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Facts
The appeals concern Assessment Year 2012-13, arising from an order by the CIT(A). The assessee's appeal involved disallowances under Sections 40(a)(ia), 69, and 14A. The Revenue's appeal concerned disallowances under Sections 36(1)(iii) and addition under Section 69.
Held
The Tribunal restored the issue of disallowance u/s 40(a)(ia) to the AO for verification of Form 26A. For additions u/s 69, the disallowance related to SVD was deleted, while the issue concerning LIL was restored to the AO. The disallowance of interest for advances to suppliers u/s 36(1)(iii) was deleted, and the disallowance of proportionate interest on loans was also deleted.
Key Issues
The core issues involved disallowances related to operational costs, reconciliation differences, investments, interest on advances, and proportionate interest on loans, and the disallowance of expenses for earning exempt income.
Sections Cited
40(a)(ia), 69, 14A, 36(1)(iii)
AI-generated summary — verify with the full judgment below
Income Tax Appellate Tribunal, “D” BENCH, CHENNAI
Before: HON’BLE SHRI MANOJ KUMAR AGGARWAL, AM & HON’BLE SHRI MANU KUMAR GIRI, JM
(िनधा)रणवष) / Assessment Year: 2012-13) DCIT M/s. Ravikumar Distilleries Limited बनाम Pondicherry Circle, # C-9 & C-10, Industrial Estate, / Vs. Puducherry-605 001. Thattanchavady, Pondicherry-605 009. �थायीलेखासं./जीआइआरसं./PAN/GIR No.AABCR-4195-D (अपीलाथ�/Appellant) : (� थ� / Respondent) अपीलाथ�कीओरसे/ Assessee by : Shri N. Arjun Raj (Advocate) - ld.AR � थ�कीओरसे/Revenue by : Shri A.Sasikumar (CIT) - Ld. Sr. DR सुनवाईकीतारीख/Date of Hearing : 21-11-2024 घोषणाकीतारीख /Date of Pronouncement : 03-12-2024 आदेश / O R D E R Manoj Kumar Aggarwal (Accountant Member)
1.1 Aforesaid cross-appeals for Assessment Year (AY) 2012-13 arises out of an order passed by learned Commissioner of Income Tax (Appeals), Puducherry, [CIT(A)] on 25-01-2018 in the matter of an assessment framed by Ld. Assessing Officer [AO] u/s.143(3) of the Act on 31-03-2015. 1.2 The grounds taken by the assessee are as under:-
1.
The Hon'ble CIT Appeals erred in disallowing u/s 40(a)ia) the operational support cost amounting to Rs.1,92,63,967/- paid to tie-up companies on the ground that they are royalty payments subject to tax deduction u/s 194J and tax has not been deducted by the Appellant. The amount claimed as expenses has already been included in the Income of the various parties to whom the payment was made and CA Certificate has been obtained by the Appellant in respect of such amounts. Also as per the judgement of the Hon'ble Supreme Court in Hindustan Coca Cola Beverages Pvt. Ltd vs. CIT (2007) 293 ITR 226 (SC) department cannot realize tax twice on the same income and if the payee has paid tax on the income by including in his ITR then that expenses cannot be disallowed if assessee has not deducted TDS on the said expenses. Your Appellant therefore prays to delete the addition of Rs.1,92,63,967/-.
2. The Learned Assessing Officer has wrongly made additions under Sec. 69 on the ground that there were some differences in balances as per books of Your Appellant and its associated concern Liquor India Ltd. as on 31.03.2012 and the difference amounting to Rs.5,08,31,829/- was disallowed as unexplained investments u/s 69. This difference is due to accounting journal entries passed by Your Appellant in its Books of accounts which have not been correspondingly passed by the associated concern. All those investments made by your Appellant are properly accounted for in the books of account and supported by proper sources and vouchers. These differences have been reconciled by the associated concern and the balances are tallying with the balances as shown in the books of accounts of Your Appellant Your Appellant therefore prays to delete the addition of Rs.5,08,31,829/-.
3. The Learned Assessing Officer was not justified in disallowing a sum of Rs.6,28,986/- under section 14A. He has wrongly come to the conclusion that your Appellant has incurred some expenditure to earn some exempt income and hence this disallowance. The Learned Assessing Officer himself has accepted the fact that no expenditure has been incurred· and at the same time he has not brought any material on record to show that Your Appellant has made any claim of income which does not form part of the total income. Your Appellant had not satisfied the conditions for invoking the provisions of Sec 14A r.w.r.8D. Thus the Learned Assessing Officer's disallowance is not warranted. Your Appellant therefore prays to delete the addition of Rs.6,28,986/-.
1.3 The grounds raised by the Revenue read as under:-
1. The order of the learned CIT(A) is contrary to the law and opposed to the facts of the case.
2. Whether the CIT(A) is right in relying on a piece of evidence to arrive a fact based on which decision is taken, without giving an opportunity to the AO as required under 46A of the Income Tax Rules?
