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आदेश / Order
Per Sanjay Garg, Judicial Member:
The present appeal has been preferred by the assessee against the order dated 27.3.2018 of the Commissioner of Income Tax (Appeals)-2, Chandigarh [hereinafter referred to as CIT(A)].
The assessee has taken the following effective ground of appeal:- “On the facts and circumstances of the case the Ld. CIT(A) has erred in having upheld the proportionate disallowance of Rs. 5,60,997/- made by the Ld. Assessing officer, out of interest on borrowed capital claimed by the assessee, by taking resort the provisions of section 36(1)(iii) of the Income Tax Act.”
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The sole issue involved in this appeal is in relation to the notional
disallowance of interest expenditure u/s 36(i)(iii) of the Income-tax Act,
1961 (in short 'the Act'). The undisputed fact in this case is that the
assessee was possessed of sufficient own funds to meet the non-current
investments. Further, that there was no direct correlation between the
funds borrowed and the investments made by the assessee. However, Ld.
CIT(A) confirmed the impugned disallowance made by the Assessing
officer u/s 36(i)(iii) of the Act while relying upon the decision of the
Hon'ble Jurisdictional High Court in the case of ‘M/s Avon Cycles Ltd.’
in ITA No. 277 of 2013 dated 20.8.2014, wherein, the Hon'ble High Court
upheld the disallowance of interest expenditure in case of funds utilized by
the assessee for investment being mixed funds. The Ld. CIT(A) further
observed that the aforesaid decision of the Hon'ble Punjab & Haryana
High Court in the case of ‘Avon Cycles Ltd.’ (supra) further came into
consideration before the Hon'ble supreme Court in a group of cases with
the lead case in Maxoop Investment Ltd. dated 12.2.2018, wherein, the
decision of the Hon'ble High Court in the case of ‘Avon Cycles Ltd.’,
(supra) have been affirmed by the Hon'ble Supreme court observing as
under;-
“Taking note of the aforesaid finding of fact the High Court has dismissed the appeal of the assessee observing as under:-
“In the present case after examining the balance sheet of the assessee, a finding of fact has been recorded that the funds utilized by the assessee being mixed funds, therefore, the interest paid by the assessee is also an interest on the investment made. Such being as findings of fact, we do not find any substantial question of law arises for consideration of this court.
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After going through the records and applying the principle of apportionment which is held to be applicable in such cases awe do not find any merit in the Civil appeal No.1423 of 2015 which is accordingly dismissed.”
In view of the above, the Ld. CIT(A) confirmed the addition so made by
the Assessing officer.
We have heard the rival submissions and have also gone through the
record. In this case, there is no rebuttal of the factual position that the
assessee was possessed of own sufficient funds to meet the investment in
question. So far as the reliance of the Ld. CIT(A) on the decision of the
Jurisdictional High Court in the case of ‘Avon Cycles Ltd Vs. CIT’
(supra) which has been further affirmed by the Hon'ble Supreme Court
while deciding bunch of cases with the lead case being ‘Maxoppp
Investment Ltd Vs. CIT’ (supra) is concerned, the issue has come into
consideration before the Coordinate Bench of the Tribunal in the case of
‘ACIT Vs. Janak Global Resources Pvt Ltd’ ITA No. 470/Chd/2018 order
dated 16.10.2018 , wherein, the issue has been decided in favour of the
assessee also considering the decision of the Hon'ble Apex Court in the
case of ‘Hero Cycles Vs. CIT’ 379 ITR 347 (SC). The relevant part of the
order of the Tribunal in ‘ACIT Vs. Janak Global Resources Pvt Ltd’
(supra) dated 16.10.2018, for the sake of completeness is reproduced
herein under:-
“7. The Ld. counsel for assessee, on the other hand, vehemently opposed this contention of the Ld. DR. The Ld. counsel for assessee pointed out that the decision rendered in the case of Avon Cycles Ltd. (supra) was on a different set of facts and the proposition laid down therein was to be
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read in the context of the facts relating to it. It was contended that before the Hon'ble Supreme Court the only fact before the Hon’ble Court was that there were mixed funds available with the assessee and in the light of this limited fact, the Hon'ble Supreme Court upheld the disallowance of interest u/s 14A of the Act after holding in the lead case i.e. Maxopp Investment Ltd. (supra) that the apportionment rule was to be applied for the purpose of making disallowance of expenses incurred in relation to earning exempt income,as per section 14A of the Act. The contention of the Ld. counsel for assessee was that it was neither submitted to the court that sufficient own interest free funds were available, nor were any arguments made raising the presumption that would arise in such case. It was pointed out that even the question before the Hon’ble Court was not relating to the correctness of the presumption theory and therefore, also the disallowance u/s 14A was not dealt with by the Hon'ble Supreme Court in this context. It was contended therefore, that the decision rendered in the case of Avon Cycles Ltd. (supra) had to be read in the restricted sense, of meaning that where the fact situation revealed the limited fact of mixed funds available with the assessee, disallowance u/s 14A was warranted. The Ld. counsel for assessee thereafter contended that in fact the Hon'ble Apex Court, in the case of Hero Cycles Pvt. Ltd. Vs. CIT, 379 ITR 347(SC), had upheld the presumption theory of utilization of own interest free funds for making non business advances where sufficiency of such funds is adequately demonstrated. It was pointed out that the Hon’ble Supreme Court in the said case ,on the issue of disallowance of interest u/s 36(1)(iii) on advances made to directors had held that where the assessee had sufficient surpluses it could have utilized those funds for giving advances to its directors.
