JAGUAR INTERNATIONAL LTD.,GURGAON vs. ITO, NEW DELHI

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH ‘SMC’, NEW DELHI BEFORE SHRI N. K. SAINI, ACCOUNTANT MEMBER ITA No. 4371/Del/2016 : Asstt. Year : 2012-13 Jaguar International Ltd., Vs Income Tax Officer, Plot No. 30, Institutional Sec.-44, Ward-13(1), Gurgaon, Haryana-122002 New Delhi. (APPELLANT) (RESPONDENT) PAN No. AABCJ0573B Assessee by : Ms. Rano Jain, Adv. & Sh. Ashish Goel, CA Revenue by : Sh. Rajesh Kumar, Sr. DR Date of Hearing : 01.02.2017 Date of Pronouncement : 27.04.2017 ORDER This is an appeal by the assessee against the order dated 29.07.2016 of ld. CIT (A)-V, Delhi.

2 ITA No.4371/Del/2016 Jaguar International Ltd. (ii)That the CIT(A) has erred in rejecting the contention of the assessee that loan being given out of owned funds, disallowance of interest cannot be made u/s 36(1)(iii) of the Act. (iii) That the CIT(A) has misinterpreted the provisions of Section 36(1)(iii) while rejecting the contention of the assessee that there is no need to prove the business expediency of granting loan in case no claim of interest is made in respect of the said loans. 3. The appellant craves leave to add, amend or alter any of the grounds of appeal.” 3. From the aforesaid grounds, it is gathered that the only grievance of the assessee in this appeal relates to the confirmation of disallowance of Rs.13,89,951/- made by the AO on account of interest expenses u/s 36(1)(iii) of the Income-tax Act, 1961 (hereinafter referred to as ‘the Act’).

3 ITA No.4371/Del/2016 Jaguar International Ltd. that the assessee had given short term loans and advances amounting to Rs.1,82,925/- and Rs.1,14,00,000/- to M/s Aggarwal industries and M/s Discovery Enterprises Pvt. Ltd. and had not charged any interest on those loans/advances but had taken loan from bank and other on interest. He considered the aforesaid loans and advances amounting to Rs.1,15,82,925/- for non-business purposes and disallowed interest @ 12% on the said amount which came to Rs.13,89,951/-.

4 ITA No.4371/Del/2016 Jaguar International Ltd. During the course of assessment proceedings the appellant has replied that the assessee company has not charged any interest on short term loans and advances. The learned A.O. draw its own conclusion, without appreciating the facts and legal position on above issue and computed interest @ 12% on these advances and made the addition. 21.3 The reply clearly shows that these advance's are not in the nature of advances on which interest could have been charged and have been made out of assessee's own capital and not from the interest bearing borrowings. 21.4 The perusal of Balance Sheet placed at Paper Book Pg. 9 clearly show that against the non interest bearing advances of Rs.1,15,82,925/- made by the assesses, the Share holder funds are Rs.6,18,01,861/-. In such circumstances, the presumption is that interest free advances are made out of interest free funds only as has been held by various judgments of the Hon'ble High Court as well as various Benches of the Tribunal. Reliance is placed on the judgment of Hon'ble Bombay High Court in the case of Reliance Utilities & Power Ltd. 313 ITR 340 and HDFC. Bank Ltd. 366 ITR 505 and that of Hon'ble Punjab & Haryana High Court, in the case of Bright Enterprises In ITA No.224 of 2013 and Kapsons Associates in ITA No. 354 of 2013. 21.5 Further, it is a settled law that assessee is free to use its own funds the way it wants and the Revenue cannot compel the assessee to do or

5 ITA No.4371/Del/2016 Jaguar International Ltd. perform in a particular manner, It is also a settled law when own funds are more than the funds utilized towards interest free advances there cannot be any disallowance towards interest paid. As regards AO's allegation that these loans and advances were not given out of business purpose, it is once again clarified that in the absence of any interest 'bearing funds used, for the purpose of granting these loans, there was no claim of interest made by the assessee in this regard. No disallowance of an expenses which has not been claimed can be made. In a scenario where the interest free advances are given out of interest free funds, there is no need for assessee to prove the business expediency. 21.6 Our aforesaid submissions is supported by a recent decision of the Hon'ble ITAT CHANDIGARH in the case of M/s R.N. Gupta and Co. Ltd. Versus The Addl. C.I.T., in ITA No.848/Chd/2015, decided on Dated: - 12 April 2016, (2016 (5) TMI 1182). The relevant extract of the decision is reproduced as under;- "20, Before parting, we would like to deal with the argument of the learned D.R., to the effect that even if there are sufficient funds, the business expediency for lending the money has to be proved by the assessee. For this, we would like to understand the provisions of section 36(1)(iii) of the Act. Section 36 comes under Chapter IVD of the Act, which deals with the computation of income under the head 'profits & gains of business or

