M/S TRADITIONAL GALLERY PVT. LTD.,JAIPUR vs. ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-4, JAIPUR

PER SANDEEP GOSAIN, J.M. These two appeals by the assessee are directed against two separate orders dated 14.12.2018 of ld. CIT (A), Ajmer for the assessment years 2013-14 & 14-15. The assessee has raised the following grounds of appeal in A.Y. 2013-14 :- “ 1. That in law and in the facts and in circumstances of the case, the ld. Lower authorities grossly erred in making an addition of Rs. 54,68,858/- on account of interest @ 12% per annum on advance given to its subsidiary company i.e. traditional Heritage Hotels Pvt. Ltd. during the year consideration. 2. That on the facts and in the circumstances of the case, the ld. Lower authorities grossly erred in disallowing Rs. 2,62,306/- out of total interest expenses incurred by the assessee appellant.

2 ITA Nos. 107 & 108/JP/2019. M/s. Traditional Gallery Pvt. Ltd., Jaipur.

company carrying on business of export of readymade garments, madeups,

handicraft items and other sundry items for past several years. Return of income for

the year under consideration was filed declaring total income at Rs. 1,00,51,070/-.

The AO completed the assessment under section 143(3) of the IT Act, 1961 after

making the addition of Rs. 54,68,858/- on notational basis towards interest,

disallowance of Rs. 2,62,306/- under section 36(1)(iii) and disallowance of Rs.

33,83,847/- on account of disallowance u/s 14A of the IT Act. Aggrieved by the

order of the AO, the assessee preferred appeal before the ld. CIT (A). The ld. CIT

(A) confirming the order of the AO, sustained the addition of Rs. 91,15,011/-. Now

the assessee is in appeal before us.

Ground No. 1 & 2 relates to confirming addition of Rs. 57,31,164/-

on account of interest @ 12% p.a. on advance given to subsidiary

company and disallowance of Rs. 2,62,306/- on account interest

expenses.

financial charges of Rs. 1,52,40,204/- for the year under consideration. The ld. A/R

contended that as per the AO, assessee had borrowed funds more than required for

business and held that advances made by it were out of borrowed funds and made

3 ITA Nos. 107 & 108/JP/2019. M/s. Traditional Gallery Pvt. Ltd., Jaipur.

the addition of accrued interest on such advances. At the appellate hearing, it was

explained before the ld. CIT (A) that borrowed funds were utilized for the purposes

of business only and assessee was having sufficient interest free funds which were

utilized for making advances, but this explanation did not find favour with the ld. CIT

(A). While making assessment, the AO reproduced Assets and Liabilities in his

assessment order and arrived at a conclusion that assessee was having shortage of

funds to the tune of Rs. 2,21,73,371.56, whereas assessee had borrowed more

funds than such shortage of funds. The AO, thus presumed that advances made to

M/s. Traditional Heritage Hotels Pvt. Ltd. of Rs. 11,04,52,000/- and two other

concerns namely M/s. Nav Sarjan Projects Pvt. Ltd. of Rs. 5,00,000/- and S.D.

Education Trust of Rs. 12,21,000/- were out of borrowed funds and accrued interest

on the funds outstanding was added as income. In this regard, ld. A/R drawn our

attention to para 3.6 of the assessment order which reads as under :-

“ Since the assessee is maintaining its books on mercantile basis, therefore, the accrued interest on loan advances to M/s. Traditional Heritage Hotels Pvt. Ltd. being 12% as paid by the assessee to the financial institutions and one percent extra as mentioned by the assessee, amounting to Rs. 50,01,100/- plus Rs. 4,67,758/- (1% additional as per agreement) is added to the total income of the assessee on account of interest accrued from M/s. Traditional Heritage Hotels Pvt. Ltd. The interest is calculated @ 12% p.a. on day to day balance. Thus accrued interest of Rs. 54,68,858/- is added to the total income of assessee on account accrued interest.”

The ld. A/R, thus submitted that it is evident that AO has added interest of Rs.

54,68,858/- to the income of the assessee on Notional basis. It is trite law that only

real income is taxable and since assessee has neither accrued nor received any

interest from amount advanced to these parties, therefore, no addition on notional

basis on account of accrued interest in the hands of the assessee could be made

4 ITA Nos. 107 & 108/JP/2019. M/s. Traditional Gallery Pvt. Ltd., Jaipur.

without any express provision under Income Tax Act. To support his contention

reliance is placed on the following judgments :-

Shoorj Vallabh Das & Co. 46 ITR 144 (SC)

Godhra Electricity Co. Ltd. vs. CIT 225 ITR 746 (SC)

CIT vs. VTC Leasing & Finance Ltd. 39 TW 211 (Raj. HC)

Brahmaputra Capital & Financial Services Ltd. vs. ITO 119 ITD 266 (Delhi)

The ld. A/R further submitted that while making addition of Rs. 54,68,858/- on

account of notional interest and disallowance of interest expenses of Rs. 2,62,306/-

on account of loan advanced to Nav Sarjan Projects Pvt. Ltd. and S.D. Education

Trust, the AO has completely ignored the vital fact that entire advances made were

considered as interest bearing whereas assessee was holding interest free loan also

from one Director Shri Dinesh Goyal. He has drawn our attention to the Ledger cum