3. Whether the CIT(A) is right in deciding that the interest expenditure is allowable u/s. 36(1)(iii) without conclusively proving with evidence that the funds utilized for advancing interest-free advances flows from non-interest bearing funds in Escrow Account?
Whether CIT(A) is right in deciding that as the interest free advances are advanced during earlier year, the interest debited to P & L Account during relevant year cannot be disallowed.
Whether the CIT(A) is right in deleting the addition on account of difference in balance sheets of assessee and group company in spite of the reason that the same is not reconciled even during appellate proceedings. 6. Whether the CIT(A) is right in deciding that the AO has accepted the balances of subsequent years because of which the AO should have accepted the unreconciled balance for the year in question. 7. For the above and for any other reasons that may be adduced at the time of hearing the order of the CIT(A) may be set aside and that of the AO may be restored.
As is evident, the subject matter of assessee’s appeal is – (i) Disallowance u/s 40(a)(ia); (ii) Addition of reconciliation difference u/s 69; (iii) Disallowance u/s 14A. The subject matter of revenue’s appeal is – (i) Disallowance u/s 36(1)(iii); (ii) Addition of reconciliation difference u/s 69. 1.4 The Ld. AR placed on record ground-wise chart and advanced arguments with the help of various documents as placed on record. The Ld. Sr. DR also advanced arguments supporting the order of Ld. AO. Having heard rival submissions and upon perusal of case records, our adjudication would be as under. The assessee being resident corporate assessee is stated to be engaged in manufacturing & selling of IMFL and trading of liquors.
Disallowance u/s 40(a)(ia) 2.1 The assessee paid operating cost of Rs.192.63 Lacs to six parties as detailed in para-3 of the assessment order. However, no tax was deducted at source against the same on the ground that the contracts were substantially sales contract and therefore, not covered u/s 194C. However, Ld. AO disallowed the same u/s 40(a)(ia). The Ld. CIT(A) confirmed the same against which the assessee is in further appeal before us.
2.2 The Ld. AR, at the outset, sought benefit of second proviso to Sec. 40(a)(ia) and placed on record copies of Form 26A from all these parties. The Ld. AR also advanced arguments and stated that no TDS, in fact, was required against these payments. Considering the fact that the assessee would be eligible to claim the benefit of second proviso to Sec. 40(a)(ia), we restore this issue back to the file of Ld. AO to verify Form 26A of payees and re-adjudicate this issue. The issue, on merits, is kept open. The corresponding grounds as raised by the assessee stand allowed for statistical purposes.
Addition u/s 69 3.1 The Ld. AO noted that there was difference in closing balance of two entities as below: - Particulars M/s.S.V. Distilleries M/s Liquor India Ltd. (SVD) (LIL) Balance as per assessee Rs.2542.19 Lacs Rs.1650.01 Lacs Balance as per other party Rs.1291.02 Lacs Rs.1141.70 Lacs Difference Rs.1251.16 Lacs Rs.508.31 Lacs The aforesaid difference were treated as unexplained investments u/s 69 and added to the income of the assessee. 3.2 During first appeal, the assessee submitted balance confirmation certificate as on 31-03-2015 and stated that the balances were reconciled. Further, in AYs 2013-14 and 2014-15, the balances of above parties were accepted by Ld. AO and therefore, the impugned disallowance was liable to be deleted. 3.3 The Ld. CIT(A) noted that the amount of Rs.12.51 Crores relating to SVD was for acquisition of the business vide agreement dated 05-04- 2011. The Ld. AO, in subsequent AY 2013-14 accepted the balance and did not make any addition. Therefore, the addition with respect to SVD was deleted. 3.4 With respect to M/s LIL, the assessee could not furnish supporting documents and accordingly, the addition, to that extent, was confirmed. The adjudication of Ld. CIT(A) is subject matter of cross-appeals before us. 3.5 So far as the reconciliation of balance of SVD is concerned, we find that the assessee has successfully reconciled the same. The balance confirmation certificate of this party as on 31-03-2015 has been placed on record on Page No.301 of the paper-book. The same is supported by Annual Report of SVD for FYs 2011-12 to 2014-15. Further, the balance of this party has been accepted by Ld. AO in scrutiny assessment order for AYs 2013-14 & 2014-15, the copies of which is on record at Page Nos.414 & 419 of the paper book. The Ld. AO has not made any such addition therein for reconciliation difference. Therefore, this addition has rightly been deleted by Ld. CIT(A). The issue was a matter of reconciliation and the assessee has successfully reconciled the same. In such a case, no such addition u/s 69 is warranted. We order so. 3.6 So far as the balance of M/s LIL is concerned, Ld. AR has stated that there is legal dispute between the assessee and this party and this party is not confirming the balance. The relevant papers, in this regard, have been kept on Page Nos. 427 to 478 of the paper book. Considering the same, we restore this issue back to the file of Ld. AO for fresh adjudication in terms of all these documentary evidences. The assessee is directed to explain the difference and reconcile the same. The corresponding grounds stand allowed for statistical purposes.
