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Income Tax Appellate Tribunal, “A” BENCH, AHMEDABAD
Before: SHRI WASEEM AHMED
PER MADHUMITA ROY, JUDICIAL MEMBER:
The instant appeal filed by the Revenue is directed against the order dated 26.11.2010 passed by the Ld. CIT(A)-9, Ahmedabad arising out of the order dated 19.12.2017 passed by the Assessing Officer under Section 143(3) of the Income Tax Act, 1961(hereinafter referred to as “the Act”) for Assessment Year 2015-16.
The Revenue has come up in appeal mainly on the 3 grounds: “1. The Ld.CIT(A) has erred in law and on facts in deleting the addition Rs 50,47,871/-made by the assessing officer on account of disallowance of interest expense u/s 36(1)(iii) of the Act as the assesses had given interest free advance to various parties for acquiring immovable properties. 2. The Ld CIT(A) has erred in law and on facts in deleting the addition of Rs 2,28,23,930/- made by the assessing officer on account of disallowance
ITA.No.91/Ahd/2019 2 u/s 14A of the Act even though the assessee company had investment of Rs 58,72,88,120/- which yielded exempt income and the assessee has debited interest expense of Rs 3,55,47,224/- on borrowed funds.
The Ld CIT(A) has erred in law and on facts in directing the Assessing Officer to delete the disallowance u/s 14A of the Act while computing books profits u/s under section 115JB of the Act.”
Ground No. 1: Deletion of addition of Rs.50,47,871 made by the assessing officer on account of disallowance of interest expenses under Section 36(1)(iii) of the Act is under challenge before us since the assessee has given interest free advance to various parties for acquiring immovable properties.
At the time of hearing of the instant appeal the representative of the revenue relied upon the order passed by the learned AO whereas the learned counsel appearing for the assessee submitted before us that this ground of appeal is squarely covered in favour of the assessee in assessee’s own case for assessment year 2013-14, 2014-15 by the order passed by the Coordinate Bench; copy whereof has also been submitted before us.
The brief facts leading to the case is this that the assessee trading in bullion, diamonds, commodities, unit of mutual funds, shares and securities, speculation, futures and option transactions in brokerages, currencies filed its return of income for the year under consideration on 30.09.2015 declaring total income at Rs.72,83,860 which was processed under section 143(1) of the Act, 1961. The case was selected for scrutiny under manual selection and notice under section 143(2) of the Act was issued on 24.09. 2016 followed by notice under section 142(1) of the Act along with detailed questionnaire on 31.08.17.
ITA.No.91/Ahd/2019 3 5. From the details submitted by the assessee during the course of assessment proceeding it was found that the assessee had given interest free advances to M/s. Applewood Estate Private Ltd, Ahmedabad and M/s. Oberoi Estate Pvt. Ltd. Mumbai of Rs.10,28,88,914 and Rs.1,96,32,248/-respectively for the purchase of immovable properties. The assessee was issued a show cause notice dated 27.11.2017 whereby and whereunder he was asked to explain as to why the interest expenses should not be disallowed since the assessee has not got possession of the said properties. In reply to that the assessee submitted that compared to the amount of advances paid to the tune of Rs.12,84,61,162/-, interest free funds available with the assessee is to the tune of Rs.65,94,35,314/-. Interest-bearing funds were utilized for trading and derivatives business and granting short-term loans and advances on which interest aggregating to Rs.1,30,73,930/- is received. In that view of the matter it is to be assumed that the investment was made out of interest-free funds and thus disallowance under section 36(1)(iii) is not warranted.
Upon considering the reply made by the assessee the learned AO was of the opinion that the assessee has not been able to prove the nexus of amounts advanced to the sources of interest free funds i.e. share capital, reserve the interest free loans from M/s. Priya textile private Ltd. Finally upon applying the proportionate interest expenses act of 4.12% on advances balance as on 31.03.2014, Rs.50,47,871/- was disallowed under section 36(1)(iii) of the Act.
