BHANSALI BRIGHT BARAS P.LTD,MUMBAI vs. ACIT 5(1), MUMBAI

आदेश / O R D E R

Per Joginder Singh (Judicial Member) The assessee is aggrieved by the impugned order dated 09/04/2012 of the Ld. First Appellate Authority, Mumbai, on the ground whether the Ld. Commissioner of Income Tax (Appeal) was right in confirming the addition of Rs.19,35,050/- under the proviso to section 36(1)(iii) of the Income Tax Act, 1961 (hereinafter the Act) on account of disallowance of interest, debited to profit and loss account, by deeming the same as proportionate interest attributable to capital work in progress. Through alternative ground, the assessee has contended that the disallowance should not exceed Rs.2,33,428/-, tabulated in annexure-A.

M/s Bhansali Bright Baras Pvt. Ltd.

2.2. On appeal, before the Ld. Commissioner of Income Tax (Appeal), the factual matrix was considered and the stand taken in the assessment order with respect to the disallowance of Rs.19,35,020/-, made by the Assessing Officer, was confirmed. The assessee is in further appeal before this Tribunal.

2.3. If the observation made in the assessment order, leading to addition made to the total income, conclusion drawn in the impugned order, material available on record,

M/s Bhansali Bright Baras Pvt. Ltd. assertions made by the ld. respective counsel, if kept in juxtaposition and analyzed, we find that the assessee company, during the relevant time, was engaged in the business of manufacturer and export of stainless steel bars, hexagons, squares, wires and flanges, showing total turnover of Rs.151.39 crores showing profit, before taxation, at Rs.31.78 lakhs. From the details, submitted by the assessee, it was found that the assessee claimed interest expenditure of Rs.4.06 croroes on secured and unsecured loans. The assessee also showed capital work in progress (CWIP) of Rs.200,10,551/-, the details of which/working capital/work in progress, were filed. The stand of the Revenue was that the assessee has not capitalized interest on the same. Before coming to any conclusion, we are reproducing hereunder the relevant provision of section 36(1)(iii) of the Act for ready reference and analysis:-

(B) any other insurer and approved by the Insurance Regulatory and Development Authority established under sub-section (1) of section 3 of the Insurance Regulatory and Development Authority Act, 1999 (41 of 1999); (ii) any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission; (iia) [Omitted by the Finance Act, 1999, w.e.f. 1-4-2000.] (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 91[***] (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; 2.4. The aforesaid section states that “the amount of interest paid in respect of capital borrowed for the purposes of business or profession”, provided that any amount of interest paid, in respect of capital borrowed for acquisition of asset for extension of existing business or profession (whether capitalized in the books of accounts or not) for any period beginning from the date on which the capital was borrowed for acquisition of asset till the date on which such asset was first put to use, shall not be allowed as deduction. We find that, under the material facts available on record, there is repayment of secured loans to the extent of Rs.10,52,64,744/- and borrowing of money to the tune of Rs.84,25,000/- is by way of interest free unsecured loans, therefore, in our view, calculation on proportionate basis, is not justified. The ratio laid down by Hon'ble jurisdictional

M/s Bhansali Bright Baras Pvt. Ltd.

High Court in CIT vs Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom.) supports our view, wherein, availability of interest free funds was determined by comparing the share capital and reserves against investment. The analysis of the balance sheet as on 31/03/2009 is as under:-

Particulars Amount (In Rs.) Share Capital 2,10,40,000 Reserves & Surplus 11,61,33,149 Depreciation Fund 2,17,79,530 Total Interest Free 15,89,52,679 Funds Less:-Fixed Assets 7,41,98,782 Interest Free Funds 8,47,53,897 Available

The aforesaid balance sheet clearly shows that there were interest free funds of Rs.8,47,53,897/-, available with the assessee. Whereas, the reason for making the disallowance by the ld. Assessing Officer was that the assessee did not have sufficient interest free reserves at its disposal for making loan repayment to the tune of Rs.12,79,07,744/- as well as to finance its working capital in progress of Rs.2,00,10,551/-. This observation of the Ld. Assessing Officer is not correct as the assessee was having interest free reserves and cash was generated by the assessee from operation, during the year and was used to repay the borrowing. The following picture further clarifies that the M/s Bhansali Bright Baras Pvt. Ltd. interest bearing unsecured loans were also replaced with interest free funds, which are summarized as under:-

