M/S KBD SUGARS & DISTILLERIES LTD,BANGALORE vs. ASST. COMMISSIONER OF INCOME-TAX, BANGALORE

Per Shri Vijay Pal Rao, J.M. : These cross appeals are directed against the orders of Commissioner of Income Tax (Appeals)-I, Bangalore Dt.30.05.2014 for the Assessment Years 2011-12.

2 ITA No.1062 & 1073/Bang/2014 2. First we take up the assessee's appeal wherein the following grounds are

raised :-

“1. The order of the CIT (Appeals) – I, Bangalore to the extent which is against the appellant is opposed to law, weight of evidence, facts and circumstances of the appellant’s case. 2. The appellant denies itself liable to be taxed over and above the total income returned by the appellant of Rs.19,52,67,485 under the facts and circumstances of the case. 3. The learned CIT (Appeals) is not justified in law in restricting the disallowance made by the ld. Assessing Officer under section 14A of the Act read with Rule 8D of the Income Tax Rules to Rs.4,64,525 instead of deleting the entire disallowance made by the ld. Assessing Officer under the provisions of section 14A read with rule 8D of the Income Tax Rules, 1962 under the facts and circumstances of the case. 3.1. The learned CIT (Appeals) failed to appreciate the fact that the ld. Assessing Officer did not arrive at a proper satisfaction for invoking the provisions of section 14A read with Rule 8D of the Income Tax Rules under the facts and circumstances of the case. 3.2. The learned CIT (Appeals) failed to appreciate the fact that the appellant had not incurred any expenditure in earning exempt income under the facts and circumstances of the case. 3.3. The learned CIT (Appeals) further failed to appreciate that what canbe disallowed by invoking the provisions of section 14A read with Rule 8D of the Income Tax Rules, 1962 are only such income which do not form part of the total income under the facts and circumstances of the case. 3.4. Without prejudice to the above the appellant contends that the disallowance made by the ld. Authorities below is highly excessive and the same requires to be reduced substantially under the facts and circumstances of the case. 4. The learned CIT (Appeals) is not justified in law in not deleting the entire additions made by the ld. A.O. under capitalization of interest in respect of work-in-progress to the extent of Rs.68,59,054, under the facts and circumstances of the case. 5. The appellant craves leave to add, alter, substitute and delete any or all of the grounds of appeal urged above. 6. For the above and other grounds to be urged during the hearing of the appeal the appellant prays that the appeal be allowed in the interest of equity and justice.”

3 ITA No.1062 & 1073/Bang/2014 3. Gr.No.1 is general in nature and does not require any adjudication.

Income Tax Act, 1961 (in short 'the Act').

Departmental Representative and considered the relevant material on record.

At the outset, we note that an identical issue has been considered and decided

by the co-ordinate bench of this Tribunal in assessee's own case for the

Assessment Years 2008-09 & 2009-10 vide order dt.5.2.2016 in ITA Nos.933 &

934/Bang/2013 in para 8 to 11 as under :-

“ 8. We have considered the rival submissions as well as the relevant material on record. We find that the Assessing Officer has made a disallowance by noting the fact that the assessee has made investment of Rs.7.1 Crore on tax free securities and dividend income is exempt from tax. Thus the Assessing Officer applied Rule 8D(2)(iii) for the purpose of disallowance under Section 14A. The Assessing Officer has not discussed anything about the indirect expenditure incurred by the assessee for earning the exempt income. The entire discussion is only with respect to the interest expenditure incurred by the assessee during the year under consideration on the loans taken for various purposes. Thus it is clear from the assessment order that the Assessing Officer has not expressed any satisfaction that the assessee has incurred certain expenditure for earning the dividend income in question. There is no quarrel that section 14A postulates the disallowance of expenditure incurred for earning the exempt income which is not forming part of the total income of the assessee. Thus there may be two type of expenditure attributable for earning the exempt income one is direct expenditure and another is indirect expenditure. So far as the direct expenditure is concerned, there is no dispute on this issue, the dispute is confined only to the disallowance of the indirect expenditure. Section 14A mandates apportionment of an expenditure incurred for indivisible activities resulting taxable income as well as tax free income. Therefore, the expenditure which has been incurred for such a composite activity resulting both taxable and non-taxable income is required to be apportioned among the taxable and non-taxable income. Thus, the primary requirement for invoking the provisions of section 14A in respect of indirect expenditure which can be apportioned for earning the tax free income is that