The Ld. counsel for assessee stated that it is clearly evident from the above that the Hon'ble Apex Court had upheld the proposition that where sufficient own interest free funds are available no disallowance of interest u/s 36(1)(iii) of the Act was warranted. Our attention was also drawn to various decisions of the Hon'ble Jurisdictional High Court which had also upheld the presumption theory as under:
“1. Bright Enterprises P. Ltd. vs. CIT, (2016) 381 ITR 107 (P&H)
CIT vs. Kapsons Associates, (2015) 381 ITR 204 (P&H)
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Gurdas Garg vs. CIT, ITA No.413/2014 dated16.7.2015 (P&H),
Pr.CIT vs. M/s. Malhotra Book Depot, ITA No.31 of 2017 dated 23.02.2017 (P&H)
Pr.CIT vs. M/s. Holy Faith International Pvt. Ltd., ITA No.87 of 2017 dated 24.07.2017 (P&H)
Trident Infotech Corporation Ltd. vs. CIT & Anr, (2016) 385 ITR 335 (P&H)
CIT vs. Max India Ltd., (2017) 398 ITR 209 (P&H) ”
“9. We have carefully considered the contentions of both the parties and have also gone through various case laws referred to before us. The issue to be adjudicated, as narrowed down from the arguments made before us by both the parties, is whether in relation to disallowance of interest made u/s.36(1)(iii) of the Act, the proposition laid down by the Hon'ble Jurisdictional High Court in a number of decisions, that where the assessee had sufficient own interest free funds along with interest bearing funds and had made or advanced sums for non business purposes without charging any interest, the presumption that would arise is that the investment had been made out of interest free funds generated or available with the assessee, is still a good law in the light of the decision of the Hon'ble Apex Court in the case of Hero Cycles Ltd. (supra).
We are in agreement with the contention of the Ld. counsel for assessee. Undoubtedly, proposition of law laid down by courts have to be read in the context of the facts before them and the issue dealt with by them. Reliance should not be placed on a decision without discussing how the factual situation fits in with the factual situation of the decision on which reliance is placed. The Hon’ble High Court of Bombay in the case of CIT vs Sudhir, 214 ITR 154 (Bom) has observed that a case is an authority for what it actually decides and not what may come to follow from some observation which may find place therein. The Hon’ble High court observed as under:
“It is well-settled that the ratio of a decision alone is binding, because a case is only an authority for what it actually decides and not what may come to follow from some observations which find place therein. The ratio of the decision has to be distinguished from propositions assumed by the Court to be correct for the purpose of disposing of the particular case, because it is the ratio and not the
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propositions which are relevant and binding. It is, therefore, not proper to regard every word, clause or sentence occurring in a judgment of the Court as containing a full exposition of the law. Judgments of the Courts should not be construed as statutes. They must be read as a whole and observations made therein should be considered in the light of the facts and circumstances of that case and the questions before the Court. A decision of the Court takes its colour from the questions involved in the case in which it is rendered.”
In the case of CIT vs Sun Engineering Works Pvt. Ltd. 198 ITR 297(SC), the Hon’ble Supreme Court observed that Judgements must be read as a whole and observations in judgements should be considered in the context in which they are made and in the light of the question that were before the court:
“It is neither desirable nor permissible to pick out a word or a sentence from the judgement of the Supreme Court divorced from the context of the question under consideration and treat it to be the complete law declared by the court. The judgement must be read as a whole and the observation from the judgement have to be considered in the light of the questions which were before the court.A decision of the Supreme Court takes its colour from the question involved in the case in which it is rendered and while applying the decision to a later case,courts must carefully try to ascertain the true principle laid down by the decision.”
