Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, DELHI BENCH “C” NEW DELHI
Before: SHRI I.C. SUDHIR & SHRI L.P. SAHU
ORDER
PER I.C. SUDHIR: JUDICIAL MEMBER The assessee has questioned first appellate order on the following grounds: 1. That the Learned CIT(Appeals) has erred in law and on facts in upholding the disallowance under sec. 14A read with Rule 8D of Rs.1,22,48,177 by merely giving a relief of Rs.4,95,635 and directing the Assessing Officer to recomputed the disallowance under sec. 14A read with Rule 8D. 1.1 That while upholding the aforesaid disallowance, the Learned CIT(Appeals) has overlooked that, the assessee had computed disallowance of Rs.40,23,829 under section 14A read with Rule8D and as such, disallowance sustained in disregard of the claim of the appellant is contrary to law and, hence untenable. In fact, even the learned Assessing Officer has overlooked such 2 computation of disallowance, while making the disallowance of Rs.1,22,48,177 in the order of assessment. 1.2 That the Learned CIT(Appeals) further failed to appreciate the fact that assessee company maintains accounts separately for each division and such interest paid on term loans of Textile division was purchase of substantial machinery, the same was not an interest within the scope of Rule 8D(2)(ii) of the I.T. Rules. 1.3 That, mere fact that there was a common bank account could not be a ground to assume and, conclude that interest of Rs.91,21,827 was not utilized for machinery and, used for making investment. The finding is factually and, legally incorrect and thus, unsustainable.
2. That the Learned CIT(Appeals) has also erred both in law and on facts in upholding a disallowance of Rs.26,25,571 out of interest paid and claimed as deduction under sec. 36(1)(iii) of the Act. 2.1 That the Learned CIT(Appeals) has failed to appreciate that interest free funds were far in excess of interest free advances and such advances were given to wholly owned subsidiary companies, it could not legally be validly concluded that, any disallowance was warranted. 2.2 That the disallowance sustained is otherwise arbitrary, misconceived and it not only overlooks judicial pronouncements of both Apex Court and, jurisdictional High Court and, but also factual position on record. In fact, each of the findings recorded below are contrary to law and facts and, therefore, untenable.
3 3. That the Learned CIT(Appeals) has grossly erred in law and on facts in sustaining a disallowance of Rs.4,59,225 on account of interest free advances given to others. 3.1 That the Learned CIT(Appeals) has ignored the fact that sums of Rs.1,20,00,000 given to Mr.Ashwin Chandok and Rs,1,33,00,000 to M/s. Aggarwal Developers Pvt. Ltd. were given for purchase of properties in state of Goa and Delhi for which required confirmations and statement of accounts were produced before the Assessing Officer, who in utter disregard of the documents on record made a disallowance of Rs.4,59,225 on account of interest free advances to others. 3.2 That the Learned CIT(Appeals) has further ignored the basic fact that the assessee furnished the confirmations and other documentary evidences to establish the fact that the advances were given in normal course of business and the Assessing Officer could have issued summons to the above said parties or could have asked the assessee to produce the above parties, which he failed to do so and made the above disallowance on mere surmises, conjecture and suspicion.
4. That the Learned CIT(Appeals) has erred in law and on facts in sustaining a disallowances of Rs.46,790 on account of loans and advances written off.
5. That the Learned CIT(Appeals) has further erred both in law and on facts and, on facts in not deleting the adjustment made to the book profit under sec. 115JB of the Act on account of disallowance of Rs.1,22,48,177 under sec. 14A read with Rule 8D of the Rules. Thus,
4 enhancement of book profit from Rs.50.14 lacs to Rs.172.62 lacs is entirely illegal, misconceived and, without jurisdiction.
Heard and considered the arguments advanced by the parties in view of orders of the authorities below, material available on record and the decisions relied upon.