4 ITA No.1062 & 1073/Bang/2014 the said expenditure has been incurred for indivisible activity resulting taxable as well as well as tax free income. The Assessing Officer has to examine and ascertain that certain expenditure has been incurred by the assessee on account of a composite indivisible activity which has resulted in taxable and non-taxable income and therefore the said expenditure is required to be apportioned. Only when the Assessing Officer is satisfied that there is an expenditure incurred by the assessee which can be apportioned and attributable to earning the exempt income, the provisions of section 14A can be invoked. Only after ascertaining and identifying such expenditure, the Assessing Officer can proceed further for quantifying the apportionment by applying the formula under Rule 8D. Thus the Rule 8D cannot be applied automatically but it is only a method of apportionment of an expenditure which has been incurred for an indivisible activity resulting in taxable and non-taxable income. As it is manifest from the assessment order that there is no such ascertainment of expenditure which can be apportioned and attributable to the tax exempt income. The co-ordinate bench of this Tribunal in the case of Subramanya Constructions & Development Co. Ltd. (supra) while dealing with an identical issue has held in para 9 as under :- “ 9. Vis-à-vis the disallowance made under Rule 8D(2)(iii), a look at the assessment order clearly show that assessee, though it did not take specific plea it had stated that there was nothing which called for a disallowance under section 14A investment portfolio. Reply of the assessee on the proposed disallowance under section 14A of the Act given before the AO read as under : “ The question of disallowance u/s 14A r.w. Rules 8D will not arise since the company has not made investments out of the loans taken from various banks. All these investments have been made out of its internal generation and the rent deposits from various tenants on which no interest is payable. Major portion of investments were made during the financial year 2005-06 in which year the general reserve was Rs.5.15 Crores and the deposits received from the tenants was Rs.49.13 Crores. Hence no portion of the loans from banks was used for the purpose of investments. With regard to investment in Drive in Enterprises, the said amount is on account of revaluation of lease hold right and hence no cash has been paid”. Though, nothing specific has been mentioned about non-incurring of any indirect expenditure, it is clear that major part of the investments were done in FY: 2005-06. Incremental investment was only 4.80 lakhs. The investment which yielded the dividend income of Rs.33,600/- claimed as exempt, came from shares worth Rs.2,30,400/- held in M/s Indian Overseas Bank, which holding was the same all though, brought forward from earlier year. Under section 14A of the Act, once assessee has taken a stand that it had not incurred any expenditure under section 14A, then in our opinion, the AO is not justified in invoking Rule 8D(2)(iii) for a disallowance of indirect expenditure unless he recorded his dis-satisfaction of claim. It is essential such non-satisfaction has to be given with cogent reasons before invoking Section 14A. Doctrine of satisfaction no doubt, does not mean that an AO should presume what was in the mind of the assessee and express his approval or disapproval thereon. However, once assessee say that it had incurred no expense covered by section 14A of the Act for its investment portfolio, AO has to make a verification. Especially so, when incremental investments is negligible. In these circumstances, we are of the opinion that CIT(A) while he was

5 ITA No.1062 & 1073/Bang/2014 justified in deleting the disallowances made under Rule 8D(2)(ii) and ought not have sustained the disallowance made under Rule 8D(2)(iii). Order of the learned CIT(A) is set aside to the extent. Disallowance under rule 8D(iii) is also deleted.”

Therefore, in view of the facts and circumstances of the case where the Assessing Officer has not expressed any satisfaction in the assessment order or even has not ascertained and identified the expenditure which is attributable to the tax free income the disallowance made by the Assessing Officer by applying Rule 8D(2)(iii) is not sustainable. We concur with the view of the co-ordinate bench of this Tribunal in the case of Subramanya Constructions & Development Co. Ltd. (supra) and accordingly delete this disallowance made by the Assessing Officer on account of indirect expenditure by applying Rule 8D(2)(iii). Further we note that there is no change in the investment portfolio of the assessee as it is evident from the record that except an investment of Rs.20,000 in NSC, there is no other change in the existing investment of the prior years. Therefore, there is no movement in the investment portfolio except Rs.20,000 which too in NSC. Accordingly when there is no movement in the investment portfolio, then, we are in agreement with the claim of the assessee that there is no expenditure incurred by the assessee on account of indirect expenditure for earning the dividend income. Even otherwise while applying the provisions of section 14A and computing the quantum of disallowance under Rule 8D(2)(iii), it cannot exceed the amount which is attributable for the earning the exempt income. Since the formula given in the Rule 8D does not recognize the actual expenditure incurred by the assessee but it calculates the disallowance being 0.5% of the average investment therefore, this computation of disallowance cannot disregard and over ride the actual expenditure attributable for earning the exempt income. Accordingly, we set aside the orders of the authorities below on this issue and delete the disallowance made by the Assessing Officer on account of indirect expenditure under section 14A by applying Rule 8D(2)(iii). 9. For the Assessment Year 2009-10, the facts are identical except that there is a fresh investment of Rs.2 Crores in the shares of Green Food Park Ltd. The learned Authorised Representative has submitted that this investment is made by the assessee in the sister concern of the assessee and it is a strategic investment and not made for earning the dividend income. Thus the provisions of section 14A cannot be invoked in respect of the investment in the sister concern which is strategic in nature. In support of his contention, he has relied upon the decision of the Mumbai Benches of the Tribunal dt.26.3.2014 in the case of J.M. Financials Ltd. Vs. CIT in ITA 4521/M/2012 and submitted that the Tribunal in the said case has held that the investment in the subsidiary is for the purpose of holding the controlling state in the group concern and not for earning the income out of investment. Therefore the learned Authorised Representative has submitted that this investment in the subsidiary does not attract the provisions of section 14A when the purpose and motive of the investment is not to earn the dividend income and it has also not yielded any dividend income during the year under consideration.