Notional Interest working account of Shri Dinesh Goyal which clearly shows that

assessee was in possession of interest free funds in the range of Rs. 42.23 lacs to Rs. 1.28 crores throughout the year (upto 24.03.2013), which was paid on 25th

March thereby reducing the balance at the end of the year of interest free loan

account to Rs. 7,33,739.17. Similarly, assessee had received interest free funds from

Kids Fashion India Pvt. Ltd. to the tune of Rs. 30 lacs approx.. Besides this, assessee

was having huge interest free funds in the shape of Share Capital and Reserves &

Surplus aggregating to Rs. 6,94,91,574.45 which were available for making

advances. The ld. A/R submitted that as the assessee was having interest free

funds available for making advances, no disallowance can be made. The AO instead

5 ITA Nos. 107 & 108/JP/2019. M/s. Traditional Gallery Pvt. Ltd., Jaipur.

of making disallowance out of interest expenses, had made addition towards the

notional interest which is not permissible under the provisions of IT Act. The ld. A/R

placed reliance on the following judgments :

CIT vs. Reliance Industries Ltd. 410 ITR 466 (SC)

Munjal Sales Corporation vs. CIT & Others 298 ITR 298 (SC)

The ld. A/R further submitted that assessee was holding funds from various sources.

At this juncture, our attention was invited to Note 2.3 of Balance Sheet, i.e. Long

Term borrowings, and Note 2.5 i.e. Short term borrowings, from perusal of which it

is evident that assessee has certain loans which are specific purposes, i.e. Loan from

SIDBI (against Plant & Machinery), Car Loans from various banks, Working capital

loans, EPC limits etc. Against the said loans, the banks by regular monitoring ensure

that funds are utilized for the purpose for which the same were sanctioned, and if

any default is noticed, penal actions are taken by the financial institutions. In the

case of assessee, no such action is taken by the financial institutions. The ld. A/R,

thus submitted that loans taken for specific purposes i.e. car loans, working capital

loans and EPC limits etc. deserve to be reduced from total borrowed funds as such

funds could not be diverted for making interest free advances. The ld. A/R submitted

that assessee maintains regular books of accounts which are subject to audit by

qualified chartered accountant, who has not given any adverse comments. The AO

has accepted the books of accounts and no discrepancy has been pointed out. The

ld. A/R, therefore, prayed that addition on notional basis on account of accrued

interest of Rs. 54,68,858/- and disallowance of Rs. 2,62,306/- out of interest

payment deserve to be deleted.

6 ITA Nos. 107 & 108/JP/2019. M/s. Traditional Gallery Pvt. Ltd., Jaipur.

and further argued that the assessee has diverted interest bearing funds for making

interest free advances to its related parties. Therefore, he requested to uphold the

order of the ld. CIT (A).

record. The A.O. made the addition on account of accrued interest calculated @

12% on the advances given to M/s. Traditional Heritage Hotels Pvt. Ltd. We are in

agreement with the ld. A/R that no addition could be made on notional basis as has

been held by Hon’ble Supreme Court in the case of Shoorji Vallabh Das & Co. 46 ITR

144 (SC) by observing as under :-

“ Income-tax is a levy on income. Though the Income-tax Act takes into account two points of time at which the liability to tax is attracted, viz., the accrual of the income or its receipt, yet the substance of the matter is the income. If income does not result at all, there cannot be a tax, even though in book-keeping, an entry is made about a “hypothetical income”, which does not materialize.”

In the instant case, no income has arisen to the assessee and the AO on

hypothetical basis calculated the accrued interest. Therefore, by respectfully

following the above judgment of Hon’ble Supreme Court and other judgments of

various High Courts including the jurisdictional High Court, we are of the considered

view that no addition could be made on notional basis. Accordingly the addition of

Rs. 54,68,858/- made on account of accrued interest is hereby deleted. With regard

to disallowance of Rs. 2,62,306/-, it is seen that assessee was having sufficient

interest free funds throughout the year which includes share capital and reserves

and surpluses out of which the advance was made to the sister concern. The

7 ITA Nos. 107 & 108/JP/2019. M/s. Traditional Gallery Pvt. Ltd., Jaipur.

Hon’ble Supreme Court recently in the case of CIT vs. Reliance Industries Ltd.

(2019) 410 ITR 466 (SC) has held that where there is a finding of fact that interest

free funds available to the assessee were sufficient to meet its investment, it will be

presumed that investments were made from such interest free funds. In view of the

above judgment (supra) and looking to the facts of the case, since sufficient funds

are available to the assessee for making interest free advances, disallowance of Rs.

2,62,306/- made by the A.O. under section 36(1)(iii) is unwarranted and the same is

deleted.