In appeal preferred by the assessee the learned CITA came to a finding that the appellant had sufficient interest free funds as against the advances made during the year under consideration and therefore the assesses case is squarely covered by several case laws including that of the jurisdictional High Court in the case of Gujarat State Fertilisers and Chemicals Ltd, reported in
ITA.No.91/Ahd/2019 4 358 ITR 323, CIT vs. Gujarat Narmada Valley Fertilisers Corporation Ltd, reported in 221 taxmann for 79 and CIT vs. Raghubir Synthetics Ltd, reported in 354 ITR 222. Furthermore it was observed that the assessee’s case is squarely covered in assessee’s own case for Assessment Years 2011-12, 2012-13, 2013-14 and 2014-15 wherein on the same facts the disallowance made by the learned AO has been deleted and on that basis relying upon the same the learned CIT(A) deleted the addition made against the assessee.
We have further considered the order passed by the Coordinate Bench in assessee’s own case for Assessment Year 2013-14 and 2014-15 whereupon we find that the issue is identical and therefore, in our considered opinion the order passed by the Ld. CIT(A) in deleting the addition made by the Ld. Assessing Officer is just and proper so as to warrant interference. Therefore, the ground of appeal preferred by revenue is found to be devoid of any merit and hence dismissed.
Ground No. 2: This ground relates to deletion of addition of Rs.2,28,23,930/- made by the Assessing Officer under Section 14A of the Act.
During the course of assessment proceeding it was found that the company had invested an amount of Rs.58,72,88,120/- which earned tax free income. A show-cause notice dated 27.11.2017 was issued directing the assessee to explain as to why disallowance under Section 14A should not be made. The assessee by and under a submission dated 15.12.2017 replied that the assessee has mainly made investments in partnership firms out of the own funds. In that view of the matter the disallowance under Section 14A is not applicable. Furthermore, the assessee has sufficient own fund and it has earned positive interest income. Along with the said submission relevant documents were also placed on record before the Ld. AO. However, having
ITA.No.91/Ahd/2019 5 found no merit the Ld. AO applying the provision of Section 14A r.w.r 8D disallowed Rs. 2,28,23,930/- on the premise that the assessee has not been able to prove that investments had been made out of interest free fund which stood deleted by the Ld. CIT(A) in appeal preferred by the assessee. Hence, the instant appeal before us.
At the time of hearing of the instant appeal the representative of the Revenue relied upon the order passed by the Ld. AO whereas the Ld. Counsel appearing for the assessee submitted before us that the case is squarely covered in assessee’s own matter for Assessment Year 2013-14 and 2014-15 by the order passed by the Coordinate Bench; copied whereof were also submitted before us by way of a Paper Book filed by the assessee.
Before the Ld. CIT(A) the assessee made the following submissions:
“12.1 The appellant company has introduced capital in partnership firms and LLP for the purpose of real estate business, earned interest income and share in profit / loss on such capital contribution. The summary of opening and closing balances in partnership firms / LLPs are as under: S. No. Partnership Firms /LLPs Capital Balance as Capital Balance as on on 31-03-15 31-03-14 1. Ganesh Infrastructure 148229226 284844959 2. Safal Homes 184240062 168907338 3. Horizon Industrial Park -1127135 95112448 4. Sahaj Commercials 50259933 77805674 5. PMZ Developers 33431950 0 6. SKZ Realties 150553597 0 7. Priyal Hydro 787245 0 8. Safal Homes LLP 20913241 73377612 Total 587288119 700048031
2.2 The Ld. AO has not appreciated the fact that from the partnership firms and LLP, where the funds are invested and the company has received interest income of Rs. 172,84,784/- from partnership firms / LLP and share in profit / loss of Rs. 264,93,976/-. 12.3 The Ld. AO has not appreciated the fact that there are ample interest free funds with the appellant company, amounting to Rs.63,22,59,453/- (Last year Rs.63,76,88,389/-). The finding of such interest free funds are given on Pg. No. 3 para no. 3.2 of Assessment Order, the same is reproduced hereunder:
ITA.No.91/Ahd/2019 6
Particulars Amount balance as Amount balance as on on 31-03-201 5 (Rs.) 31-03-201 4 (Rs.) Share Capital 10,00,000 10.00,000 Reserves 44,42,59,453 41,26,88,389 Interest Free Unsecured Loans 18,70,00,000 22,40,00,000 Total Free Funds 63,22,59,453 63,76,88,389