6 ITA No.1062 & 1073/Bang/2014 10. On the other hand, the learned Departmental Representative has submitted that the decisions relied upon by the learned Authorised Representative is not applicable in the case of the assessee as in the said case the investment in the group company was made upto 98% and therefore it was an investment for holding the controlling stake which is not in the case of assessee where the investment is only of Rs.2 Crores. The learned D.R. has thus contended that when there is a investment during the year, then, the provisions of section 14A r.w Rule 8D(2)(iii) are very much attracted. In rebuttal the learned A. R. has submitted that even otherwise when there is no dividend income from the said investment no disallowance can be made without identifying the expenditure attributable for earning the dividend income and further the Assessing Officer has not recorded any satisfaction for rejecting the claim of the assessee that no expenditure has been incurred. 11. We have considered the rival submissions and relevant material on record. As regards the non-expression or recording of satisfaction by the Assessing Officer, we find that the Assessing Officer has made no efforts to ascertain and identify the expenditure which is attributable to the activity which has resulted taxable and non- taxable income and therefore can be apportioned under Section 14A r.w. Rule 8D. Therefore, so far as the requirement of recording the satisfaction the assessment order is lacking this requirement and consequently for want of the pre-requisite condition for making the disallowance under section 14A on account of indirect expenditure the action of the Assessing Officer is not sustainable. In view of our findings for the Assessment Year 2008-09 which are applicable for the Assessment Year 2009-10. As regards the new investment in the sister concern, as it is clear from the business of the sister concern being Green Food Park Ltd. the assessee is also in the business of beverages and distilleries and therefore the investment in the sister concern cannot be ruled out being a strategic and holding a controlling stake in the said company. Even otherwise this investment in the sister concern has not yield any dividend income. The Assessing Officer has just speculated that investment in the shares can only yield dividend income without considering the history and past record of the sister concern of declaring any dividend or not. Therefore, when the purpose of investment is not for earning the dividend income and it is only for holding a controlling stake then the provisions of section 14A cannot be applied. The co-ordinate bench of this Tribunal in the case of JM Financial Ltd. (supra) has held in paras 7 to 13 as under : “ 7. Having considered the rival submissions as well as relevant material on record, we note that so far as applicability of Rule 8D is concerned, there is no quarrel on this point that for the A.Y. under consideration Rule 8D is applicable. Further for the A.Y. 2008-09, the Tribunal held in para 15 as under:- “We have considered the rival arguments made by both the sides, perused the orders of the AO and CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. In the instant case, the only dispute is regarding determination of disallowance of expenditure for earning tax free dividend income of Rs. 18,17,68,458/- the assessee disallowed on its own Rs. 16.50 lakhs u/s 14A. Despite being asked by the AO to furnish the

7 ITA No.1062 & 1073/Bang/2014 disallowance under rule 8D, the assessee did not furnish the details. The provisions of rule 8D inserted by the IT (Fifth Amendment) Rules 2008 with effect from 24.3.2008 are applicable for A.Y. 2008-09 and onwards. Therefore, the revenue authorities are bound to follow the mandatory provisions for calculation of disallowance u/s 14A. Therefore, we do not find any infirmity in the order of the CIT(A) upholding the action of the AO for disallowing the deduction u/s 14A read with rule 8D. The contention of the assessee that the AO without satisfaction being reached invoked the provisions of Rule 8D, in our opinion, does not hold good especially in absence of non-furnishing of details for the purposes of calculation of disallowance at Rs. 16.50 lakhs by the assessee on its own. In this view of the matter and in absence of any distinguishable feature brought to our notice by the learned Counsel for the assessee against the order of the CIT(A), we do not find any infirmity in the same. Accordingly the same is upheld and the ground raised by the assessee is dismissed.” 8. As it is clear from the finding of Tribunal that the assessee failed to furnish the details of disallowance under section 14A and, therefore, the disallowance made by the AO was found by the Tribunal without any infirmity. For the year under consideration the assessee has specifically raised a point before the AO that 97.82% of the investment is in the subsidiary companies and joint venture companies and, therefore, no expenditure was incurred for maintaining the portfolio on these investments or for holding the same. The assessee has also pointed out that these investments are long term investment and no decision is required in making the investment or disinvestment on regular basis because these investments are strategic in nature in the subsidiary companies on long term basis and, therefore, no direct or indirect expenditure is incurred. We find that the department has not disputed this fact that out of the total investment about 98% of the investment are in subsidiary companies of the assessee and, therefore, the purpose of investment is not for earning the dividend income but having control and business purpose and consideration. Therefore, prima facie the assessee has made out a case to show that no expenditure has been incurred for maintaining these long term investment in subsidiary companies. The AO has not brought out any contrary fact or material to show that the assessee has incurred any expenditure for maintaining these investments or portfolio of these investments. In the case of Godrej & Boyce Mfg. Co. Ltd. (supra) Hon’ble Jurisdictional High Court while dealing with the issue of disallowance u/s 14A and application of Rule 8D has recorded the principles as laid down by the Hon’ble Supreme Court in the case of Walfort Share and Stock Brokers P. Ltd. [2010] (326 ITR 1,) in para 31 as under:- (a) “The mandate of section 14A is to prevent claims for deduction of expenditure in relation to income which does not form part of the total income. (b) Section 14A(1) is enacted to ensure that only expenses incurred in respect of earning taxable income are allowed; (c) The principle of apportionment of expenses is widened by section 14A to include even the apportionment of expenditure between taxable and nontaxable income of an indivisible business; (d) The basic principle of taxation is to tax net income. This principle applies even for the purpose of section 14A and expenses towards non-taxable income must be excluded; (e) Once a proximate cause for disallowance is established – which is the relationship of the expenditure with income which does not form part of the total income – a disallowance has to be effected. All expenditure under the provisions of the Act has to be disallowed under section 14A Income which does not form part of the total income is broadly adverted to as exempt income as an abbreviated appellation.” 9. After considering these principles as emerged from the decision of Hon’ble Supreme Court in the case of Walfort Share and Stock Brokers P. Ltd. (supra), Hon’ble Jurisdictional High Court has held in para 32 and 33 as under:-

