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Income Tax Appellate Tribunal, DELHI BENCHES : D : NEW DELHI
Before: SHRI R.S. SYAL & MS SUCHITRA KAMBLE
PER R.S. SYAL, VP: This appeal by the Revenue arises out of the order passed by the CIT(A) on 03.09.2013 in relation to the assessment year 2008-09.
The first ground is against the deletion of disallowance of Rs.3,07,63,223/- made by the Assessing Officer on account of interest.
Briefly stated, the facts of this ground are that the assessee claimed deduction of interest amounting to Rs.7,08,87,603/-. On perusal of the details, it was observed by the AO that a sum of Rs.24,19,00,304/- was advanced by the assessee to its subsidiaries as interest free loan. Apart from that, a sum of Rs.2,84,59,890/- was also given as share application money to subsidiaries. On being called upon to explain as to why the disallowance of interest should not be made for giving such amounts as loan to subsidiary companies without interest, the assessee tendered an explanation, whose relevant part have been extracted in the assessment order. Not convinced with the same, the Assessing Officer made pro rata disallowance of interest amounting to Rs.3,07,63,223/-. The ld. CIT(A) deleted the addition, against which the Revenue has come up in appeal before us.
We have heard both the sides and perused the relevant material on record. There is no dispute on the fact that a sum of Rs.2.84 crore was given as share application money. This amount was given in an earlier year and for this year, it was an opening brought forward balance. It is a matter of record that no disallowance of interest has been made in any of the earlier years on such money given to subsidiary companies. Once it has been accepted in the earlier years that this money was not given out of any interest free funds, a new case cannot be set up in the instant year, as it would impliedly reverse the settled position in earlier years in this regard. Going by the rule of consistency, we hold that no disallowance is warranted to this extent. As regards the major amount of interest free loan of Rs.24.19 crore, we find that the assessee obtained fresh loan amounting to Rs.32.78 crore during the year which was utilised for specific business purpose, namely, acquisition of fixed assets. As against the interest free loans amounting to Rs.24.19 crore given by the assessee to its subsidiary companies without charging any interest, the assessee had its own share capital with reserves standing at a whopping sum of Rs.188.89 crore. Section 36(1)(iii) provides for deduction of interest of the amount of interest paid in respect of capital borrowed for the purpose of business or profession. The essence of this provision is that the interest should be allowed so long as the capital borrowed, on which such interest is paid, is used for the purpose of business or profession. If, however, an assessee is having its own interest free surplus funds and such funds are utilised as interest free advances even for a non-business purpose, there cannot be any disallowance of interest paid on interest bearing loans. The Hon'ble Bombay High Court in CIT vs. Reliance Utilities and Power Ltd. (2001)
313 ITR 340 (Bom), has held that where an assessee possessed sufficient interest free funds of its own which were generated 4 in the course of relevant financial year, apart from substantial shareholders’ funds, presumption stands established that the investments in sister concerns were made by the assessee out of interest free funds and, therefore, no part of interest on borrowings can be disallowed on the basis that the investments were made out of interest bearing funds. In that case, the AO recorded a finding that a sum of Rs.213 crore was invested by the assessee out of its own funds and Rs.1.74 crore out of borrowed funds.
Accordingly, disallowance of interest was made to the tune of Rs.2.40 crore. It was argued on behalf of the assessee that no part of interest bearing funds had gone into investment in those two companies in respect of which the AO made disallowance of interest. It was also argued that income from operations of the company was Rs.418.04 crore and the assessee had also raised capital of Rs.7.90 crore, apart from receiving interest free deposit of Rs.10.03 crore. It was, therefore, submitted before the first appellate authority that the balance-sheet of the assessee adequately depicted that there were enough interest free funds at its disposal for making investment. The ld. CIT(A) got 5 convinced with the assessee’s submissions and deleted the addition.
