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Before: Shri Bhavnesh Saini & Shri L.P. Sahu
Assessee by Sh. R.K. Kapoor, C.A. Revenue by Sh. Amit Jain, Sr. DR Date of Hearing 28.05.2018 Date of Pronouncement 27.06.2018 ORDER Per L.P. Sahu, A.M.: This is an appeal filed by the assessee against the order of ld. CIT(A)-III, New Delhi dated 27.03.2015 for the assessment year 2009-10 on the following grounds :
“1.0 That the order of assessment passed by the AO and upheld by Hon'ble CIT(A) is bad in law. 2.0 That the Hon'ble CIT(A) has erred in law and on the facts and circumstances of the assessee's case in following its predecessor's order without considering the facts of the case for the year under consideration. 3.1 That the Hon'ble CIT(A) has made erroneous interpretation of section 36(1)(iii).
ITA No. 3324/Del./2015 2
3.2 That the Hon'ble CIT(A) has erred in law and on the facts and circumstances of the assessee's case in upholding the disallowance of interest expense of Rs. 2,07,93,960/- on notional basis on the basis of conjectures, surmises and assumptions. 3.3 That the Hon'ble CIT(A) has erred in law and on the facts and circumstances of the assessee's case in completely disregarding the detail and documents filed by the assessee with regard to disallowance of interest of Rs.2,07,93,960/-. 3.4 That the Hon'ble CIT(A) has failed to appreciate that this ground is covered by CIT(A) order in favor of the assessee in assessee's own case. 4.1 That the Hon'ble CIT(A) has erred in law on the facts and circumstances of the assessee's case in upholding the addition of Rs.10,46,560/- on estimated basis u/s 14A of the Income Tax Act. 4.2 That the Hon'ble CIT(A) has erred in law on the facts and circumstances of the assessee's case in upholding the AO's contention that there existed a nexus between the administrative expenses and the dividend income. 4.3 That the Ld. CVT(A) has erred on facts of the assessee's case in holding that the assessee has not offered any disallowance u/s 14A. 4.4 That the Ld.CIT(A) failed to follow the orders of Hon'ble ITAT in assesses's own case & earlier orders of AO where 1% of dividend income has been held to be sufficient as attributable to earning of exempt income u/s 14A of the Act.”
The brief facts of the case are that the assessee filed return of income on 30.09.2009 declaring a loss of Rs.40,380/-. The assessee was engaged in the business of manufacturing, supply and distribution of automobile components. In the assessment proceedings, the Assessing Officer observed that the assessee has paid huge amount of interest of Rs.2759.59 lacs on loans received by it. He also observed from Schedule No. 11 of the audited account that the assessee has given interest free loans to its subsidiary amounting to ITA No. 3324/Del./2015 3 Rs.1732.63 lacs. The assessee filed reply stating that the assessee company had advanced a sum of Rs.1732.63 lacs as on 31.03.2009 to its 100% subsidiary, namely, M/s. Satara Rubber and Chemicals Ltd. The said advance was given out of business expediency and business needs. The assessee also highlighted that he has not granted any physical loan in cash to the said subsidiary. The assessee has incurred certain expenses or discharged other business obligations on behalf of the said company through its own funds, which have been shown recoverable as advance from the said subsidiary. The Assessing Officer was not satisfied from the submissions of the assessee and observed as under :
“In view of the above, detailed discussion the interest payment made by the assessee to the extent of loan advanced to the sister concern free of interest, is being disallowed under section 36(1)(ii) of the Act. Reliance in this regard is placed on the decision of the Hon’ble High Court of Punjab and Haryana in the case of Commissioner of Income Tax versus Abhishek Industries Ltd. The Hon’ble Court has held that once assessee has borrowed certain funds on which liability to pay tax is being incurred and on the other hand, certain amounts had been advanced to sister concerns without carrying any interest and without any business purpose, the interest to the extent the advance had been made without carrying any interest is to be disallowed. The onus is on the assessee to prove the nexus between the own funds and the funds advanced to others without interest. In view of the above discussion an amount ofRs.2,07,93,960/- is disallowed under section 36(1)(iii) of the Act. The amount is calculated as 12% of the outstanding loan to the subsidiary company as on 31.03.2009.The undersigned is satisfied that the assessee has furnished inaccurate particulars of its income on this account. Therefore, penalty proceedings u/s. 271(1)(c) of the Act are initiated against the assessee.”