8 ITA No.1062 & 1073/Bang/2014 “32. Sub-section (2) and (3) to section 14A were inserted by an amendment brought about by the Finance Act of 2006 with effect from April 1, 2007. Sub Sections (2) and (3) Provide as follows. "14A.(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, if the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such expenditure in relation to income which does not form part of the total income under this Act. (3) The provisions of sub-section (2) shall also apply in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act : Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154 for any assessment year beginning on or before the 1st day of April, 2001." (The proviso was inserted earlier by the Finance Act of 2002 with retrospective effect from May 11, 2001)

9 ITA No.1062 & 1073/Bang/2014 10. It has been made clear by the Hon’ble High Court that sub-section (2) does not if so facto empower the AO to apply the method prescribed by Rules straightaway without considering whether the claim made by the assessee is correct.

“We have considered the rival submission and carefully perused the relevant records. So far as the issue regarding disallowance u/s 14A in the case where no dividend has been received, the same is covered against the assessee by the order of Tribunal in assessee’s own case for the assessment year 2008-09, wherein the Tribunal has followed the decision of special bench of Tribunal while deciding the issue. Therefore, we do agree with the finding of the Tribunal on this point. Further since the assessee has raised the new plea in the year under consideration that no expenditure had been incurred by the assessee for earning the exempt income or for the investment in question. We find merit and substance in the contention of the assessee on this point because the investment has been made by the assessee in the group concern and not in the shares of any un-related party. Therefore, the primary object of investment is holding controlling stake in the group concern and not earning any income out of investment. Further the investment were made long back and not in the year under consideration. Therefore, in view of the fact that the investment are in the group concern we do not find any reason to believe that the assessee would have incurred any administrative expenses in holding these investments. The AO has not brought on record any material to show that the assessee has incurred any expenditure in relation to the income which does not form part of the total income. Section 14A has within it implicit the notion of apportionment in the cases where the expenditure is incurred for composite/indivisible activities in which taxable and non taxable income is received but when no expenditure has been incurred in relation to the exempt income then principle of apportionment embedded in section 14A has no application. The object of section 14A is not allowing to reduce tax payable on the non exempt income by deducting the expenditure incurred to earn the exempt income. In the case in hand it is not the case of the revenue that the assessee has incurred any direct expenditure or any interest expenditure for earning the exempt income or keeping the investment in question. If there is expenditure directly or indirectly incurred in relation to exempt income the same cannot be claimed against the income which is taxable. For attracting the provisions of section 14A- “there should be proximate cause for disallowance which has relationship with the tax exempt income as held by the Hon’ble Supreme Court in case of CIT Vs. Walfort Share and Stock Brokers P. Ltd. ( 326 ITR 1). Therefore, there should be a proximate relationship between the expenditure and the income which does not form part of the total income. In the case in hand the assessee has claimed that no expenditure has been incurred for earning the exempt income, therefore, it was incumbent on the AO to find out as to whether the assessee has incurred any expenditure in relation to income which does not form part of the total income and if so to quantify the expenditure of disallowance. The AO has not brought on record any fact or material to show that any expenditure has been incurred on the activity which has resulted into both taxable and non taxable income. Therefore, in our view when the assessee has prima facie brought out a case that no expenditure has been incurred for earning the income which does not form part of the total income then in the absence of any finding that expenditure has been incurred for earning the exempt income the provisions of section 14A cannot be applied. Accordingly we delete the addition/disallowance made by AO u/s 14A r.w. Rule 8D.”

10 ITA No.1062 & 1073/Bang/2014 12. A similar view was taken by the Delhi Bench of this Tribunal in the case of M/s Oriental Structural Engineers (P) Ltd (supra) which has been confirmed by the Hon’ble Delhi High Court vide decision dated 15.01.2013 in para 6.3 as under:-

'6.3 We have carefully considered the submissions and perused the records. We find that Ld. Commissioner of Income Tax (Appeals) has given a finding that only interest of Rs 2,96,731/- was paid on funds utilized for making investments on which exempted income was receivable. Further, Ld. Commissioner of Income Tax (Appeals) has observed that in respect of investment of Rs 6,07,775,000/- made in subsidiary companies as per documents produced before him, they are attributable to commercial expediency, because as per submission made by the assessee, it had to form Special Purpose Vehicles (SPY) in order to obtain contracts from the NHAI and the SPVs so formed engaged the assessee company as contract to execute the works awarded to them (i.e. SPVs) by the NHAI. In its profit and loss account for the year, the assessee has shown the turnover from execution of these contracts and therefore no expense and interest attributable to the investments made by the appellant in the PSVs can be disallowed u/s 14A LW. Rule 8D because it cannot be termed as expense/ interest incurred for earning exempted income. Under the circumstances, Ld. Commissioner of Income Tax (Appeals) is correct in holding that disallowance of a further sum Rs 40,556/- calculated@2%ofthedividend earned is sufficient. Under the circumstances, we do not find any infirmity in the order of the Ld. Commissioner of Income Tax (Appeals), hence we uphold the same.”

By following the earlier order of this Tribunal, we decide this issue in favour of

the assessee and consequently the disallowance made by the Assessing Officer

is deleted.

progress.