3. Ground Nos. 1, 1.1 to 1.3: The relevant facts are that during the year in its return of income the assessee has declared loss of Rs.2,93,28,600. In the assessment framed under sec. 143(3) of the Act, the Assessing Officer had, however, assessed the income at Rs.1,72,62,244 consisting of disallowances on the above heads questioned in the appeal. 3.1 The assessee company is running a textile process house and a hospitality division along with investment in stock and securities. The Assessing Officer noted that a big part of income revolves around sale purchase of equity, dividend income and capital gain and that funds have been utilized to the great extent to earn this part of income. He was thus of the view that the assessee has incurred expenses to manage its investment which have yielded exempt income or which may yield exempt income. He noted that the assessee has failed to calculate such expenses in a reasonable manner to ascertain the true and correct picture of its income and expenses. The Assessing Officer accordingly computed such expenses at Rs.1,22,48,177 as per the provisions of sec. 14A read with Rule 8D. The 5 Learned CIT(Appeals) has, however, directed the Assessing Officer to rework the disallowance considering the interest of Rs.1,72,86,481 after subtracting Rs.4,95,635 i.e. the interest paid on car loan.
4. In support of the grounds, the Learned AR submitted that out of the total interest expenditure debited in the profit and loss account amounting to Rs.1,77,81,116, which should have been reduced by interest specifically with regard to car loan amounts to Rs.4,94,635 and interest paid on term loan amounting to Rs.91,22,827 pertaining to textile division where no investment was made and no exempt income was earned and as such interest portion amounting to Rs.81,63,654 should have only been taken for working out disallowance under Rule 8D(2)(iii) i.e. the interest portion which cannot be identified whether it has been gone to earn exempt income or taxable income. He submitted that for working out average value of investments under Rule 8D(2)(ii) and (iii) only those investments should have been considered which had yielded exempt/tax free income and not the entire investment, which has been done by the Assessing Officer. The Learned AR submitted that for working out average value of total assets under Rule 8D(2)(ii) only total of fixed and current assets should have been taken and not the net of total assets i.e. after subtracting total assets by current liability as done by the Assessing Officer.
6 4.1 The Learned AR submitted that the assessee revised the working under sec. 14A read with Rule 8D at Rs.64,11,091 as against Rs.40,23,829 earlier worked out before the Assessing Officer. The Learned CIT(Appeals) has, however, following the decision of Special Bench of the ITAT in the case of Chem Invest Ltd. vs. ITO – 124 TTJ 577 has held that entire investment has to be considered for working out disallowance under sec. 14A read with Rule 8D and there is no need to segregate investment on which exempt income has been earned and on which exempt income has not been earned. The Learned CIT(Appeals) directed that Rs.4,95,635 i.e. interest paid on car loan is to be excluded from interest portion while working out disallowance under Rule 8D(2)(ii), however, with respect to interest paid by Textile Division amounting to Rs.91,22,827, the Learned CIT(Appeals) held that since separate bank account have not been maintained hence the same cannot be excluded.
4.2 The Learned AR pointed out that disallowance under sec. 14A read with Rule 8D should have been restricted to Rs.64,11,091 i.e. as per the working given by the assessee. For clear understanding the approach of the authorities below as well as the submission of the assessee on the issue, the Learned AR has summarized the same as under:
“S. Date Event No. 1. - Assessee Company is running a textile process house and a hospitality division along with investments in stocks and securities.
Events w.r.t. disallowance of Rs. 1, 22, 48, 177/- under section 14A r.w. Rule 8D (Ground Nos. 1 to 1.3) 2. 29.09.2008 Return of Income filed by the assessee – appellant and no disallowance was made under section 14A of the Act, however, dividend claimed exempt under section 10(34) amounted to Rs. 89, 67, 440/- and under section 10(35) amounted to Rs. 72, 22, 420/- (kindly see page 2 to 3 of the paper book).
- AO vide order sheet entry directed assessee to produce working of disallowance under section 14A r.w.r. 8D (kindly see page 2, para 3.1 of AO’s order).
03.12.2010 Reply to AO, furnishing working of disallowance under section 14A r.w. Rule 8D amounting to Rs. 40, 23, 829/-, however, it was again reiterated by assessee – appellant that no expenditure has been incurred by assessee to earn exempt income (kindly see pages 135 too 177 of the paper book, relevant pages 135, 137 (working u/r 8D) and 138 (details of investments on which exempt income is earned) 180 (details of loans raised and its utilization in specified business assets)).