Particulars Op. Bal. Additions Repayments Closing Net Increase/ Decrease Int. 1,53,95,000 58,60,263 1,69,85,563 42,70,000 (1,11,25,000) Bearing Funds Int. Free 1,07,00,000 2,65,50,000 70,00,000 3,02,50,000 1,95,50,000 Funds 2,60,95,000 3,24,10,263 2,39,85,263 3,45,20,000 84,25,000 2.5. Considering the totality of facts, admittedly any and every payment, in the garb of interest, in excess of what can be really termed as interest, is not allowable. At the same time the deduction is not dependent on whether resulting profit is taxable or not. The word “borrowed” and “paid” in section 36(1)(iii) clearly postulate two different entities, one which lends capital and the other which borrows and pays interest. What section 36(1)(iii) emphasizes on its user of capital and not user of asset, which comes into existence as a result of borrowed capital, unlike section 37(1), which expressly exclude and expense of a capital nature. Legislature has, therefore, made no distinction in section 36(1)(iii) between “capital borrowed for revenue purposes” and “capital borrowed for capital purposes” and an assessee is entitled to claim interest paid on borrowed capital provided that capital is used for business purposes irrespective of what may be result of using such borrowed capital. Our view find support from the ratio laid down in DCIT vs Core Health Care Ltd. (2008) 167 taxman 206 (SC), CIT vs Monnet Industries

M/s Bhansali Bright Baras Pvt. Ltd. ltd. (2012) 210 taxman 264 (SC), Vardhman Polytex Ltd. vs CIT 210 taxman 261 (Sc), CIT vs Anand Technology Resources Park P. Ltd. (2011) 202 taxman 654. Hon’ble M.P. High Court in Birla Gwalior Pvt. Ltd. 44 ITR 847 (M.P.) holding that it is not necessary to show for the purposes of deduction under clause (iii) that the money borrowed was utilized for a particular branch of assessee’s business. Identical ratio was laid down by Hon’ble jurisdictional High Court in CIT vs Bombay Samachar Ltd 74 ITR 723 (Bom.) and Amma Bai Hajee Issa vs CIT 51 ITR 835 (Mad.) 2.6. The expression “for the purposes on business” is wider in scope than “for the purposes of earning income” (Madhav Prasad Jatia vs CIT (118 ITR 200)(SC) and L.M. Thappar vs CIT 173 ITR 577 (Cal.). Interest on borrowal is allowable as deduction only when the borrowals are used for the purpose of business. In S.A. Builders Ltd. vs CIT (supra), where holding company had a deep interest in its subsidiary and the holding company advances borrowed money to its subsidiary, the same was used by the subsidiary for business purposes, the holding company was held to be entitled to deduction of interest on its borrowed loans. The only condition is that it should be used for business purposes. The ratio laid down in CIT vs Motor General Finance Ltd. 272 ITR 550 (Del.) supports the case of the assessee. We find that the ratio laid down in CIT vs Reliance Utilities and Power Ltd (2009) 313 ITR 340 (Bom.), wherein, the assessee was having sufficient interest free funds of its own and apart from M/s Bhansali Bright Baras Pvt. Ltd. substantial share holder funds, it is presumed that investment in sister concern were made by the assessee out of interest free funds, thus, no part of interest on borrowings can be disallowed on the basis that investment were made out of interest bearing funds, supports the case of the assessee. Likewise, Hon’ble High Court in CIT vs HDFC Bank Ltd. (366 ITR 505) (Bom.), took identical view. It is noteworthy that while coming to a particular conclusion, the Hon’ble jurisdictional High Court, duly considered the decision in Reliance Utilities and Power Ltd. (supra) along with the case of American Express International Banking Corporation vs CIT (2002) 258 ITR 601, CIT vs M/s Lord Krishna Bank Ltd. (now merge with HDFC Bank Ltd.) order dated 04/07/2014 (ITA No.1079 of 2012). Identically, the Hon’ble High Court in HDFC Bank Ltd. vs DCIT (W.P. No.1753 of 2016) order dated 25/02/2016 in para 11 (a) observed as under:-