Interest disallowance : Advance to suppliers 4.1 It transpired that the assessee advanced loans to 20 parties for Rs.2910.02 Lacs. It was stated that the money was given by one Shri Anil Agarwal (merchant banker) without the knowledge of Managing Director and the assessee had legal dispute with Shri Anil Agarwal. However, Ld. AO estimated notional interest of 14.2% against these balances and disallowed interest of Rs.413.22 Lacs. 4.2 During first appeal, the assessee stated that advances were given out of interest free funds and not out of borrowed funds which was supported by ‘Statement of Utilization of borrowed funds’ as furnished to Ld. CIT(A). It was also stated that the assessee received proceeds of IPO for Rs.74.40 Crores which was kept in escrow account. The assessee advanced loans from escrow account and therefore, there was direct nexus of IPO proceeds and loans advanced by the assessee. In such a case, the impugned disallowance was liable to be deleted. The assessee referred to various judicial decisions to support its claim. The Ld. CIT(A) rendered a factual finding that the funds were advanced in FY 2010-11 and not in this year and therefore, this addition was not correct. Aggrieved, the revenue is in further appeal before us. 4.3 The undisputed fact that emerges is that there is direct nexus with IPO proceeds and the loans advanced by the assessee. The assessee also furnished ‘Statement of Utilization of borrowed funds’ before Ld. CIT(A) to establish that the borrowed funds were not utilized to make the advances. In fact, few of the advances were made in earlier FY 2010-11 which is evident from the ledger of all these parties as placed on record. In the absence of any nexus between the borrowed funds vis-à-vis the advances granted by the assessee, no such interest disallowance could have been made by Ld. AO. Therefore, this addition has rightly been deleted by Ld. CIT(A). The corresponding grounds raised
by the revenue stand dismissed.
5. Disallowance of proportionate interest on loans 5.1 The assessee advanced interest free loan of Rs.832.17 Lacs to M/s Ravikumar Properties Ltd. (RPL). The assessee was a major shareholder in the same. The assessee stated that the advances were for setting up of a new distillery plant. The project was aimed at improving the business and profitability. Therefore, no disallowance should be made u/s 36(1)(iii). However, Ld. AO disallowed proportionate interest of Rs.358.86 Lacs. 5.2 The Ld. CIT(A) deleted the addition on the ground that the amount was given in AY 2011-12 and further this amount was not proved to be linked to interest bearing funds. Aggrieved, the revenue is in further appeal before us. 5.3 It is quite apparent that this advance has been given to set up a new distillery plant which is in the same line of existing business of the assessee. In such a case, the test of commercial expediency would be satisfied and therefore, no such interest disallowance could have been made considering the decision of Hon’ble Apex Court in the case of S.A. Builders Limited vs. CIT (2007) 288 ITR 1 holding that once the commercial expediency is established, the expenditure would be allowable to the assessee. Even otherwise, the assessee had sufficient interest free funds to make the advances. Therefore, the ratio of decision of Hon’ble Supreme Court in the case of Reliance Industries Ltd. (410 ITR 466) would apply to the facts of the case. In this case, Hon’ble Court held that in case interest free funds were available to assessee which were sufficient to meet its investment in subsidiaries, the deduction of interest expenditure would be allowed to the assessee. In the present case, no nexus of borrowed funds vis-à-vis the advances made by the assessee has been established. Therefore, the adjudication of Ld. CIT(A) find our concurrence. The corresponding grounds raised by the revenue stand dismissed.
6. Disallowance u/s 14A 6.1 The assessee made investment in shares of Liquors India Ltd. and M/s S.V. Distilleries Ltd. but did not offer any disallowance u/s 14A. The Ld. AO applied Rule 8D(2) and computed indirect expense disallowance u/r 8D(2)(iii) for Rs.6.28 Lacs computed at 0.5% of average investments. The Ld. CIT(A) confirmed the same against which the assessee is in further appeal before us. 6.2 The Ld. AR submitted that for the purpose of computation, only those investments are to be considered which have actually yielded exempt income during the year. We accept the same and direct Ld. AO to re-compute the disallowance accordingly. The ground stand partly allowed. Conclusion
7. The appeal of the revenue in stands dismissed. The appeal of the assessee in stands partly allowed. Order pronounced on 3rd December, 2024.
Sd/- Sd/- (MANU KUMAR GIRI) (MANOJ KUMAR AGGARWAL) �ाियक सद# / JUDICIAL MEMBER लेखा सद# / ACCOUNTANT MEMBER चे3ई Chennai; िदनांक Dated :03-12-2024 DS आदेशकीKितिलिपअ�ेिषत/Copy of the Order forwarded to : 1. अपीलाथ�/Appellant 2. � थ�/Respondent 3. आयकरआयु</CIT Chennai. 4. िवभागीय�ितिनिध/DR 5. गाडAफाईल/GF