The Hon’ble apex court in the case of Goodyear India Ltd & Ors vs State of Haryana & Another and State of Maharashtra & Another reported in 188 ITR 402(1991) have held that a decision on a question that has not been argued cannot be treated as a precedent. The Hon’ble Kerala High Court in the case of CIT vs K. Ramakrishnan (1993) 202 ITR 997 held that a precedent is an authority only for what it actually decides and not for what may remotely or even logically follow from it.
Having said so we find that in the case of Avon Cycles Ltd. (supra) the issue was relating to disallowance of expenditure u/s 14A of the Act. The Hon'ble Apex Court dealing with the bunch of cases relating to said issue, took up the case of Maxopp Investment Ltd. (supra) as the lead case and proceeded to answer the question which arose under various circumstances before them that whether the investment made in shares and stocks for the purpose of retaining the control over the company or as stock-in-trade and from which exempt income by way of dividend was generated would attract the provisions of section 14A of the
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Act, calling for disallowance of expenditure incurred in relation to earning the said dividend income and the question arose for the reason that it was the contention of the assessee, which had been upheld by various High Courts, that the dominant purpose for making the investment in the shares not being earning of dividend income, it called for no disallowance of expenditure u/s 14A of the Act. Answering this question the Hon'ble Supreme Court held that the dominant purpose test was irrelevant and the fact remaining that the exempt income had been earned which was attributable to the dividend income had to be disallowed and could not be treated as business expenditure. The Hon'ble Apex Court reaffirmed the theory of apportionment of expenditure between taxable and non taxable income laid down by it in the case of CIT Vs. Walfort Share & Stock Brokers Pvt. Ltd., 326 ITR 1. After holding so, the Hon'ble Apex Court dealt with the appeal filed in the case of Avon Cycles Ltd. (supra) and taking note that the fact in that case was that the funds utilized by the assessee were mixed funds, the Hon'ble Apex Court held that the principle of apportionment was to be applied and, therefore, dismissed the appeal of the assessee. The same is evident from a bare reading in the case of Maxopp Investment Ltd. (supra) and more specifically para 42 of the said order wherein the case of Avon Cycles Ltd. (supra) has been dealt with and which is reproduced again hereunder: 40. Civil Appeal No. 1423 of 2015 is filed by M/s. Avon Cycles Limited, Ludhiana, wherein the AO had invoked section 14A of the Act read with Rule 8D of the Rules and apportioned the expenditure. The CIT(A) had set aside the disallowance, which view was upturned by the ITAT in the following words: "...Admittedly the assessee had paid total interest of Rs.2.92 crores out of which interest paid on term loan raised for specific purpose totals to Rs.1.70 crores and balance interest paid by the assessee is Rs.1.21 crores. The funds utilized by the assessee being mixed funds and in view of the provisions of Rule 8D(2)(ii) of the Income Tax Rules the disallowance is confirmed at Rs.10,49,851/-, we find no merit in the ad hoc disallowance made by the CIT (Appeals) Rs.5,00,000/-. Consequently, ground of appeal raised by the Revenue is partly allowed and ground raised by the assessee in cross-objection is allowed..." Taking note of the aforesaid finding of fact, the High Court has dismissed the appeal of the assessee observing as under: "In the present case, after examining the balance-sheet of the assessee, a finding of fact has been recorded that the funds utilized by the assessee being mixed funds, therefore, the interest paid by the assessee is also an interest on the investments made. Such being a finding of
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fact, we do not find that any substantial question of law arises for consideration of this Court. After going through the records and applying the principle of apportionment, which is held to be applicable in such cases, we do not find any merit in Civil Appeal No. 1423 of 2015, which is accordingly dismissed.”
