on this point has to be set aside. In such circumstances, the alternate plea of the assessee assumes importance.
10. The learned Counsel for the assessee has placed reliance upon the decision of the Hon'ble Supreme Court in the case of Hindustan Coca Cola Beverage (P) Ltd vs. CIT, reported in (163 Taxmann.355) wherein the Hon'ble Supreme Court was considering the case of the assessee who was considered as an assessee in default u/s 201(1) and interest u/s 201(1A) was also made. The Hon'ble Supreme Court has held that the assessee therein, cannot be treated as “as assessee in default” u/s 201(1), if the recipient has offered the income and has paid the taxes thereon. However, with regard to the interest u/s 201(1A), the Hon'ble Supreme Court has held that the same is payable till the date of payment of taxes by the deductee assessee. He submitted that in the case of the assessee before us, the recipients of the payment, have already offered the income in their hands and therefore, the assessee cannot be treated
(A.Y: 2014-15) C.O.No. 158/MUM/2019 M/s. Vakrangee Limited as “as assessee in default”. Further, the learned Counsel for the assessee also argued that by virtue of the second proviso to section 40(a)(ia), where the assessee is not deemed to be “an assessee in default” under the provisions of sub-section 201 (1), then for the purpose of this sub-clause i.e. 40a(ia), it shall be deemed that the assessee has deducted and paid the tax on such sum on the date of furnishing returned income by the recipient. By referring to the said proviso, he submitted that though this proviso has been inserted by the Finance Act of 2013, various Benches of the Tribunal have held this proviso to be clarificatory in nature and applicable retrospectively. He placed reliance upon the decision of the Hon'ble Delhi High Court in the case of CIT vs. Ansal Land Mark Township reported in 61 Taxman.com 45 (Del.) in support of this contention. He therefore, submitted that since the assessee has not been treated as an “Assessee in Default” u/s 201(1) of the Act, it is to be presumed that the recipients have offered the said income to tax and in such circumstances, no disallowance u/s 40a(ia) is to be made.
This decision of the Hyderabad Bench of the Tribunal is squarely applicable to the facts of the assessee ‘s case. Thus respectfully following the said decision we direct the Assessing Officer to delete the disallowance made u/s. 40(a)(ia) of the Act.
At the time of hearing Ground No.4 of the grounds of cross objection is not pressed by the Ld. Counsel for the assessee and thus the same is dismissed as not pressed.
Coming to the Ground No.5 of the grounds of cross objection i.e. disallowance of interest on Service Tax and VAT, Ld. Counsel for the assessee submits that the said amounts are not penal in nature and hence allowable as business expenditure. Reliance was placed on the following decisions: -
(A.Y: 2014-15) C.O.No. 158/MUM/2019 M/s. Vakrangee Limited (i) BSR & Co. v. ACIT in ITA.No. 1485/Mum/2011 dated 03.08.2018. (ii) ACIT v. Ezeego One Travel & Tours Ltd in ITA.No. 689/Mum/2018 dated 14.02.2019.
Ld. DR vehemently supported the orders of the authorities below.
We have heard the rival submissions, perused the orders of the authorities below. Assessing Officer while completing the assessment disallowed interest on Service Tax and VAT treating them as penal in nature. It is the contention of the assessee that the said amounts are not penal in nature but only compensatory in nature and therefore the same is an allowable deduction. We find that identical issue came up before the Coordinate Bench in the case of M/s. BSR & Co. v. ACIT (supra) wherein it has been held as under: - 14. “Coming to Ground No.3, Ld. Counsel for the assessee submitted that Assessing Officer disallowed interest paid on service tax observing that the same is penal in nature and not an allowable expenditure and the same is upheld by the Ld.CIT(A). Ld. Counsel for the assessee placing reliance on the decision of the Delhi Bench in the case of DCIT v. Messee Dusseldorf India (P.) Ltd., [129 TTJ 81] and the decision in the case of M/s. Remfry & Sugar Consultants v. ACIT in ITA.No. 5887/Del/2011 dated 20.07.2012, submitted that the Tribunal considered similar issue as to whether the interest paid for delay in payment of service tax would amount to penalty for infraction of law or is only compensatory and allowable as deduction in computing the income of the assessee and held that, interest paid by the assessee for the delayed payment of service tax is compensatory and has the same character as service tax and therefore same is allowable as deduction. 15. Ld. DR vehemently supported the orders of the authorities below.
(A.Y: 2014-15) C.O.No. 158/MUM/2019 M/s. Vakrangee Limited 16. We have heard the rival submissions, perused the orders of the authorities below and the case laws relied on. Assessing Officer while completing the assessment noticed that assessee made payment of interest for delay in payment of service tax and this was disallowed by the Assessing Officer observing that the same is penal in nature and not an allowable expenditure which was confirmed by the Ld.CIT(A). Before us, it is contended that such interest payment on delayed remittance of service tax is only compensatory in nature and is supported by the decision of the Delhi Bench. On a perusal of the decisions relied on by the Ld. Counsel for the assessee, we find that the Tribunal held that interest on service tax is compensatory in nature and not penal in nature and is therefore allowable expenditure. On a perusal of the Explanation to Section 37(1) of the Act which says that any expenditure incurred by an assessee for any purpose which is an offense or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or professions and no deduction or allowance shall be made in respect of such expenditure. Here the assessee made payment of interest for the delay in payment of service tax which in our considered view it is not an expenditure incurred for the purpose of any offence or prohibited by law. Thus, respectfully following the said decision we direct the Assessing Officer to delete the disallowance made towards interest for delay in payment of service tax. Ground No. 3 is allowed.”
Respectfully following the above said decision, we hold that interest paid on Service Tax and VAT is not penal in nature and therefore is allowable as deduction. Thus, following the said decision we direct the Assessing Officer to delete the disallowance of interest on Service Tax and VAT and recompute the income of the assessee.
The last ground is in relation to disallowance u/s. 14A r.w. Rule 8D of I.T. Rules while computing the book profits u/s. 115JB of the Act. At the time of hearing Ground No.6 of the grounds of cross objection is not (A.Y: 2014-15) C.O.No. 158/MUM/2019 M/s. Vakrangee Limited pressed by the Ld. Counsel for the assessee and thus the same is dismissed as not pressed.
In the result, appeal of the Revenue is dismissed and cross objection of the assessee is partly allowed as indicated above.
Order pronounced in the open court on the 23rd October, 2019