11 ITA No.1062 & 1073/Bang/2014 6.1 We have heard the rival submissions as well as considered the relevant

material on record. An identical issue has been considered by this Tribunal in

assessee's own case for the Assessment Year 2010-11 in ITA Nos.933 &

934/Bang/2013 in para 14 as under :

“ 14. We have heard the learned Authorised Representative as well as learned Departmental Representative and considered the relevant material on record. There is no dispute that the assessee has borrowed the term loan for the purpose of expanding its business and therefore the interest expenditure incurred on the borrowed fund used for expansion of the business has to be capitalized and the same cannot be allowed as revenue expenditure in view of the proviso to section 36(1)(iii) which reads as under : “Section 36(1)(iii) : The amount of the interest paid in respect of capital borrowed for the purposes of the business or profession : Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset 58[for extension of existing business or profession] (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction. Explanation.—Recurring subscriptions paid periodically by shareholders, or subscribers in Mutual Benefit Societies which fulfil such conditions as may be prescribed, shall be deemed to be capital borrowed within the meaning of this clause;” “

Thus when there is no dispute that the interest expenditure was incurred by the assessee on the term loan used for expansion of its business, then the same cannot be allowed as revenue expenditure but has to be capitalized as cost of the expansion being part of the work in progress. Accordingly, we do not find any error or illegality in the orders of authorities below on this issue. This ground of the assessee’s appeal is dismissed.”

In principle, we concur with the view of the co-ordinate bench of this Tribunal

in assessee's own case and therefore if the interest bearing borrowed fund has

been used by the assessee for the purpose of expansion of business forming

part of work-in-progress then the proportionate interest has to be disallowed

12 ITA No.1062 & 1073/Bang/2014 being capital in nature. However, the learned Authorised Representative of

the assessee has submitted that the assessee was having its own fund which

were sufficient for the expenditure incurred being part of the work-in-progress

for the year under consideration. Therefore, to the extent of availability of

own fund, the disallowance of interest is not justified. Thus the learned

Authorised Representative has pleaded that the disallowance may be deleted.

6.2 On the other hand, the learned Departmental Representative has

submitted that since the availability of the fund has not been verified by the

authorities below and therefore this issue requires proper verification at the

level of the Assessing Officer.

6.3 In view of the contention of the learned Authorised Representative that

the assessee is having its own fund sufficient for the expenditure incurred

being part of the work-in-progress, we are of the considered opinion that this is

a factual aspect of the matter and requires a proper examination and

verification. Accordingly, we set aside this issue to the record of the Assessing

Officer for limited purpose of verification of availability of non-interest bearing

fund with the assessee and thereafter the Assessing Officer has to adjudicate

the issue in accordance with the above observations.

13 ITA No.1062 & 1073/Bang/2014 “1. The order of the learned CIT (Appeals) in so far as it is prejudicial to the interest of revenue, is opposed to law and the facts and circumstances of the case. 2. The CIT (Appeals) erred in deleting the disallowance of Rs.33,95,068 by holding that none of the interest payments can be taken for the purposes of rule 8D(2)(ii) without appreciating the provisions of Section 14A read with Rule 8D in its true sense and right spirit and the fact that when the interest expense incurred cannot be directly attributed to any particular income or receipt, provisions of Rule 8D(2)(ii) are automatically applicable. 3. The CIT (Appeals) erred in holding that the payments cannot be attributable to borrowings specifically used for tax exempt income and holding that there is no material evidence on record to show the nexus between the borrowers and tax free investments by relying on the decision of Hon'ble Tribunal of Kolkata Bench in the case of Champion Commercial Ltd. [139 ITD 108 (Kol)] without appreciating the fact that investments are made form a common pool of funds i.e. working capital and / or cash credit or overdraft accounts and the provisions of Rule 8D(2)(ii) will be only such interest expenses as are neither directly attributable to borrowings specifically used for tax exempt incomes or receipts nor are directly attributable to borrowing specifically used for taxable incomes or receipts. 4. The CIT (Appeals) erred in deleting the disallowance of interest of Rs.6,60,93,403 holding that there is no finding by the A.O. that the borrowed funds were diverted towards interest free loans without appreciating that the assessee had not offered any explanation regarding the purpose for which such advances/loans were advanced to the relatives of the Directors, family and group concerns in all numbering to 70 persons free of interest either before the Assessing Officer or before the CIT (Appeals). 5. The CIT (Appeals) erred in restricting the disallowance of interest of Rs.2,24,76,468 to Rs.68,59,054 at 11% on account of capitalization of work-in- progress without appre4ciating that the assessee neither before the Assessing Officer nor before the CIT (Appeals) was able to furnish any evidence with regard to the utilization of loans other than work-in-progress and the disallowance of 15% was reasonable. 6. The CIT (Appeals) erred in computing the disallowance at Rs.68,59,054 by holding that the Assessing Officer has not justified in computing the disallowance of Rs.2,24,76,468 without finding as to where from the work in progress of Rs.14,51,61,100 and carry forward balance of Rs.6,23,55,045 were adopted and as to why the disallowance is computed at 11% as against 15% made by the A.O.

14 ITA No.1062 & 1073/Bang/2014 7. For these and such other grounds that may be urged at the time of hearing, it is humbly prayed that the order of the CIT (Appeals) be reversed and that of the Assessing Officer be restored. 8. The appellant craves leave to add, to alter, amend or delete any of the grounds that may be urged at the time of hearing of the appeal.”