12.4 During the year, the capital contribution in partnership firms is reduced toRs. 58.72 crore against fast year capital contribution of Rs. 70 crore, thus, the funds are withdrawn from partnership firms and utilized for investment in new partnership firms / LLP and for the purpose of business of trading in bullion, diamonds, commodities, etc. The interest income from partnership firms are as under:
S. No Partnership Firms / LLPs Capital Balance as on Interest income 31-03-15 1 PMZ Developers 33431950 1387812 2 SKZ Realties 150553597 13599354 3 Safal Homes LLP 20913241 2297618 Total 204898788 17284784
12.5 Thus, the interest free funds of Rs. 63.22 crore are deployed in the partnership firms at Rs. 38.23 crore (total contribution of Rs. 58.72 crore less contribution on which interest is earned of Rs. 20.49 crore) and interest income of Rs. 172,84,784/- is received from partnership firms. Thus, capital contribution in partnership firms / LLP are from interest free funds.
12.6 In the case CIT Vs. Gujarat State Fertilizers & Chemicals Ltd., (2013) 358 ITR 323 (Guj-HC), Hon'ble Gujarat High Court held that: "3.8 .... However, when both the CIT (Appeals) and the Tribunal have noted that the assesses had sufficient funds available with it, which was more than the amount it invested for earning the dividend income, both these authorities have correctly approached the issue by setting aside the order of disallowance under Section 14A of the Act in respect of interest expenditure. When the very basis for employing Section 14A of the Act on factual matrix is lacking, the disallowance to the extent of 10% of dividend income was not permissible. When it transpires from record that the assessee's own funds were at higher than the/investment made by it and with nothing to indicate that the borrowed funds were utilized for the purpose of investment in shares and for earning dividends, the Tribunal committed no error...."
12.7 The appellant company is partner in certain partnership firms/LLP, from where received taxable income in the form of interest income and tax free income in the form of share in profits. The partnership firms / LLP are having their own establishments to run business and there is merely transfer of funds, which no expenditure is incurred, no salary is given to director Sh. Pravin Majithia, who looks after such partnership firms/LLP.
ITA.No.91/Ahd/2019 7 12.8 The appellant also relied on certain judicial pronouncements which are as under:
(i) CIT vs. Guiarat Industrial Development Corporation (2013) 218 Taxman 142 (Gui-HC) "Where sufficient interest free funds are available with assesses and when revenue had failed to establish link between borrowed fund and investment made by assessee in equity shares, addition made on account of disallowance by AO was not sustainable."
(ii) CIT vs. Suzlon Enemy Ltd. (2013) 215 taxman 272 (Gui-HC) "When interest free own funds of assessee was many time more than investment made and no direct nexus was shown between interest bearing borrowed funds and investment in Indian subsidiaries, no disallowance u/3. 14A can be made out of interest expenditure."
(iii) CIT vs. Gujarat Power Corporation (2013) 352ITR 583 (Gui-HC) "When the assessee did not invest borrowed fund for earning interest free income, provision of Section 14A of the Act cannot be applied for taxing interest on such borrowed funds."
(iv) CIT vs. Deepak Mittal (2013) 361 ITR 131 (P&H-HC) "The AO had not brought on record any expense having been incurred by the assessee to earn the non-exempt income or the exempt income. In the absence of the same, it could not be said that the assessee had actually incurred any expenditure. Therefore, whether before insertion of Rule 8-D or there after this fact had to be brought on record by the authorities below which in the present case has not been done. Having not incurred any expenditure which can be disallowed or any such expenses having not been brought on record, there cannot be any disallowance of any expenditure under Rule 8-D or otherwise against the exempt income." (v) CIT vs. Hero Management Service Ltd. (2014) 360 ITR 68 (Del-HC) "To invoke Rule 8D, the AO had to first record a finding that he was not satisfied with the correctness of the claim for expenditure made by the assessee in relation to income, which did not form part of the total income under the Act. No such satisfaction had been recorded by the AO. Therefore excess disallowance was deleted."