Before the Tribunal, it was contended on behalf of the Revenue that the shareholders’ funds were utilized for the purchase of its assets and hence the assessee was left with no reserve or own funds for making investment in the sister concern. Thus, it was argued that the borrowed funds had been utilized for the purpose of making investment in the sister concern and the disallowance of interest was rightly called for.
The Tribunal, on appreciation of facts, recorded a finding that the assessee had sufficient funds of its own for making investment without using the interest bearing funds. Accordingly, the order of CIT(A) was upheld. When the matter came up before the Hon’ble High Court, it was contended by the Department that the shareholders’ funds stood utilized in the purchase of fixed assets and hence could not be construed as available for investment in sister concern. Repelling this contention, the Hon’ble High Court observed that : “In our opinion, the very basis on which the Revenue had sought to contend or argue their case that the shareholders’ fund to the tune of over Rs.172 crore was utilized for the purpose of fixed assets in terms of the balance-sheet as on March 31, 6 1999, is fallacious.” In upholding the order of the Tribunal, the Hon’ble High Court held that : “If there be interest free funds available to an assessee sufficient to meet its investment 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”. Thereafter, the judgment of the Hon’ble Supreme Court in the case of East India Pharmaceutical Works Ltd. Vs. CIT (1997) 224 ITR 627 (SC) and also the judgment of the Hon’ble Calcutta High Court in Woolcombers of India Ltd. Vs. CIT (1981) 134 ITR 219 (Cal) were considered. It was finally concluded that : “The principle, therefore, would be that if there are funds available both interest free and overdraft and/or loans taken, then a presumption would arise that the investments would be out of interest free funds generated or available with the company, if the interest free funds were sufficient to meet the investment”. Consequently the interest was held to be deductible in full. From the above judgment, it is manifest that there can be no presumption that the shareholders’ fund of a company was utilized for the purchase of fixed assets. If the assessee has interest free funds as well as interest bearing funds at its disposal, 7 then the presumption would be that investments were made from interest free funds at the disposal of the assessee.
Similar view has been taken by the Hon'ble jurisdictional High Court in CIT vs. Tin Box Company (2003) 260 ITR 637 (Del), holding that when the capital and interest free unsecured loan with the assessee far exceeded the interest free loan advanced to the sister concern, disallowance of part of interest out of total interest paid by the assessee to the bank was not justified.
Adverting to the facts of the instant case, we find that the assessee has its own share capital and reserves amounting to Rs.188.89 crore. As against that, only sum of Rs.24.19 crore was given as interest free loan to subsidiary companies. The amount of share capital and reserves is many times higher than the amount of interest free loan given to subsidiary companies. Guided by the ratio laid down by the Hon'ble jurisdictional High Court in Tin Box Company and that of the Hon'ble Bombay High Court in Reliance Utilities and Power Ltd., we hold that the ld. CIT(A) was justified in deleting this disallowance.
Reliance of the ld. DR on the decision of the Delhi tribunal in ACIT vs. Samrat Rice Mills (P) Ltd. (2012) 23 taxmann.com 350 (Dehi) is not relevant in view of the fact the addition has been instantly deleted because of the availability of surplus interest free funds available with the assessee and not on account of the user of funds for business or non- business purpose.
The only other ground raised in this appeal is against the deletion of disallowance of depreciation amounting to Rs.1,00,30,472/- on assets which were received without any consideration. The facts apropos this ground are that a society in the name of Escorts Heart Institute and Research Centre was formed at Delhi on 21.10.1981. Another society with the same name was formed at Chandigarh on 11.11.1999. Whereas the Delhi society had charitable objects and its income was exempt u/s 10(21), the Chandigarh society did not have the object of relief to the poor. Both the societies merged on 01.04.2000. On 30.05.2000 Chandigarh society was registered as a company, namely, Escorts Heart Institute and Research Centre Ltd. Upon such conversion, the assets of the erstwhile Chandigarh and Delhi societies came to be considered as the assets of the assessee company. The assessee claimed depreciation, inter alia, on the assets acquired from Delhi Society. The Assessing Officer opined that since full deduction of the cost of these assets was allowed as application of income u/s 11 of the Act, the written down value of this asset in the hands of the society was only a notional book value. The Assessing Officer canvassed a view that by taking over of the assets and liabilities of the Society on the book value of these assets, an artificial enhanced value of these assets was shown by the assessee company on which the depreciation could not be allowed. The ld. CIT(A) overturned the assessment order on this point. The Revenue is in appeal on this issue.