5. 27.12.2010 AO vide order under section 143 (3) made a disallowance of Rs. 1, 22, 48, 177/- u/s 14A r.w. Rule 8D, gist of AO’s findings are (kindly see pages 2 to 5 of AO’s order): Making investments and earning exempt income is not a passive activity and requires conscious management decisions. Followed Godrej & Boyce Mfg. Co. Ltd. vs DCIT in 2010 and ITAT Special Bench in the case of Chem Invest Ltd. vs ITO reported in 317 ITR 86. Disallowance u/s 14A r.w. rule 8D worked out at Rs. 1, 22, 48, 177/-. (kindly see pages 2 to 5 of AO’s order). 6. - Submissions filed before CIT (A) dated 17.11.2011, gist of such submissions are (kindly see pages 331 to 365 of the paper book): Appellant Company submitted that out of the total interest expenditure debited in the Profit & Loss Account amounting to Rs. 1, 77, 81, 116/-, which should have been reduced by interest specifically w.r.t. car loan amounts to Rs. 4, 94, 635/- and interest paid of term loan amounting to Rs. 91, 22, 827/- pertains to Textile Division where no investment was made and no exempt income was earned and as such, interest portion amounting to Rs. 81, 63, 654/- should have only been taken for working out disallowance under rule 8D(2)(iii) i.e. the interest portion which cannot be identified whether it has been gone to earn exempt income or taxable income (kindly see page 331 and 338 of the paper book). For working out average value of investments under rule 8D(2)(ii) and (iii) only those investments should have been considered which had yielded exempt/ tax free income and not the entire investments (which has been done by AO) (kindly see page 334 of the paper book). For working out average value of total assets under rule 8D(2)(ii) only total of fixed and current assets should have been taken and not the net of total assets i.e. after subtracting total assets by current liabilities (as done by AO) (kindly see page 334 of the paper book). Assessee – appellant revised the working under section 14A r.w. rule 8D at Rs. 64, 11, 091/- as against Rs. 40, 23, 829/- worked out before AO (kindly see pages 334 to 335 A of the paper book).
27.12.2011 CIT (A) findings on pages 4 to 5 of his order, para 5, gist of such findings are as below:
Following ITAT Delhi Special Bench Cheminvest Ltd. vs ITO reported in 124 TTJ 577, ld. CIT (A) held that entire investments have to be considered for working out disallowance under section 14A r.w. rule 8D and there is no need to segregate investments on which exempt income has been earned and on which exempt income has not been earned (kindly see pages 4 and 5 of the order). Interest on car loan amounting to Rs. 4, 95, 635/- was directed to be excluded to be excluded from interest portion while working out disallowance under rule 8D(2)(ii), however, with respect to interest paid by textile division amounting to Rs. 91, 22, 827/-, ld CIT (A) held that since separate bank accounts have not been maintained and hence, the same cannot be excluded. (Kindly see pages 4 to 5 of CIT (A)’s order)
4. That at the outset, the assessee – appellant would seek to make contentions in brief with respect to its Ground No. 1 to 1.3 which are with respect to wrong sustenance of disallowance under section 14A read with Rule 8D amounting to Rs. 1, 22, 48, 177/-, submission for the same are as follows:
4.1 That to begin with, disallowance under section 14A r.w. rule 8D should have been restricted to Rs. 64, 11, 091/- i.e. as per the working given by assessee – appellant (kindly see pages 334 to 335A of the paper book). In this regard, a comparative reading of disallowances made by assessee, enhanced by AO and sustained by CIT (A) should be made, as below:
Particulars Disallowed Disallowed Disallowance Sustained by by Assessee by AO vide by Assessee CIT (A) vide during order revised Order dated before CIT Assessment dated 27.12.2011 (A) proceedings 27.12.2010 Rule 8D (2) (ii) Nil Nil Nil Nil Rule 8D (2) (ii) in a case where the assessee See page See page 4 of See page 331 See page 4 has incurred 137 and 138 AO’s order and 335A of and 5 of CIT expenditure of paper paper book (A)’s order. by way of book. interest during A = Rs. 1, 77, the previous 81, 116/- A = Rs. 81, A = Rs. 1, 72, year which is A = Rs. 17, (took entire 63, 654/- 86, 481/- not directly 45, 471/- interest (took only (only gave attributable to (took net of expenditure that portion relief of Rs. any particular interest debited in of interest 4, 94, 635/- income or expenditure P&L Account which was i.e. for receipt, an and interest see page 9 of not interest paid amount receipt). paper book) identifiable computed in on car loan). as to accordance whether, the with the same was following incurred for formula, earning namely :— taxable B income or tax A free income). × B = Rs. 81, B = Rs. 81, C 17, 74, 486/- 17, 74, 486 Where amount of (took entire (took entire A = expenditure B = Rs. 67, investments investments by way of 49, 19, 096/- B = Rs. 67, as appearing as appearing interest (took 49, 19, 096/- in balance in balance other than average of (took sheet, see sheet, see the amount only those average of page 8 of page 9 