12.9 On similar facts and similar issue the appeal of assessee has been allowed in AY 2011-12 by CIT(A)-9 in Appeal no. CIT(A)-9/377/Addl. CIT Range 5/2013-14 dated 14-08-2015, in AY 2012-13 by CIT(A)-9 in Appeal no. CIT(A)-9/559/DCIT Cir. 3(1)(1)/2014-15 dated 15-10-2015 (Paper Book Pg. No. 27 to 35). in AY 2013- 14 by CIT(A)-9 in Appeal no. CIT(A)-9/10628/DCIT Cir. 3(1)(1)/2014-15 dated 13- 09-2017 (Paper Book Pg. No. 36 to 49) and in A Y 2014-15 by CIT(A)-7 in Appeal no. CIT(A)-7/274/2016-17 dated 03-10-2017 (Paper Book Pg. No. 50 to 63). where it is held that:
"5.2 I have carefully considered the assessment order, facts of the case and the submissions made by the appellant. The AO made the impugned disallowance u/s.
ITA.No.91/Ahd/2019 8 14A read with 8D stating that the appellant had not proved that investments had been made out of interest free funds. I find that on identical facts, the appellant's appeal on this ground has been decided in its favour for the three years i.e. Asst. Years 2011-12, 2012-13 & 2013-14 wherein the ld. CIT(A) has held as under:
"6.2 I have carefully considered the facts of the case, submission of the appellant as well as the case law relied upon by the appellant. Identical issue have come up before me for A.Y. 2012-13. The issue was already decided in favour of the appellant vide order No. CIT(A)-9/559/DCIT,Cir-3(1)(1)/14-15 for A.Y. 2012-13 dieted 15/10/2015. The concluding paragraph is reproduced as under-
"With respect to ground no.2, relating to disallowance of Rs.23,14,254/- vis-a-vis the advances given for purchases of immovable property, the appellant has submitted a similar argument that sufficient interest free funds were available, as was observed by the AO himself. The appellant also relied on the following judgment by the Hon’ble Gujarat High Court namely:
(a) CIT vs. GSFC Ltd 358ITR 0323 (Guj) (b) CIT vs. Gujarat Narmada Valley Fertilizers Co. Ltd. 221 Taxman 479 (c) CIT vs. Raghuvir Synthetics 354 ITR 222. (d) CIT vs. Reliance Utilities & Power Ltd. 313 ITR 340
4.2 The fundamental principle highlighted in these judgments, as pointed out by appellant, is that if there are funds available, both interest free and overdraft or loans, then the presumption would arise that the investments would be out of interest free funds available with the appellant, if the interest free funds were sufficient to make such investments. Further, it is not evident from the order u/s. 143(3) that such investment in two house properties is out of the interest bearing funds.
Since substantial interest free funds were available as pointed out above and also on page-4 of the AOs order, I am of the view that the disallowance of interest at the rate of 1.227% for IT AY 2011-12 and 5.04% for IT AY 2012-13 worked out by the A.O. is not tenable. On similar facts and on similar issue the appeal of assesses has been allowed for AY 2011-12 vide CIT(A) Order dated 14-08-2015. The A.O. is therefore directed to delete the addition of Rs. 23,14,254/-. This ground is allowed."
On similar facts and on similar issue the appeal of the assessee has been allowed for AY 2011-12 and 2012-13 vide CIT(A) order dated 14-08-2015 and 15/10/2015 respectively. Relying on the findings of earlier A. Y.s and the issue being the same the addition of Rs.68,06,226/- is directed to be deleted. This ground of appeal is allowed."