6 ITA No.4371/Del/2016 Jaguar International Ltd. profession'. Section 36 deals with other deductions, while sub-section (1) to section 36 reads as under: "(1) The deductions provided for in the following clauses shall be allowed in respect of the matters dealt with therein, in computing the income referred to in section 28--------” 21. Thus, the provisions of section 36(1)(iii) of the Act relates to deductions to be allowed while computing income under the head 'business income'. The clause (iii) of the sub-section (1) of section 36, to the extent relevant in the present context, reads as under: "(iii) The amount of interest paid in respect of capital borrowed for the purpose of business or profession," 22. From the bare perusal of all provisions, it becomes quite clear that the section relates to the deduction of interest expenditure, while computing business income. While computing income under the head, 'profit & gains from business or profession', the deduction on account of interest is allowed only if the same is paid in respect of capital borrowed and that too for the purpose of business or profession. 23. The scene emerging from this analysis is that conditions for getting deduction in respect of interest are, (i) money must have been borrowed for the purpose of business and (ii) the assessee must have paid interest on the-said amount and (iii) assessee has claimed it as deduction. This

7 ITA No.4371/Del/2016 Jaguar International Ltd. proposition has also been held in the Landmark judgment of the Hon'ble Apex Court in the case of Mahavir Prasad Jatia Vs. CIT (1979), 118 ITR 200 (SC). 24. Usually, in a business, the assessee has two kinds of funds. Firstly, the interest free funds which mainly consists of its owned funds and secondly the borrowed funds. In first kind of funds i.e. owned funds, there is no question of any interest expenditure. However, in second kind of funds, i.e. borrowed funds, there are interest expenditure, for which the onus is on the assessee to prove that since these funds were borrowed for business purposes, the interest expenditure is allowable. 25. Once, it is established that for a given situation, the assessee has not borrowed any money, for that matter, putting it reverse, the assessee has used his owned funds or interest free funds, there is no question of proving that the funds so taken from owned or interest free funds are used for business purposes. There being no claim of any interest expenditure, no question of deduction to be allowed under section 36(1)(iii) of the Act arises. 26. Once it is presumed that the lending as in the present case is made out of owned funds, assessee need not show the business expediency for the same. An assessee or for that matter any person is free to use his own funds the way he wants. In the present case, on the proposition laid down by the Jurisdictional High Court that the assessee has

8 ITA No.4371/Del/2016 Jaguar International Ltd. used owned funds for such lending, we do not find any need to go into the question of commercial expediency. The ground No.3 raised by the assessee is allowed." 21.7 The Hon'ble Bombay High Court in a recent decision in C.I.T. Vs HDFC Bank Ltd. [2014] 366 ITR 505 has held as under: "4. After examining the entire factual matrix of the matter and the law on the subject, this Court held as under:- "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. v. CIT (1997) 224 ITR 627 had the occasion to consider the decision of the Calcutta High Court in Woolcombers of India Ltd. (1982) 134 ITR 219 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 Woolcombers of India Ltd.'s case (1982) 134 ITR 219 the Calcutta

9 ITA No.4371/Del/2016 Jaguar International Ltd. 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 were 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 funds generated or available with the company if the interest-free funds were sufficient to meet the investment. In this case this presumption is established considering the finding of fact both by the Commissioner of Income-fax (Appeals) and the Income-tax Appellate Tribunal." (emphasis supplied) 5. We find that the facts- of the-present case are squarely covered by the judgment in the case of Reliance Utilities and Power Ltd. (supra). The finding of fact given by the ITAT in the present case is that the Assessee's own funds and other non-interest bearing funds were more than the Investment in the tax-free securities. This factual position is not one that is disputed. In the present case, undisputedly the Assessee's capital, profit reserves, surplus and current account deposits were higher than the investment in the tax-free securities. In view of this factual position, as per the judgment of this Court in the case of Reliance