We have heard the rival submissions and perused the relevant material on record. The view point of the Assessing Officer is that the actual written down value of the assets in the hands of the Society was not the book value assigned to it. The book value was only a notional or artificial value and the real cost was actually Nil because the cost of those assets had been allowed as deduction to the Society as application of income u/s 11 of the Act. Thus, the short controversy before us is to decide if depreciation can be allowed on assets for which deduction has been allowed as application of income u/s 11.
At this stage, it is relevant to note that sub-section (6) has been inserted to section 11 by the Finance (No.2) Act, 2014 w.e.f. 01.04.2015 which reads as under:-
`In this section where any income is required to be applied or accumulated or set apart for application, then, for such purposes the income shall be determined without any deduction or allowance by way of depreciation or otherwise in respect of any asset, acquisition of which has been claimed as an application of income under this section in the same or any other previous year.’
A bare perusal of the above provision indicates that where any income has been applied for the purchase of assets on which exemption has been granted, then, no separate claim by way of depreciation in respect of such assets can be allowed in the same or any other year. In fact, this is the view point canvassed by the Assessing Officer in disallowing the claim of depreciation. However, it is important to note that sub-section (6) has been inserted to section 11 w.e.f. 01.04.2015.
The Hon'ble Delhi High Court in DIT (E) vs. Indraprastha Cancer Society (2015) 53 taxmann.com 463 (Del), has held that insertion of sub- section (6) to section 11 is prospective and, hence, no disallowance on account of depreciation can be made in years prior to the assessment year 2015-16.
It is noticed that the Hon’ble Delhi High Court in an earlier case in DIT (Exemption) vs. Charanjiv Charitable Trust (2014) 267 CTR 305 (Del) vide its judgment dated 18th March, 2014 has held that depreciation is not allowable in respect of assets, cost of which was earlier allowed as deduction as application of income of trust. However, the Hon’ble Delhi High Court vide its later judgment dated 18th November, 2014 in Indraprastha Cancer Society (supra) has held that Capital assets purchased by charitable institution and treated amount spent on purchase of capital asset as application of income, were entitled to claim depreciation on same capital asset utilised for business. Thus, the judgment in Indraprastha Cancer Society (supra), being latest in the point of time and also considering amendment to section 11(6), has more binding force. As the assessment year before us is 2008-09, the ratio of the decision in the Indraprastha Cancer Society (supra) would apply enabling the assessee to claim depreciation on such assets.
It has also been brought to our notice that though the assets were acquired by the assessee company in an earlier year, but, the disallowance on account of depreciation was never made in the past. It was also stated that the assessments for the assessment years 2004-05 to 2007-08 were reopened but the ld. CIT(A) quashed the reopening. The ld. AR submitted that the quashing of reassessment by the ld. CIT(A) has been accepted by the Revenue and no further appeal was filed to the Tribunal. This contention has not been controverted by the ld. DR. This shows that such depreciation has been allowed to the assessee in all earlier years.
The ld. DR relied on certain orders of the Chennai and Cochin tribunal to buttress his point of view of not allowing depreciation on assets whose cost was allowed u/s 11. These decisions will not support the case of the Revenue in view of the direct judgment of the Hon’ble jurisdictional High Court on the point, granting depreciation in such circumstances. In view of the foregoing discussion, we are satisfied that the ld. CIT(A) was justified in deleting the disallowance.
In the result, the appeal of the Revenue stands dismissed.
Order Pronounced in the open Court on 18.04.2017.