of of interest investments only those paper book). paper book). included in from which investments clause (i) dividend/ from which incurred exempt dividend/ during the income has exempt previous C = Rs. 176, C = Rs. 176, been income has year ; 24, 76, 679/- 24, 76, 679/- received). been (took (took B = the average received). average average of value of value of total value of total investment, income assets as assets as C = Rs. 181, from which reduced by reduced by 45, 27, 933/- C = Rs. 181, does not or current current 45, 27, 933/- shall not liabilities and liabilities and (took form part provisions) provisions) average of (took of the total total value average of income, as of assets) total value of appearing A*B/C = Rs. A*B/C = Rs. assets) in the 81, 89, 455/- 79, 61, 935/- balance sheet of the assessee, on the first A*B/C = Rs. 30, 36, A*B/C = Rs. 6, 49, 233/- day and the 496/- last day of the previous year ; C = the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year ; Rule 8D (2) (iii) an amount equal to one-half per cent of the average of the value of investment, 0.5% of Rs. 0.5% of Rs. 0.5% of Rs. 0.5% of Rs. income from which 67, 49, 19, 81, 17, 44, 67, 49, 19, 81, 17, 44, does not or shall not 096/- = Rs. 486/- = Rs. 096/- = Rs. 486/- = Rs. form part of the 33, 74, 595/- 40, 58, 722/- 33, 74, 595/- 40, 58, 722/- total income, as (too entire (too entire (took only (took only appearing in the investments) investments) those those balance sheet of the investments investments assessee, on the first on which on which day and the last day of the previous year. exempt exempt income has income has been been earned) earned) Total disallowance Rs. 40, 23, 829/-Rs. 1, 22, 48, 177/- Rs. 64, 11, 091/-Rs. 1, 20, 20, 657/- u/s 14A r.w. rule 8D 4.2 That the basic reason of difference between assessee’s working and AO’s working is w.r.t. items A and B in Rule 8D(ii), which can be understood from below and submissions for the same has also been incorporate in the chart below:
Particulars As taken by assessee As taken by AO company and sustained by CIT (A) (Section 8D(2)(ii) Assessee has taken AO took this to be 81, 63, the entire 654/- (see page 331 interest of paper book). expenditur in a case where the e as Appellant Company assessee has debited in had submitted that incurred P&L 13 expenditure by out of the total Account way of interest interest expenditure amounting during the debited in the Profit to Rs. 1, previous year & Loss Account 77, 81, which is not amounting to Rs. 1, 116/-- as directly 77, 81, 116/-, interest relatable attributable to specifically w.r.t. car to any particular loan amounts to Rs. investmen income or 4, 94, 635/- and t, receipt, an interest paid of term however, amount loan amounting to Rs. the computed in 91, 22, 827/- learned accordance pertaining to Textile CIT (A) has with the Division where no reduced following investment was made the figure formula, namely :— and no exempt of Rs. 4, income was earned 94, 635/- B A should have been on × C reduced and as such, account of interest portion interest on Where amount of amounting to Rs. 81, car loan A = expenditure 63, 654/- should have and in by way of only been taken for doing so, interest working out both the other than disallowance under lower the amount rule 8D(2)(iii) i.e. the authorities of interest interest portion have included in clause (i) which cannot be ignoring incurred identified whether it the fact during the has been gone to that previous earn exempt income interest year ; or taxable income amounting (kindly see page 331 to Rs. 81, and 338 of the paper 63, 654/- book). should also have Here, the appellant been company would seek reduced to place its reliance for on the judgment of working Hon’ble Kolkata ITAT out in the case of ACIT vs interest Champion expenditur Commercial Ltd. e to be reported in 152 TTJ disallowed 241, wherein, Hon’ble under rule Bench has held that: 8D(2)(ii), as the said “Para 11 There is no expenditur dispute about e was working of this directly in method so far as rule relation to 8D(2)(i) and (iii) is textile concerned. It is only division, with regard to the wherein, computation under no rule 8D(2)(ii) that investmen the Assessing Officer t was and the CIT(A) have different approaches. made and as such, no This provision exempt admittedly deals with income a situation in which “ was the assessee has earned. incurred expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt” . Clearly, therefore, this sub clause seeks to allocate ‘common interest expenses’ to taxable income and tax exempt income. In other words, going by the plain wordings of rule 8D(2)(ii) what is sought to be allocated is “expenditure by way of interest………..which is not directly attributable to any particular income or receipt” and the only categories of income and receipt, so far as scheme of rule 8 D is concerned, are mutually exclusive categories of ’tax exempt income and receipt’ and ‘taxable income and receipt’. No other classification is germane to the context in which rule 8 D is set out, nor does the scheme of Section 14A leave any ambiguity about it.”