10 ITA No.4371/Del/2016 Jaguar International Ltd. Utilities and Power Ltd. (supra), it would have to be presumed that the investment made by the Assessee would be out of the Interest-free funds .available with the Assessee. We therefore, are unable to agree with the submission of Mr. Suresh Kumar that the Tribunal had erred in dismissing the Appeal of the Revenue on this ground. We do not find that question (A) gives rise to any substantial question of law and is therefore rejected." 21.8 More over the Income tax Department has not taken any such adverse inference in all the earlier years. Your honour though strictly speaking res judicata does not apply to income tax proceedings. Again each assessment year being a unit, what is decided in one year may not apply in the following year but where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order,, it would not be at all appropriate to allow the position to be changed in a subsequent year. In support of our submission we rely on the judgment of Hon'ble Apex Court in the case of Commissioner of Income Tax vs Excel Industries Ltd, as reported at 295 ITR has held in paragraphs 28, 29, 30 and 31. 21.9 More over the Income tax Department has not taken any such adverse inference In all the earlier years. Your honour though strictly speaking res judicata does not apply to income tax proceedings. Again, each assessment year being a unit, what is decided in one year may not apply in the following

11 ITA No.4371/Del/2016 Jaguar International Ltd. year but where a fundamental aspect permeating through the different assessment years has been 'found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. In support of our submission we rely on the judgment of Hon'ble Apex Court in the case of Commissioner of Income Tax vs. Excel Industries Ltd, as reported at 295 ITR has held in paragraphs 28, 29, 30 and 31 which reads as under: "28 Secondly, as noted by the Tribunal, a consistent view has been taken in favour of the assessee on the questions raised, starting with the assessment year 1992-93, that the benefits under the advance licenses or under the duty entitlement pass book do not represent the real income of the assessee. Consequently, there is no reason for us to take a different view unless there are very convincing reasons, none of which have been pointed out by the learned, counsel for the revenue. 29. In Radhasoami Satsang v. CIT (1992) 193 ITR 321 (SC) this court did not think it appropriate to allow the reconsideration of an Issue for a subsequent assessment year if the same "fundamental aspect" permeates in different assessment years. In arriving at this conclusion, this court referred to an Interesting passage from Hoystead v. Commissioner of Taxation (1926) AC 155 (PC) wherein it was said (page 328 of 193 ITR):

12 ITA No.4371/Del/2016 Jaguar International Ltd. "Parties are not permitted to begin fresh litigation because of new views they may entertain of the law of the case, or new versions which they present as to what should be a proper apprehension by the court of the legal result either of the construction of the documents or the weight of certain circumstances. If this were permitted, litigation would have no end, except when legal ingenuity is exhausted. It is a principle of law that this cannot be permitted and there is abundant authority reiterating that principle. Thirdly, the same principle- namely, that of a setting to rest rights of litigants, applies to the case where a point, fundamental to the decision, taken or assumed by the plaintiff and, traversable by the defendant, has not been transversed. In that case also a defendant is bound by the judgment, although it may be true enough that subsequent light or ingenuity might suggest some traverse which had not been taken." 30. Reference was also made to Parashuram Pottery Works Co. Ltd vs ITO (1977) 106 ITR 1 (SC) and then it was held (page 329 of 193 JTR): “---------------------------------- 31. It appears from the record that in several- assessment years, the Revenue accepted the order of the Tribunal In favour of the assessee and did not pursue the matter any further but in respect of some assessment years the matter was taken up in appeal before the Bombay High Court but without any success. That being so, the Revenue cannot be allowed to flip-flop on the issue and it ought let the matter rest rather than spend the tax payers money in pursuing litigation for the sake of it."