(Appeals) on account of interest expenditure under Section 14A of the Act.

9.1 We have heard the rival submissions as well as considered the relevant

material on record. We note that an identical issue has been considered by the

co-ordinate bench of this Tribunal in assessee's own case for the Assessment

Years 2008-09 to 2010-11 in ITA Nos.933 & 934/Bang/2013 & 408/Bang/2014

in para 20 as under :

“ 20. We have heard the rival submissions as well as considered the relevant material on record. There is no dispute that there is no fresh investment during the Assessment Year 2008-09 except a sum of Rs.20,000 in the NSCs. Therefore there is no use of any fund whatsoever for the purpose of making the investment during the year under consideration. The entire investments were made in the earlier yeas and it is not the case of Assessing Officer that there was a disallowance on account of interest expenditure under Section 14A in the earlier assessment year. Further, the Tribunal for the Assessment Years 2006-07 & 07-08, while deciding the issue of interest free loans advanced to the related parties have given the finding that the assessee was having sufficient interest free funds. We further find that during the year under consideration the assessee has incurred the interest expenditure of Rs.17.84 Crores, the details of the same has been reproduced by the CIT (Appeals) at page No.7 in table as under :-

15 ITA No.1062 & 1073/Bang/2014 FINANCE CHARGES Rupees Bank charges & Commission 1,25,62,461 Interest on term loans 3,62,41,904 Interest on working capital 11,77,98,115 Interest on KSBCL Advance 81,36,431 Interest on vehicle loan (motor car) 5,86,253 Interest on vehicle loan (motor 11,33,490 trucks) Total : 17,84,58,674

It is clear from the details as recorded by the CIT (Appeals) and has not been disputed by the revenue that the entire expenditure during the year has been incurred in respect of the interest on term loans, interest on working capital, interest on specific other advances and vehicle loans including the bank charges and commission on said transactions. Therefore, the term loan, working capital loan, vehicle loan and specific advances cannot be used for the purpose other than which the loan was taken and the specific purpose was financed by the banks. Thus for the year under consideration none of the items of interest can be attributable to the earning of dividend income which is exempt income. Accordingly, in view of the fact that there is no disallowance on account of interest expenditure under Section 40A in the earlier year and there is no fresh investment during the year under consideration as well as the interest expenditure during the year is on account of specific loans for specific purposes, we do not find any error or illegality in the order of the CIT (Appeals) in deleting the said disallowance made by the Assessing Officer under Section 14A on account of indirect interest expenditure.”

Following the earlier order of this Tribunal, we do not find any reason to

interfere with the impugned order of the CIT (Appeals).

free advances given to related parties.

10.1 We have heard the learned Authorised Representative as well as learned

Departmental Representative and the relevant material on record. At the

outset, we note that an identical issue has been considered by this Tribunal in

16 ITA No.1062 & 1073/Bang/2014 assessee's own case for the Assessment Year 2008-09 and 2009-10 vide order

(supra) in paras 25 to 28 are as under :

“ 25. We have considered the rival submissions as well as the relevant material on record. The Assessing Officer noted that the assessee has given the interest free advances to its sister concerns amounting to Rs.179 Crores, correct amount is Rs.155.51 Crores. The Assessing Officer thus invoked the provisions of section 40A(2) and made a proportionate disallowance of interest expenditure. The CIT (Appeals) has deleted the disallowance made by the Assessing Officer. In para 4.4 to 4.7 of the impugned order as under : “ 4.4 I have carefully considered the appellant’s submissions and the reasons given by the AO in the assessment order. The AO noted that the appellant had advanced interest-free loans to various sister concerns amounting to RS.179 crores. The AO also found that the appellant was paying Rs. 17.84 crores as interest towards borrowals. In view of this, the AO presumed that interest- bearing funds were diverted to the sister concerns free of interest and accordingly made a disallowance of Rs .16,45,27,168/ -. The appellant seriously obj ected to the above disallowance in its detailed submissions extracted above. The appellant also clarified that the total amount of interest-free advances to the sister concerns is only Rs.155.51 crores and not Rs.179 crores as worked out by the AO. There is a totalling mistake in this regard. It is also pointed out by the appellant that the AO considered the advance of Rs.2,05,08,600/- given to Sapthagiri Enterprises, Bangalore was an interest-bearing loan and the appellant received interest at the rate of 10% and the same was offered for taxation. 4.5 The question isJ whether the AD is justified in making the interest disallowance. It is seen from the balance sheet that the interest-free advances given to various sister concerns were actually advanced in earlier years. It is only an amount of Rs .10 crores advanced during the year. It is also seen from the balance sheet the appellant has got the following interest-free funds as on 31/3/2008: i) Reserves & surplus Rs. 79J99J26J524 78J47J88J032 ii) Interest-free unsecured loans Rs. iii) Total Rs. 158J47J14J556