The Assessing Officer further observed that the assessee has claimed exempt income u/s. 10(33) of the Act amounting to Rs.30,60,000/-. He
ITA No. 3324/Del./2015 4 observed that while computing of taxable income, the assessee has not offered any disallowance u/s. 14A of the Act against earning of exempt income. In this regard, the assessee submitted that all the investments were made out of its own funds in the past and no new investment has been made during the year under consideration. The Assessing Officer after considering the submissions of the assessee applied rule 8D and calculated the disallowance of Rs.10,46,560/- u/s. 14A which is 0.5% of the average investment, i.e., opening balance of investment and closing balance of investments. The assessee challenged the additions in appeal before the ld. CIT(A) who upheld the action of the Assessing Officer. Aggrieved, the assessee is in appeal before the ITAT.
The ld. AR of the assessee submitted a written synopsis which reads as under :
Assessee's further submission on merits- Covered Issue At the outset it is submitted that this issue is fully covered in favor of assessee by ITATs order in its own case in AY 2007-08 (Anenxure-2) and AY 2008-09 (Anenxure-3) on identical facts of addition on account of notional interest to Satara Rubber & Chemicals Ltd. and held that- AY 2007-08 Once it is found that the assessee company had huge surplus funds then it can be safely presumed that any such advance or interest free loan given to subsidiary is out of such surplus funds only unless the department brings on recrd that the surplus funds have been utilized for some other purposes and borrowed funds have been diverted to subsidiary/sister concern. The sole reliance placed by the Assessing Officer on the judgment of CIT vs. Abhishek Industries Ltd. (supra) for making the disallowance, now does not hold ground in view of the judgment of Supreme Court in the case of Munjal Sales Corporation vs. CIT (supra), wherein the judgment of CIT vs. Abhishek Industries Ltd. (supra) has been reversed and it has been specifically held by the Hon 'ble Apex Court that so long as funds have been given to the sister concern out of interest free funds, no disallowance u/s 36(l)(iii) can be made. Thus, without their being material to controvert the finding of the Learned CIT (Appeals) that advance standing in the name of the subsidiary is out of assessee's own interest free funds, we do not find any reason to deviate from such a finding of fact. Accordingly, the order of the Learned CIT (Appeals) is upheld and ground raised by the Revenue is dismissed.
ITA No. 3324/Del./2015 5
AY 2008-09 Similar facts and findings of authorities below are permeating in this year also in as much as we find that the assessee has huge interest free funds in the form of share capital and reserve and surplus which stood at more than Rs.2000 Cr and surplus cash flow from operating activities at Rs.149 Cr an fresh capital received during the year amounting to Rs.100 Cr. In the wake of such huge syrplus funds, advances ofRs.9.71 Cr during the year, cannot presumed to be out of interest bearing loans. Thus in the light of the principle held by Tribunal in the earlier year, we direct the deletion of the said disallowance and accordingly the grounds raised by the assessee are allowed. The Ld. AO has assumed that assessee has diverted its borrowed funds for the non- business use by advancing money to its subsidiary. These observations are based on the assumptions and surmises. There is no direct nexus of diversion of funds as assumed by the AO. Your honor would notice that the issue has been decided in favor of the assessee by Hon'ble ITAT in AY 2007-08 and AY 2008-09. Thus it has been held that advances given upto 31.03.2008 were not given out of any borrowed funds but out of own funds. Now in year under consideration the assessee has not paid any fresh advance to the Satara Rubber, rather outstanding as on 31.03.2009 has been reduced as compared to 31.03.2008. Thus no further addition of notional interest on account of alleged advance to sister concern is warranted. Therefore since the issue is fully covered by the earlier order in assessee's case on identical facts as also noted by CIT(A) in para 3.1 page 11 and again while deciding the appeal at Para 3.2 Page 21, it is prayed that relief on this issue may kindly be allowed. Grounds 4.1 to 4.4- Disallowance u/ s 14A Rs.10,46,560/ - The assessee has earned a dividend income of Rs.30.60 Lacs during the year on investment in subsidiary. It is submitted before your honour that no expenditure has been incurred by the assessee in earning the exempt income because all the investments have been made in the earlier years, even before introduction of section 14A out of the assessee's own funds and all the expenditure has been incurred wholly and exclusively for the manufacturing operations of the assessee. Reference in this connection is made to the following judgements:- 310 ITR 421 Delhi High Court in the case of CIT v. Walfort Share & Stock Brokers Ltd. where at page 144 para 57 of the order the hon'ble Bombay High Court has observed that: "What Section 14A contemplates is the expenditure actually incurred for earning tax free income and not assumed expenditure or deemed expenditure. " It may be submitted that this judgement of the Bombay High Court has been confirmed by the Hon'ble Supreme Court in [326 ITR 1].