It is evident from the above that the issue before the Hon'ble Apex Court was not whether the presumption theory would apply or not where there are mixed funds and the assessee had demonstrated availability of sufficient own funds for making the investments . No discussion on this aspect has also been done by the Hon'ble Apex Court and merely noting that the assessee had utilized mixed funds, the Hon'ble Apex Court held that the principle of apportionment would apply. Without any discussion or deliberation on the presumption theory, the proposition laid down in the case of Avon Cycles Ltd. (supra) by the Hon'ble Apex Court has to be restricted to the extent of the issue before the Hon'ble Apex Court and facts before it and not beyond that. And on that basis the decision of the Hon'ble Supreme Court in the case of Avon Cycles Ltd. (supra) can be read only to the extent of upholding the principle of apportionment of expenses incurred in the context of the limited fact of mixed funds available with assessee and no further. The proposition laid down cannot be stretched even logically to address the fact situation where sufficient own interest free funds are available with assessee, which fact was not there before the Hon’ble Apex court in the case of Avon Cycles (supra), and to negate the presumption that the own funds were used for making the investment, which was neither the question raised before the apex court and therefore not addressed by it also.
Going further from here we find that the presumption theoory was upheld by the Hon'ble Supreme Court in the case of Hero Cycles Pvt. Ltd. (supra) wherein on the issue of disallowance of expenditure u/s.36(1)(iii) of the Act on interest free advance made to Directors, the Hon'ble Apex Court held that in view of the findings of fact that the assessee had sufficient credit balance in its bank account for making the impugned advances and had sufficient own interest free funds, the assessee company could in any case utilize those funds for giving advances to its Directors. The findings of the Hon'ble Apex Court at para 16 of this order to this effect are as under:
“16. Insofar as the loans to directors are concerned, it could not be disputed by the Revenue that the assessee had a credit balance in the bank account
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when the said advance of Rs.34 lakhs was given. Remarkably, as observed by the CIT(A) in his order, the company had reserve/surplus to the tune of almost Rs.15 crores and, therefore, the assessee company could in any case, utilise those funds for giving advance to its directors.”
It is evident from the above that the Hon'ble Apex Court had in very clear terms held that where sufficient own interest free funds are available with the assessee, the presumption arises that the assessee had utilised those funds for the purpose of making interest free non business advances. Thus in very clear terms the Hon'ble Apex Court in the case of Hero Cycles Pvt. Ltd. (supra) have upheld he presumption theory.
Considering both the judgments of the Hon'ble Apex Court and reading and interpreting them in the light of facts and the issue before the Hon'ble Apex Court we find that the judgments compliment each other. In the case of Avon Cycles Ltd. (supra) the Hon'ble Apex Court held that in the fact situation where mixed funds are utilized by the assessee, the disallowance of interest to the extent the funds are utilized for the purpose of non business advance is warranted. Going forward from there, the presumption theory would come into operation if in the case of mixed funds, the assessee is able to demonstrate/ establish availability of interest free funds equal to or more than interest free non business advances/investments thus raising the presumption that the same have been made out of the interest free funds of the assessee.
In view of the above, we hold that the decision of the Hon'ble Apex Court in the case of Avon Cycles Ltd. (supra) does not displace the presumption theory which has been upheld by the Hon'ble Apex Court in the case of Hero Cycles Pvt. Ltd. (supra) and the same still holds. In view of the above, since the Ld.CIT(Appeals), we find, has allowed the assessee’s appeal deleting the disallowance of interest made on finding that it had sufficient own interest free funds for making the investment, which fact has not been controverted by the Revenue, we see no reason to interfere in the order of the Ld. CIT(Appeals) and the ground raised by the Revenue, therefore, is dismissed.
Respectfully following the above decision, no disallowance us
36(1)(iii) is attached in this case in the light of the decision of the Hon'ble
Supreme Court in the case of Hero Cycles Pvt. Ltd. (supra). We, therefore,
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do not find any justification on the part of the lower authorities’ in making the impugned disallowance and the same is accordingly ordered to be deleted. In the result, the appeal of the assessee is hereby allowed. Order pronounced in the Open Court on 29.11.2018
Sd/- Sd/- ( बी , आर . आर . कुमार / B.R.R. KUMAR) (संजय गग� / SANJAY GARG ) लेखा सद�य/ Accountant Member �या�यक सद�य /Judicial Member
Dated : 29.11.2018 “आर.के.” आदेश क� ��त�ल�प अ�े�षत/ Copy of the order forwarded to : 1. अपीलाथ�/ The Appellant 2. ��यथ�/ The Respondent 3. आयकर आयु�त/ CIT 4. आयकर आयु�त (अपील)/ The CIT(A) 5. �वभागीय ��त�न�ध, आयकर अपील�य आ�धकरण, च�डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड� फाईल/ Guard File आदेशानुसार/ By order, सहायक पंजीकार/ Assistant Registrar