Ground No. 3 is regarding disallowance made under section 14A of

the IT Act.

of interest bearing funds, therefore, he invoked the provisions of section 14A and

disallowed Rs. 33,83,847/- being interest on such investment @ 12% on day to day

balance. The ld. CIT (A) uphold the disallowance so made by the AO. Aggrieved by

the addition, the assessee preferred appeal before us.

has not earned or received any exempt income from the said investment during the

year under consideration, then no disallowance is called for under section 14A of the

IT Act. He has further contended that even the assessee has not incurred any

expenditure for the said investment and, therefore, no disallowance can be made.

To support his contention, the ld. A/R placed reliance on the judgment of Hon’ble

Supreme Court in case of Maxopp Investment Ltd vs. CIT reported in 402 ITR 640

(SC) and also on the judgment of Hon’ble Delhi High Court in case of Cheminvest

Ltd. vs. CIT, 378 ITR 33 (Delhi) and also relied on the decision of Jaipur Bench of

8 ITA Nos. 107 & 108/JP/2019. M/s. Traditional Gallery Pvt. Ltd., Jaipur.

the Tribunal in case of Deepak Vegpro (P) Ltd vs. ACIT in ITA No. 110/JP/2014 and

in the case of M/s. Mahalaxmi Saws Pvt. Ltd. in ITA No. 280/JP/2019 and prayed for

deletion of disallowance made by the AO under section 14A of the IT Act.

is not relevant as settled by the Hon’ble Supreme Court in case of Maxopp

Investment Ltd. vs. CIT, 91 taxmann.com 154. He has relied upon the Circular No.

5 of 2014 issued by the CBDT and submitted that the CBDT has further clarified that

the word “Income” as used in the section 14A not necessarily be the exempt income

of a particular year but the income under the Act and, therefore, provisions of

section 14A would be attracted even if the assessee has not earned such exempt

income during the financial year.

record. As far as Circular No. 5 of 2014 relied upon by the ld. D/R, it is settled

position of law that the Circular issued by the CBDT are binding on the Taxing

Authorities but the same is not binding on the Court. Further, if a particular

provision of the Act is already explained/interpreted by the Court then the

explanation of the CBDT which is contrary to the decision of the Court, would not be

binding even on the Taxing Authorities. Therefore, the circular which explains the

provision of the Act is binding on the Taxing authorities only to the extent of the said

provision is not given a different meaning or explanation by the Court. The decision

of the court is binding on both the parties i.e. assessee as well as the revenue.

Therefore, once the Hon’ble High Court as well as Hon’ble Supreme Court has

explained the provision, no disallowance of expenditure can be made under section

14A if there is no exempt income earned or received during the year under

9 ITA Nos. 107 & 108/JP/2019. M/s. Traditional Gallery Pvt. Ltd., Jaipur.

consideration. The provisions of section 14A is attracted if the assessee has certain

income which is not includible in its total income under any provisions of the Act and

assessee has incurred any expenditure in relation to earning such income which is

exempted under the Act. Our attention was drawn to the fact that during the year

under consideration there is no investment which had earned or for that matter even

would have earned exempt income and thereby there is no occasion to invoke the

provisions of section 14A and therefore, the disallowance made is totally

unwarranted. This also finds support from the catena of the judicial decisions as

relied upon by the ld. A/R hereinabove.

9.1. Since there is no dividend income earned by the assessee during the year

under consideration, therefore, there is no question of making any disallowance for

earning the exempt income. Hence the disallowance made by the AO under section

14A is deleted.

assessment year 2014-15. The grounds raised in the appeal are reproduced

hereunder :-

10 ITA Nos. 107 & 108/JP/2019. M/s. Traditional Gallery Pvt. Ltd., Jaipur. 11. We have already adjudicated similar grounds as raised by the assessee in assessee’s own case for the assessment year 2013-14 in ITA No. 107/JP/2019 by deleting the additions. While dealing with these grounds, we have discussed the issue hereinabove in para 5 and para 9 & 9.1 respectively and considering that there is no change in facts and circumstances of the case for the year under consideration, and following the judgments of Hon’ble Supreme Court and Hon’ble High Courts, we set aside the orders of the authorities below and delete the additions. 12. In the result, appeals of the assessee are allowed.

Order pronounced in the open court on 12/05/2022. Sd/- Sd/- ¼lanhi xkslkbZ½ ¼ jkBkSM+ deys'k t;arHkkbZ] ½ (RATHOD KAMLESH JAYANTBHAI) (SANDEEP GOSAIN) ys[kk lnL;@Accountant Member U;kf;d lnL;@Judicial Member Tk;iqj@Jaipur fnukad@Dated:- 12/05/2022. das/

आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू 1. vihykFkhZ@The Appellant-M/s. Traditional Gallery Pvt. Ltd., Jaipur. 2. izR;FkhZ@ The Respondent-The ACIT, Circle-4, Jaipur. 3. vk;dj vk;qDr@ CIT 4. vk;dj vk;qDr@ CIT(A) 5. विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत 6. xkMZ QkbZy@ Guard File {ITA No. 107 & 108/JP/2019} vkns'kkuqlkj@ By order, सहायक पंजीकार@Aेेज. त्महपेजतंत

11 ITA Nos. 107 & 108/JP/2019. M/s. Traditional Gallery Pvt. Ltd., Jaipur.