ITA No. 3324/Del./2015 6
Similarly, in the case of CIT v. Hero Cycles Ltd. 323 ITR 518, Hon'ble Punjab & Haryana High Court has held that "if there is no nexus between income earned and expenditure incurred, no disallowance can be made. " We may also refer to the decision of Hon'ble Delhi High Court in the case of CIT v. Sushma Kapoor reported in 2009-TIOL-713-HC-Delhi. Also no disallowance can be made u/s 14A of the Act in an mechanical application of Rule 8D when no satisfaction recorded about the claim of the assessee regarding non-incurrence of expense or disallowance offered by the assesee. Reliance is placed on Maxopp Investments Ltd. vs. CIT [2014-TIOL-2239-HC-DELHI]. "The AO cannot proceed to determine the amount of expenditure incurred in relation to exempt income without recording a finding that he is not satisfied with the correctness of the claim of the assessee. This is condition precedent. " Also Hon'ble SC in case of Maxxop Investment [2018] 91 taxmann.com 154 (SC)] in para 41 held that- Having regard to the language of Section 14A(2) of the Act, read with Rule 8D of the Rules, we also make it clear that before applying the theory of apportionment, the AO needs to record satisfaction that having regard to the kind of the assessee, suo moto disallowance under Section 14A was not correct. It will be in those cases where the assessee in his return has himself apportioned but the AO was not accepting the said apportionment. In that eventuality, it will have to record its satisfaction to this effect. Further, while recording such a satisfaction, nature of loan taken by the assessee for purchasing the shares/making the investment in shares is to be examined by the AO. It was held by Delhi HC in case of H.T.MEDIA LTD. [2017] 85 taxmann.com 113 (Delhi) that- ________________ Para 30- Rule 8D(l) states more or less what Section 14 A (2) of the Act states. It requires the AO to first examine the accounts of the Assessee and then record that he is not satisfied with (a) the correctness of the Assessee's claim of expenditure or (b) the claim made by the assessee that no expenditure has been incut-red. Unless this stage is crossed i.e. the stage of the AO recording that he is not satisfied with the clam of the Assessee in the manner indicated i.e. after examining the Assessee's accounts, the question of applying the formula under Rule 8D (2) does not arise. That this is a mandatory pre-requisite for applying Rule 8D (2) is fairly well-settled. It is reiterated that assessee has made no investment during the year for earning any exempt income. The investments appearing in audited financials have been made in the earlier years out of the assessee's own funds. Earning of dividend income during the year in mere incidental of investment in subsidiary made in earlier years. No administrative or interest cost has been incurred during the year for earning such dividend income of Rs.30.60 Lacs. This addition is prayed to be deleted.
ITA No. 3324/Del./2015 7
Covered by CIT(A) in AY 2010-11 The Hon'ble CIT(A) in AY 2010-11 in assessee's own (copy enclosed as Annexure- 4) case has deleted the disallowance u/s 14A of Rs. 10,46,1707- made by the Ld. AO on similar facts of the case. The Ld. CIT(A) in AY 2010-11 in para 6,1 has acknowledged the fact that the assessee has made investment in securities almost 20 years back and there is no further activity in investment portfolio. Thus it is evident that no time and effort has been spent in managing the investment portfolio of the assessee which for last many years is showing the balance of Rs. 20.92 Cr on the basis of which the Ld. AO has made disallowance. The dividend income of Rs.30.60 Lacs received during the year is in respect of investment in Preference Shares of subsidiary company Federal Mogul TPR for Rs.5.10 Cr. This is also evident from RPT schedule which shows the amount of preference dividend received from Federal Mogul TPR. Without prejudice to the above, it is submitted that average value of investment for making disallowance as per Rule 8D should be restricted to the value of investments on which dividend has been received during the year and not on all the investments appearing in balance sheet. Reliance is placed on ACB India Ltd [TS-176-HC- DELHI-2015] in which it was held that- "The AO, instead of adopting the average value of investment of which income is not part of the total income i.e. the value of tax exempt investment, chose to factor in the total investment itself. Even though the CIT(Appeals) noticed the exact value of the investment which yielded taxable income, he did not correct the error but chose to apply his own equity. Given the record that had to be done so to substitute the figure of ^38,61,09,287/- with the figure of '3,53,26,800/- and thereafter arrive at the exact disallowance of .05%. " Thus disallowance if any should be restricted to the value of investment of Rs.5.10 Cr only which comes out to Rs.2,55,000/- and not on total investment of Rs.20.92 Cr, as has been done by the Ld. AO.
