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Before: Shri Abraham P. George & Shri Duvvuru RL Reddy
O R D E R
PER DUVVURU RL REDDY, JUDICIAL MEMBER:
This appeal filed by the assessee is directed against the order of the ld. Commissioner of Income Tax (Appeals) 6, Chennai dated 18.08.2017 relevant to the assessment year 2007-08. In this appeal, the assessee has raised three effective grounds viz., (i) the ld. CIT(A) has erred in confirming the addition of ₹.20,69,570/- made under section 14A r.w. Rule 8D and (ii) the ld. CIT(A) has erred in confirming the addition of notional interest at ₹.4,69,008/- and (iii) the ld. CIT(A) erred in sustaining the addition of ₹.5,934/- being the interest on NSC.
Brief facts of the case are that the assessee has filed its return of income on 31.10.2007 admitting total loss of ₹.2,92,98,766/-. The assessment was completed under section 143(3) of the Income Tax Act, 1961 [“act” in short] by assessing total loss at ₹.2,67,54,254/- after making various additions.
2.1 On examination of the documents and details furnished by the assessee, the Assessing Officer noticed that the assessee company has invested in the share capital of Dynavista Industries Pvt. Ltd. to an extent of ₹.10,61,39,974/- and not claimed any dividend income from this investment. Before the Assessing Officer, the assessee has argued that disallowance under section 14A of the Act cannot be made in the absence of receipt of dividend income. However, by following various decisions as well as invoking the provisions of section 14A r.w. Rule 8D, the Assessing Officer determined the expenditure component at ₹.20,69,570/- and made the disallowance. On appeal, the ld. CIT(A) confirmed the disallowance.
On being aggrieved, the assessee is in appeal before the Tribunal. By relying on various decision of the Tribunal in which the judgement in the case of Redington (India) Ltd. v. Addl. CIT in T.C.A. No. 520 of 2016 dated 23.12.2016 has been followed in which, the Hon’ble Jurisdictional High Court has held that when there is no exempt income there cannot be a disallowance of expenditure, the ld. Counsel for the assessee has submitted that the assessee has not earned any exempt income or incurred any expenditure in the assessment year under consideration. It was further submitted that the issue is squarely covered in favour of the assessee in view of the above judgement of the Hon’ble Jurisdictional High Court and prayed that the disallowance made by the Assessing Officer should be deleted. On the other hand, the ld. DR strongly supported the orders of authorities below.
We have heard both sides, perused the materials available on record and gone through the orders of authorities below. It is an admitted fact that the assessee has not earned any exempt income and therefore, no disallowance shall be made in view of the decision in the case of Redington (India) Ltd. v. Addl. CIT (supra), wherein, the Hon’ble Jurisdictional High Court has held as under: “15. The exemption extended to dividend income would relate only to the previous year when the income was earned and none other and consequently the expenditure incurred in connection therewith should also be dealt with in the same previous year. Thus, by application of the matching concept, in a year where there is no exempt income, there cannot be a disallowance of expenditure in relation to such assumed income. (Madras Industrial Investment Corporation Ltd. v. CIT (225 ITR 802). The language of s. 14A(1) should be read in that context and such that it advances the scheme of the Act rather than distort it. 16. In conclusion, we are of the view that the provisions of s. 14A read with Rule 8D of the Rules cannot be made applicable in a vacuum
i.e., in the absence of exempt income. The questions of law are answered in favour of the assessee and against the department and the appeal allowed. No costs.” 4.1 Respectfully following the above decision, wherein, it was held that when there was no exempt income earned, no disallowance could be made, we set aside the order of the ld. CIT(A) on this issue and delete the disallowance made under section 14A r.w. Rule 8D. Thus, the ground raised by the assessee is allowed.
The next ground relates to confirmation of notional interest aggregating to ₹.4,69,008/- [₹.1,53,822/- + ₹.3,15,186/-]. The assessee was directed to produce details of the transactions between the assessee and its directors. The assessee produced ledger copy of the transactions. While scrutinizing the same, the Assessing Officer noticed that the assessee has granted loan to its two directors namely Mr. Arif Ismail [loan of ₹.10,50,436/- as on 31.03.2006] and Mr. G. Parimelazhagan [loan of ₹.12,81,848/- as on 31.03.2006]. The assessee has charged interest @ 10% p.a. only from Mr. Arif Ismail since he was not a share-holder and only a professional director and duly offered as income in the profit & loss account of the company, whereas, the assessee has not charged any interest from the other director Mr. Parimelazhagan because he was a share-holder and has interest in the company. The assessee company has taken loan from banks and was offering it to its directors either at a lower interest rate or without charging any interest. When specific query was raised, there was no response from assessee’s side. Accordingly, the Assessing Officer estimated interest @ 12% p.a. on the total loan amount and determined the interest at ₹. 1,53,822/-. Similar loans and advances were also given by the assessee to the share-holders Mrs. Chitra Rajan at ₹.18,31,989 and Dr. Naliniveerapandian at ₹.7,94,563/- on free of interest. Accordingly, the Assessing Officer estimated the interest on the total loan amount @ 12%, which comes to ₹.3,15,186/- and brought to tax.
5.1 On appeal, since the assessee has not furnish any explanation on the business exigency of the loans extended to the share-holders, the ld. CIT(A) confirmed the additions.
5.2 Before us, the ld. Counsel for the assessee vehemently argued that no borrowed funds have been diverted as loans and advances to its share- holders and moreover, the advances were made more than 3 years ago and the assessee had sufficient and surplus funds under its capital & reserves. The ld. Counsel prayed that charging of interest @ 12% is totally unwarranted. On the other hand, the ld. DR strongly supported the orders of authorities below.
5.3 We have heard rival contentions. We have also considered the submissions of the assesse that the loan availed from Karur Vysya bank and vehicle loans are for specific purposes and there was no nexus between the advances and the borrowed funds. However, the assessee has not furnished any detailed explanation as to what “specific purposes” the loans were availed from Karur Vysya Bank. Before the ld. CIT(A), the assessee has furnished the details of reserves and surplus and the same was not disputed by him. Thus, it is an admitted fact that under “capital & reserves”, the assessee had surplus funds. Being so, the onus lies on the Department to establish that the assessee has diverted borrowed funds for offering loans and advances. However, in the assessment order, the Assessing Officer has not given any specific findings as to whether the assessee has diverted borrowed funds for offering loans and advances to its share-holders. In view of the above, we direct the Assessing Officer to examine as to whether the assessee has actually diverted borrowed funds for giving loans and advances to its share-holders when sufficient funds are available under “capital & reserves”. The assessee is also directed to furnish detailed explanation with regard to the usage of borrowed funds before the Assessing Officer and after considering the same, the Assessing Officer shall decide the issue in accordance with law. This ground of appeal is allowed for statistical purposes.
6. The next ground relates to addition of interest on NSC of ₹.5,934/-. The Assessing Officer has noticed that the assessee has not offered the interest accrued on NSC as income in the profit and loss account. Accordingly, the same was brought to tax. On appeal, since the assessee has not furnished any supporting evidence, the ld. CIT(A) confirmed the addition. Before us also, the assessee has not furnished any explanation as to why the assessee has not offered the interest accrued on NSC as income in the profit and loss account. Thus, the addition made on interest on NSC stands confirmed.
In the result, the appeal filed by the assessee is partly allowed for statistical purposes. Order pronounced on the 31st October, 2018 at Chennai.