Thus, a look at the above case law, would clearly bring home the point that no disallowance can be made u/s 14A r.w. Rule 8D wherein the interest expenditure are directly relatable to any taxable income or receipt, as is the case of the appellant company with regards to interest expenditure of Rs. 91, 22, 827/- and thus, the same needs to be excluded while working out figure of interest under Rule 8D(2)(ii).
Rule 8D (2) (ii) Here the appellant AO took company took the in a case where the average of only those average of assessee has investments which total incurred had earned exempt investmen expenditure by income during the ts and the way of interest year and average of said stand during the all those investments of AO was previous year amounted to Rs. 67, also which is not 49, 19, 096/-. upheld by directly CIT (A) This stand of the attributable to following appellant company is any particular judgment supported by the income or of ITAT jurisdictional high receipt, an Delhi court in following amount special computed in cases: Bench in accordance (a) Commissioner the case of of with the Income-tax- IV vs. Cheminves following Holcim India (P.) t Ltd. vs formula, Ltd. (Del HC) reported in 272 CTR CIT namely :— 282. reported B (b) ACB India Ltd. vs A in 124 TTJ ACIT (Del HC) × 577. C reported in 615/2014. This stand B = the average (c) CIT vs Bharat Hotels of AO and of value of Ltd. (Delhi HC) in CIT (A) is investment, 536/Del/2015. contrary income to the from which judgment does not or of shall not form part jurisdictio of the total nal high income, as courts and appearing as such, in the only those balance investmen sheet of the ts should assessee, be allowed on the first to be day and the considered last day of on which the assessee – previous appellant year ; has earned exempt income. Rule 8D (2) (ii) Assessee – appellant Both took only average learned in a case where the value of total assets AO and CIT assessee has amounting to Rs. 181, (A) took 17 incurred 45, 27, 933/-, which is average expenditure by what has also been value of way of interest mentioned under rule total during the 8D(2)(ii) assets as previous year reduced which is not by current directly liabilities attributable to and any particular provisions income or at Rs. 176, receipt, an 24, 76, amount 679, which computed in is not the accordance mandate with the of rule following formula, 8D(2)(ii) namely :— and as such, only B A the × C average value of Where total C = the assets, as average taken by of total assessee – assets as appellant appearing should be in the taken for balance the sheet of purposes the of rule assessee, 8D(2)(ii). on the first day and the last day of the previous year ; Rule 8D (2) (iii) Here the appellant AO took company took the an amount equal to average of only those average of one-half per cent of investments which total the average of the had earned exempt investmen value of investment, income from which income during the ts and the does not or shall not year and average of said stand form part of the total all those investments of AO was income, as appearing amounted to Rs. 67, also in the balance sheet 49, 19, 096/-. upheld by of the assessee, on CIT (A) This stand of the the first day and the following appellant company is last day of the judgment previous year supported by the of ITAT jurisdictional high Delhi court in following special cases: Bench in (d) Commissioner the case of of Income-tax- IV vs. Cheminves Holcim India (P.) t Ltd. vs Ltd. (Del HC) reported in 272 CTR CIT 282. reported (e) ACB India Ltd. vs in 124 TTJ ACIT (Del HC) 577. reported in 374 ITR 108. This stand (f) CIT vs Bharat Hotels of AO and Ltd. (Delhi HC) in CIT (A) is contrary 536/Del/2015. to the judgment of jurisdictio nal high courts and as such, only those investmen ts should be allowed to be considered on which assessee – appellant has earned exempt income.