One more aspect which needs to be adverted to and that is a decision would be considered to be a binding precedent only if it deals with/decides an issue which is subject matter of consideration/decision before a coordinate or subordinate court. It is axiomatic that a decision cannot be relied upon in support of the proposition that it did not decide. (Mittal Engineering v. Coll,of Central Excise 1997 (1)SCC 203).Therefore it is only the ratio decidendi i.e. the principle of law that decides the dispute which can be relied upon as precedent and not any obiter dictum or casual observations. (Girnar Tea vs. State of Maharashtra 2007(7) SCC 555 and Shin Estu Chemical Co. Ltd v. Aksh opticfibre Ltd. 2005 (7) SCC 234). Keeping the aforesaid position of law in mind, we shall now examine the impugned order of the Tribunal. The issue before the Tribunal as raised by the petitioner was that Section 14A would have no application to disallow interest expenditure on fund borrowed in respect of the tax free returns on the securities for the following two reasons: The petitioner possessed of sufficient interest free

M/s Bhansali Bright Baras Pvt. Ltd. funds of Rs.2153 crores against the investment in tax free securities of Rs. 52.05 crores. Consequently, there is a presumption that the investment which has been made in the tax free securities has come out of the interest free funds available with the petitioner. This is so as it been held by this Court in the petitioner’s own case for an earlier AY being HDFC Bank Ltd. In any event, the tax free investments in securities were the petitioner’s stock in trade. Consequently, there would be no occasion to invoke Section 14A as held by this Court in India Advantage Securities Ltd. wherein the Revenue’s appeal from the order of the Tribunal was dismissed, to contend that no disallowance can be under Section 14A in respect of exempted Income arising from stock in trade. One more fact which must be emphasized is that merely because a decision has been cited before the Court and a reference to that has been made in the order of the Court such as in the case of Godrej and Boyce Manufacturing Co. Ltd. reference was made to CIT Vs. Reliance Utilities and Power Ltd. 313 ITR 340 by itself would not lead to the conclusion that Reliance Utilities and Power Ltd. been considered and the opinion on the same been rendered in the case of Godrej and Boyce Manufacturing Co. Ltd. The test to decide whether or not two decisions are in conflict with each other is to first determine the ratio of both the cases and if the ratio in both cases are in conflict to each other, then alone, can it be said that the two decisions are in conflict. We find that no such exercise has been done in current case. It is clear that for the first time in the case of HDFC Bank Ltd., this court took a view that the presumption which has been laid down in Reliance Utilities and Power Ltd. with regard to investment in tax free securities coming out of assessee’s own funds in case the same are in excess of the investment made in the securities applies, when applying sec.14A. Thus decision of this court in HDFC Bank Ltd. for the first time on 23rd July,2014 has settled the issue by holding that the test or presumption as held by the court in Reliance Utilities and Power Ltd. would apply while considering the application of sec.14A. The above decision has also been accepted by the revenue inasmuch no appeal has been filed against this order in apex court. Therefore the issue which arose for consideration before the tribunal had not been decided by this court in Godrej and Boyce Manufacturing Ltd. 328 ITR 81. It arose and was so decided for the first time by this court in HDFC Bank Ltd. Thus there is no conflict as sought to be made out of the order. Thus the order of tribunal has proceeded on a fundamentally erroneous basis. Considering the factual matrix and in the light of the foregoing discussion, we found that the assessee was having sufficient funds, which were utilized for business purposes for making investment. The assessee generated surplus funds from operation during the year and the same were M/s Bhansali Bright Baras Pvt. Ltd. used for expansion of business and were accounted for. No funds were raised on short term basis, which were utilized for making long term investment as the assessee either was having or generated surplus funds, thus, we allow the appeal of the assessee. Finally, the appeal of the assessee is allowed. This Order was pronounced in the open court in the presence of ld. representatives of both sides at the conclusion of the hearing on 11/01/2017.