17 ITA No.1062 & 1073/Bang/2014

4.6 Thus the total interest-free funds available with the appellant were Rs. 158.47 croresJ whereas the appellant advanced interest-free loans to sister concerns amounting to Rs.155.51 crores. Thus it can be concluded that the interest-free advances were out of the interest-free funds available with the appellant. The details of interest payment have already been extracted at para 3.6 above. A perusal of the said interest payment indicates that they were incurred for the purpose of business and they are allowable u/s 36(1) (iii) of the Act. There is no material available on record to show that interest -free funds are diverted towards interest-free advances to the sister concerns. Even otherwiseJ where the appellant had interest- free funds by way of capital and reserves or by way of interest-free deposits from customersJ there is an inference that borrowed funds are not diverted for non-business purpose. In such circumstancesJ there can be no disallowance. This is the ratio laid down by the Hon 'ble High Court of Allahabad in the case of Prem Engineering Pvt. Ltd. [285 ITR 554]. A similar view has been expressed interest-free funds generated or available with the company if the interest- free funds were sufficient to meet their investments. In the present case, the interst-free funds available with the appellant are Rs.158.47 crores and whereas the interest-free advances were only Rs.155.51Crores. Thus there cannot be any disallowance of interest on account of account of interest-free advances made to the sister concerns in the instant case. It is also not the argument of the appellant that the interest-free advances were for any commercial expediency. Therefore, the decision of the Hon'ble Supreme Court in the case of SA Builders [288 ITR 1] is not applicable to the instant case. The AO relied on the following decisions i) Abhishek Industries [20S CTR 304 (P&H)] ii) Varinder Agro Chemicals Ltd. [20S CTR 304] iii) Doctor & Co. [180-ITR-627] 4.7 The Hon' ble Punjab & Haryana High' Court followed the decision in the case of Abhishek Industries Ltd. while giving decision in the Varinder Agro Chemicals Ltd. case cited above. It

18 ITA No.1062 & 1073/Bang/2014 should be mentioned that the decision in the case of Abhishek Industries rendered by the Punjab & Haryana High Court was overruled by the Hon'ble Supreme Court in the case of Manjula sales Corpn. [298-ITR-298(SC)]. The decision in the case of Doctor & Co. is distinguishable on facts because there is a clear finding by the AO in the said case that the borrowed funds were diverted towards interest-free loans. In the instant case, there is no such finding or any evidence on record in this regard. In view of the discussion above, the AO is not justified in making the disallowance of interest in the present case. Hence, the same is deleted.”

Thus it is clear that the assessee's own interest free fund is Rs.158.47 Crores in comparison to the interest free advance given to sister concern at Rs.155.51 Crores. An identical issue came up before this Tribunal for the Assessment Year 2007-08 in assessee's own case and the Tribunal has given a finding in paras 9.5.1 & 9.5.2 are as under :-

“ 9.5.1. As could be seen from the details furnished by the assessee during the course of hearing that the chunk of interest free loans to the tune of Rs.117.39 crores were out of noninterest bearing funds, comprised of capital, reserves & surplus and interest free unsecured loans to the extent of Rs.170.93 crores. Thus, the question of interest bearing funds being utilised to advance non-interest bearing loans by the assessee did not arise. The AO had opined in the assessment order that ‘the assessee company could have involved its own money in its business instead of taking bank loans on interest.’ [Courtesy: page 2 of Asst. order]. It is, however, the prerogative of the assessee as how to conduct its business. Further, it is very evident from the details furnished by the learned AR and also perusal of the Schedules to Profit & Loss account as at March, 31, 2007, it is obvious that the interest bearing loans obtained from the banks were availed for specific purposes, namely, working capital, KSBCL Advance, vehicle loans [motor cars, trucks] etc., [Copies of Balance Sheet/Schedules to P & L a/c as at March 31, 2007 are placed on record]. ITA Nos.1362 & 1363 if 2011 JBD Sugars & Distilleries Ltd., Bangalore. 9.5.2 We shall now analyse the case laws as to whether the AO was within her realm to disallow the interest amount of Rs.10.97 crores. (i) CIT v. Reliance Utilities and Power Ltd (2009) 313 ITR 340 (BOM): (a) In that case, the assessee claimed deduction of interest on borrowed capital. The AO recorded a finding that the sum of Rs.213 crores was invested out of its own funds and Rs.147 crores was invested out of borrowed funds. Accordingly, he disallowed interest of Rs.4.4 crores calculated at 12% per annum. The CIT (A) found that the assessee had enough interest free funds at its disposal for investment and, accordingly, deleted the addition which was subsequently upheld by the Tribunal. On appeal, the Hon’ble Court had held that “if there were funds