5.2.1 In view of the above, and the fact that the identical issue is involved during the year under consideration as well, the disallowance of Rs.2,88,48,738/- made by the Assessing Officer is deleted. Grounds of appeal Nos. 2 to 5 are allowed." (Pg. no. 62 to 63).
ITA.No.91/Ahd/2019 9 13. In view of the above facts, explanations and case laws, it is furnished that there is interest income of Rs. 172,84,784/- from investment in partnership firms and LLP and earned interest of Rs. 130,73,930/- from other parties, whereas interest of Rs. 355,47,224/- is paid on borrowings. The borrowed funds are utilized for business of trading in bullion, commodities and derivative business. The interest free funds are invested in partnership firms and LLP, therefore, for earning profit / loss from partnership firms, there is no interest expenditure and no any other expenditure, hence, no disallowance may kindly be made u/s. 14A, in view of decision of jurisdictional High Court in the case of CIT vs. Suzlon Energy Ltd. (2013) 215 taxman 272 as there are huge interest free funds, no disallowance may kindly be made. Furthermore, the facts of the case are identical as held by ld. CIT(A) in AY 2011-12 to AY 2014-15, it is prayed that disallowance made u/s. 14A of Rs. 228,23,930/- may kindly be deleted."”
We have heard the rival submissions made by the respective parties, we have also perused the relevant materials available on record. We find that the Ld. CIT(A) considered the order passed by his predecessor on the similar facts on the identical issue in the appeal preferred by the assessee itself for A.Y. 2011-12 and 2012-13. We have further considered the order passed by the Coordinate Bench in assessee’s own case for A.Y. 2013-14 and 2014-15 whereupon we find that the issue is identical and therefore, in our considered opinion the order passed by the Ld. CIT(A) in deleting the addition made by the Ld. AO is just and proper so as to warrant interference. Therefore, the ground of appeal preferred by Revenue is found to be devoid of any merit and hence dismissed.
The order passed by the Ld. CIT(A) in directing the Assessing Officer to delete the disallowance under Section 14A of the Act while computing book profit under Section 115JB of the Act has been challenged before us.
The representative of the Revenue at the time of hearing of the matter relied upon the order passed by the Ld. AO whereas the Ld. DR relied upon the order passed by the Ld. CIT(A).
We have further considered the order passed by the Ld. CIT(A) while deleting the order passed by the Ld. AO. It appears that since the
ITA.No.91/Ahd/2019 10 disallowance has already been deleted by the Ld. CIT(A) which has been confirmed by us the disallowance while computing income under Section 115JB has also been deleted as found to be justified and hence upheld. This ground of appeal, therefore, found to be devoid of any merit and hence dismissed.
In the result, appeal of the Revenue is dismissed.
Order pronounced in the Court on 20th April, 2022 at Ahmedabad.
Sd/- Sd/- WASEEM AHMED (MADHUMITA ROY) (ACCOUNTANT MEMBER) JUDICIAL MEMBER Ahmedabad; Dated 20/04/2022 TRUE COPY आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. संबं�धत आयकर आयु�त / Concerned CIT 4. आयकर आयु�त(अपील) / The CIT(A) 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण / DR, ITAT, 6. गाड� फाईल / Guard file. आदेशानुसार/BY ORDER,
उप/सहायक पंजीकार (Dy./Asstt.Registrar) आयकर अपील�य अ�धकरण, अहमदाबाद / ITAT, Ahmedabad
Date of dictation- 04-4-2022 2. Date on which the typed draft is placed before the Dictating Member 3. Date on which the approved draft comes to the Sr.P.S./P.S. - 4. Date on which the fair order is placed before the Dictating Member for Pronouncement ……………….. 5. Date on which the file goes to the Bench Clerk .. : 20.04.2022 6. Date on which the file goes to the Head Clerk……………………………. 7. The date on which the file goes to the Assistant Registrar for signature on the order…………………….. Date of Despatch of the Order………………