On the other hand, the ld. DR relied on the order of the authorities below.
After hearing both the sides and perusing the entire material available on record, we observe that the disallowance of interest u/s. 36(1)(3) is covered by the order dated 20.08.2017 of coordinate Bench of Tribunal in assessee’s own case (ITA No. 1811/Del./2014 filed by the Revenue for A.Y.
ITA No. 3324/Del./2015 8 2007-08). This order has also been followed by the Tribunal in the case of assessee for the assessment year 2008-09 vide order dated 16.10.2017. The findings of the Tribunal in A.Y. 2007-08 read as under : “Once it is found that the assessee company had huge surplus funds then it can be safely presumed that any such advance or interest free loan given to subsidiary is out of such surplus funds only unless the department brings on record that the surplus funds have been utilized for some other purposes and borrowed funds have been diverted to subsidiary/sister concern. The sole reliance placed by the Assessing Officer on the judgment of CIT vs. Abhishek Industries Ltd. (supra) for making the disallowance, now does not hold ground in view of the judgment of Supreme Court in the case of Munjal Sales Corporation vs. CIT (supra), wherein the judgment of CIT vs. Abhishek Industries Ltd. (supra) has been reversed and it has been specifically held by the Hon'ble Apex Court that so long as funds have been given to the sister concern out of interest free funds, no disallowance u/s 36(l)(iii) can be made. Thus, without their being material to controvert the finding of the Learned CIT (Appeals) that advance standing in the name of the subsidiary is out of assessee's own interest free funds, we do not find any reason to deviate from such a finding of fact. Accordingly, the order of the Learned CIT (Appeals) is upheld and ground raised by the Revenue is dismissed.”
Similarly in appeal for A.Y. 2008-09, the Tribunal has observed as under:
“Similar facts and findings of authorities below are permeating in this year also in as much as we find that the assessee has huge interest free funds in the form of share capital and reserve and surplus which stood at more than Rs.2000 Cr and surplus cash flow from operating activities at Rs.149 Cr an fresh capital received during the year amounting to Rs.100 Cr. In the wake of such huge surplus funds, advances of Rs.9.71 Cr during the year, cannot presumed to be out of interest bearing loans. Thus in the light of the principle held by Tribunal in the earlier year, we direct the deletion of the said disallowance and accordingly the grounds raised by the assessee are allowed.”
ITA No. 3324/Del./2015 9
Respectfully following the above decisions of coordinate Bench, the issue pertaining to interest is decided in favour of the assessee. Accordingly, the ground relating to this issue is allowed.
Regarding the disallowance u/s. 14A, we observe that the assessee is earning income under different heads, as mentioned above. During the year, the assessee has claimed exempt income of Rs.10,46,170/- bu the assessee did not show suo moto disallowance of expenditure towards earning of exempt income. The Assessing Officer has applied section 14A read with Rule 8D and disallowed the expenditure as per formula provided under rule 8D. The assessee is stated to have made no fresh investments out of borrowed funds. The Assessing Officer appears to have calculated the disallowance as per Rule 8D(2)(iii) observing that administrative expenses cannot be denied to earn exempt income. We however, find that the Assessing Officer has considered average total investment appearing on the first day and last day of the financial year, which in our opinion is not justified. These investments may also include such investments from which no exempt income would have been earned by the assessee. As is clear from the Rule itself, the average of only such investments have to be taken into account, which yielded the income not forming part of the total income. Therefore, the AO was required to work out the average of such investment, the income from which did not form part of the total income instead of total value of investment. For this view, we stand fortified by the decision of Special Bench in the case of ACIT vs. Vireet Investment (P) Ltd., (2017) 82 Taxman.com 415 (Delhi Trib.)(SB). None of the parties before us, however, have laid any details to examine as to which of the investments have yielded such income which did not form part of the total income. We, therefore, restore the matter back to the file of the Assessing
ITA No. 3324/Del./2015 10 Officer for calculating the disallowance u/s. 14A read with Rule 8D afresh, in the light of observations made in the body of this order above. Accordingly, the grounds relating to this issue deserve to be allowed for statistical purposes.