19 ITA No.1062 & 1073/Bang/2014 available both interest-free and overdraft 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 investments. In this case, this presumption was established considering the finding the fact both by the Commissioner (Appeals) and the Tribunal. The interest was deductible.” (b) We have, with due regards, perused the judgment of the Hon’ble Court (supra) and of the view that the ratio laid down by the Court is directly applicable to the present assessee as the issue under consideration is identical to that of the matter dealt by the Hon’ble Court. (ii) The Hon’ble High Court of Gujarat had an occasion to deal with a similar issue in the case of CIT V. Raghuvir Synthetics Ltd reported in (2013) 354 ITR 222 (Guj). The issue before the Hon’ble Court, in brief, was that the AO noticed that the assessee had incurred heavy interest expenses of Rs.59.83 lakhs and, on the other hand, it had given interest free loans to the parties to the extent of Rs.19.45 crores. On examining the details furnished, the AO disallowed the interest to the extent of Rs.18.66 lakhs of the interest –free loans advanced on the premise that the expenses were not incurred for business expenses. The CIT (A) set aside the order of the AO and deleted the addition, holding that the amounts advanced to the parties were not given during the year under consideration. The CIT (A) had also taken note of the fact that there were sufficient funds available with the assessee on which no interest liability had been incurred and, thus, held that the disallowance was unjustifiable. The Tribunal upheld the stand of the CIT (A), holding that the interest-free funds available with the assessee were far greater than the loan advanced to sister concerns and the borrowed money was not utilized for the purpose of advance to its sister concerns and the interest was not disallowable merely on account of the utilization of the funds for non- business purposes. On appeal, the Hon’ble Court held that “when there was no evidence brought on record by the Department for the Tribunal to hold otherwise than what had been concluded by way of any material; the assessee was eligible for allowance of interest.” 9.5.3. Taking all the above facts into consideration and also in conformity with the judicial views on a similar issue (supra), we are of the considered view that the authorities below were not justified in resorting to disallow the interest claim of Rs.10,97,85,319/-. It is ordered accordingly.” Thus, for the earlier assessment year, the Tribunal found that the assessee was having sufficient funds for advancing interest free loan to the sister concern to the tune of Rs.117.39 Crores. For the year under consideration, there is an increase in the interest free advances of about Rs.37 Crores. Therefore to the extent of Rs.117.39 Crores advanced in the earlier year the issue has been settled by the Tribunal that the assessee was having sufficient funds. The CIT (Appeals) has recorded that the assessee's own fund during the year is more than the advance given to the sister concern, therefore, we do not find any reason to interfere with the finding of the CIT (Appeals) that the assessee is having its own interest free funds which is sufficient to advance interest free loan to the sister concern. Accordingly, this issue is decided against the revenue and in favour of the assessee.

20 ITA No.1062 & 1073/Bang/2014 26. For the Assessment Year 2009-10, the grounds are identical. As regards the disallowance under Section 14A on account of interest expenditure which has been deleted by the CIT (Appeals), the facts are almost identical except the fact that for the said assessment year the assessee has made an investment of Rs. 2 Crores in the sister concern namely Green Food Park Ltd. 27. We have heard the learned Departmental Representative and learned Authorised Representative as well as considered the relevant material on record. The learned Authorised Representative of the assessee has pointed out that the investment is a strategic investment in the sister concern therefore provisions of section 14A are not applicable. Even otherwise the assessee was having its own fund for making the said investment of Rs.2 Crores during the year under consideration. He has referred to the details of the funds available with the assessee and the amount of interest free advance given to the sister concern and submitted that even after including this amount of Rs.2 Crores as well as in the amount of interest free advance to the sister concern, the assessee's own funds are more than sufficient for making the investment as well as advance given to the sister concerns. The learned Departmental Representative has relied upon the order of the Assessing Officer and submitted that when the assessee has made a fresh investment during the year, therefore, to the extent of said investment, the facts are distinguishable from the earlier years. 28. Having considered the rival submissions and careful consideration of the facts, we note that for the Assessment Year 2009-10, the interest free advance to the related parties amounting to Rs.144.78 Crores in comparison to Rs.155 Crores in earlier assessment year, therefore it is clear that there is a reduction in the interest free advance to the sister concern to the extent of Rs.10 Crores during the year under consideration. Going by this fact itself, it is clear that the assessee was having its own fund which was sufficient for this additional investment of Rs.2 in the sister concern namely Green Food Park Ltd. Therefore, we do not find any error or illegality in the order of CIT (Appeals) in deleting the disallowance made by the Assessing Officer on account of interest expenditure under Section 14A.”

Following the earlier order of this Tribunal, we do not find any reason to

interfere with the impugned order of the CIT (Appeals).

capitalization of work-in-progress.

21 ITA No.1062 & 1073/Bang/2014 11.1 We have heard the learned Authorised Representative as well as

learned Departmental Representative and the relevant material on record. The

only grievance of the revenue on this issue is the rate of interest for disallowing

the interest expenditure on account of capitalization of work-in-progress. The

Assessing Officer has made the disallowance by taking the interest @ 15%

which has been restricted by the learned CIT (Appeals) to 11%. We note that

the CIT (Appeals) has applied the interest rate of 11% by considering the

balance of work-in-progress appearing in the books of account from

1.4.2009/31.3.2009 to 31.3.2011. The relevant finding of the CIT (Appeals) in

para 5.4 as under :

“5.4 Similar issue was discussed in appeal for A.Y. 2010-11 and considered that certain percentage of interest attributable to work-in-progress. In the books of account capital work-in-progress appears as under :-

As on 31.03.2009 Rs.7,11,61,668 As on 31.03.2010 Rs.9,21,96,773 As on 31.03.2011 Rs.20,25,16,145

Further it is also observed that no addition towards fixed asset during the previous year out of work-in-progress of Rs.14,51,61,100 carried forwarded balance Rs.6,23,55,045 and since units yet to be completed and put to use for business purpose, hence interest attributable to be considered as capital nature, required to be clubbed into with work-in-progress.”

22 ITA No.1062 & 1073/Bang/2014 Thus it is clear from the finding of the CIT (Appeals) that the interest rate of

11% as calculated by considering all the relevant amounts of loan and interest.

Therefore, in the absence of any contrary fact brought before us, we do not

find any reason to interfere with the finding of the CIT (Appeals) on this issue.

Sd/- Sd/- (INTURI RAMA RAO) (VIJAY PAL RAO) Accountant Member Judicial Member *Reddy gp Copy to : 1. Appellant 2. Respondent 3. C.I.T. 4. CIT(A) 5. DR, ITAT, Bangalore. 6. Guard File. (True copy) By Order

Asst. Registrar, ITAT, Bangalore