13 ITA No.4371/Del/2016 Jaguar International Ltd. 21.9 In the light of aforesaid judicial interpretation in the similar facts, we would submit before your honour to delete the addition and grant relief to the appellant." 6. The ld. CIT(A) after considering the submissions of the assessee observed that the assessee had received a loans from M/s Sudha Apparels ltd. amounting to Rs.5,06,36,314/- and repaid Rs.62,00,000/-, so there would be no escape from the finding that interest being paid by the assessee to the extent the amounts were diverted on interest free basis, were to be disallowed. He further observed that once it was borne out from the record that the assessee had borrowed certain funds on which liability to pay interest was incurred and on the other hand, certain amount had been advanced to others without carrying any interest and without any business purpose, the interest to the extent the advance had been made without carrying any interest was to be disallowed u/s 36(1)(iii) of the Act. The reliance was placed on the judgment of the Hon’ble Delhi High Court in the case of Punjab Stainless Steel Industries Vs CIT 324 ITR 396 (Del.). He further observed that the assessee was not an investment company but a trader of Hot Rolled Coils, seamless pipes etc., it was not in the business of borrowing and lending and the only investment held as per balance

14 ITA No.4371/Del/2016 Jaguar International Ltd. sheet was 45,000 shares of Jindal Composite Tubes Pvt. Ltd. and that the liquid resources available for carrying out business operations and for meeting the finance charges stands substantially reduced in view of the interest free advance given to the two parties. The ld. CIT(A) also observed that interest free funds had been given in the assessment year 2008-09 and admittedly for the purposes, totally unrelated to the business of the assessee. Therefore, the prorata interest disallowed by the AO u/s 37(1) of the Act was correct and the interest expenditure was also not allowable as per Section 36(1)(iii) of the Act.

15 ITA No.4371/Del/2016 Jaguar International Ltd. account on account of interest which comprises of two parts, Rs.24,36,323/- on working capital loan from bank which had been directly used by the assessee for the business purpose and Rs.24,60,749/- paid in respect of the unsecured loan of Rs.5,06,36,314/- from M/s Sudha Apparels Ltd.. The said loan was received by the assessee during the year under consideration out of which an amount of Rs.62,00,000/- had been repaid. The said loan had been used for fixed deposit with the bank as is evident from details of utilization of the unsecured loan (copy of which is placed at page no. 45 of the assessee’s paper book). It was explained that the loans and advances had been given by the assessee in financial year 2007-08. Therefore, the allegation of the AO that there was a nexus between the loan from M/s Sudha Apparels Ltd. and the advances given was completely misplaced and contrary to the facts of the case. It was further submitted that the loan obtained by the assessee from M/s Sudha Apparels Ltd. was used for business exigency and the assessee had earned interest on fixed deposit amounting to Rs.39,73,387/-. A reference was made to page no. 17 of the assessee’s paper book which is the copy of Schedule 9.2 relating to other income. It was contended that the interest expenditure incurred during the year had direct nexus with the income of the assessee, so it

16 ITA No.4371/Del/2016 Jaguar International Ltd. was fully allowable as per the provisions of Section 36(1)(iii) of the Act. It was further contended that the own funds available with the assessee during the year under consideration and the previous years were sufficient to cover the loans and advances given by the assessee, particularly when, the amount of shareholders funds available with the assessee as on 31.03.2012 was Rs.6,31,74,469/- and in the year in which the loans and advances had been given by the assessee i.e. financial year 2007-08, the funds available were at Rs.6,40,59,120/-. A reference was made to page no. 52 of the assessee’s paper book. It was submitted that the assessee was free to use its own funds the way it wanted and the department could not have compelled the assessee to do or perform or use its funds in a particular manner and when own funds were more than the funds utilized towards interest free advances, there could not have been any disallowance.

17 ITA No.4371/Del/2016 Jaguar International Ltd. � Pri. CIT Vs Consumer Marketing (India) (P.) Ltd. in ITA No. 646 of 2015 (Guj.) � M/s R. N. Gupta and Co. Ltd. Vs Addl. CIT in ITA No. 848/Chd/2015 order dated 12.04.2016 10. In his rival submissions the ld. DR strongly supported the orders of the authorities below and reiterated the observation made by the ld. CIT(A) in the impugned order.

18 ITA No.4371/Del/2016 Jaguar International Ltd. Rs.13,89,951/- out of the expenses claimed on account of interest which was paid by the assessee for the business exigency. In my opinion the action of the AO was not justified and the ld. CIT(A) without appreciating the fact in right perspective, sustained the disallowance made by the AO.

19 ITA No.4371/Del/2016 Jaguar International Ltd. disallowance made by the AO and sustained by the ld. CIT(A) is deleted.

Sd/- (N. K. Saini) ACCOUNTANT MEMBER Dated: 27/04/2017 *Subodh* Copy forwarded to: 1.Appellant 2.Respondent 3.CIT 4.CIT(Appeals) 5.DR: ITAT ASSISTANT REGISTRAR