4.3 The Learned AR placed reliance on the following decisions: i) CIT vs. Holcim India P. Ltd. – and 299/2014, decision dated 5.9.2014 (Del.); ii) ACB India Ltd. vs. ACIT – ITA No. 615/2014 – decision dated 24.3.2015 (Del.); iii) Quippo Telecom Infrastructure Ltd. vs. ACIT – ITA No. 4931/Del/2010 (A.Y. 2007-08) – order dated 18.2.2011; iv) Integrated Data Bases India Ltd. vs. DCIT – ITA No. 4582/Del/2013 (A.Y. 2009-10)- order dated 6.2.2015.
4.4 The Learned AR submitted further that the Assessing Officer has invoked the provisions under section 14A read with Rule 8D without recording his comments adversely on the working of the disallowance made under the above provisions furnished by the assessee. Thus, on the sole ground, the disallowance made by the Assessing Officer is not maintainable. In this regard, he placed reliance on the following decisions: i) CIT v Taikisha Engineering India Ltd. 370 ITR 338(Del.); ii) Joint Investment (P) Ltd. vs. CIT - 233 Taxmann 117 (Del.); & iii) Maxopp Investment Ltd. vs. CIT - 347 ITR 272 (Del.);
The Learned Senior DR on the other hand tried to justify the first appellate order on the issue. He submitted that it appears from the very 20 assessment order that the Assessing Officer was not satisfied with the working of disallowance of expenses under sec. 14A read with Rule 8D made by the assessee. Sizeable overdraft was there to support the existence of borrowed funds. As per the balance sheet, loan and overdraft were increased. No such disallowance was made by the Assessing Officer in earlier years does not mean that the Assessing Officer is prevented to act differently on the basis of facts of the case on the issue during the year before him. He submitted that Rule 8D(i)(ii) prescribes as to what type of investment is to be considered. He placed reliance in the case of Cam Invest Ltd. vs. ITO & Ors. – (A.Y.2002-03) and 2004-05 (order dated 05.08.2009 (SB).
We find that the Assessing Officer was not satisfied with the explanation of the assessee that out of the total interest expenditure debited in the profit and loss account amounting to Rs.1,77,81,116, interest specifically with regard to car loan amounting to Rs.4,94,634 and interest paid of term loan amounting to Rs.91,22,827 pertained to textile division where no investment was made and no exempt income was earned should have been reduced and as such interest portion amounting to Rs.81,63,654 should have only been taken for working out disallowance under Rule 21 8D(2)(iii). The Assessing Officer took the entire interest expenditure as debited in profit and loss account amounting to Rs.1,77,81,116 as relatable to investment. The Learned CIT(Appeals), however, has reduced the figure of Rs.4,94,635 on account of interest on car loan. Both the authorities below have ignored the submission of the assessee that interest amounting to Rs.81,63,654 should also have been reduced for working out interest expenditure to be disallowed under Rule 8D(2)(ii) as the said expenditure was directly in relation to textile division, wherein no investment was made and as such no exempt income was earned. In its recent decision, the Hon'ble jurisdictional High Court of Delhi in the case of CIT vs. Taikisha Engineering India Ltd. has been pleased to hold that (i) sub-rule (2) of rule 8D specifically prescribes the mode and method for computing the disallowance under sec. 14A. Thus, the interpretation of clause (ii) to sub- rule (2) of rule 8D by the Commissioner (Appeals) and the Tribunal was not sustainable. Clause (ii) expressly states that where the assessee has incurred expenditure by way of interest in the previous year and the interest paid is not directly attributable to any particulars income or receipt then the formula prescribed would apply. Under clause (ii) of Rule 8D(2), the Assessing Officer is required to examine whether the assessee has incurred expenditure by way of interest in the previous year and, secondly whether the interest 22 paid was directly attributable to a particular income or receipt. In case the interest paid was directly attributable to any particular income or receipt, then the interest on loan amount to this extent or in entirety, as the case may be, has to be excluded for making computation as per the formula prescribed. Pertinently, the amount to be disallowed as expenditure relatable to exempt income, under sub-rule (2) is the aggregate of the amount under clause (i), clause (ii) and clause (iii). Clause (i) relates to direct expenditure relating to income forming part of the total income and under clause (iii) an amount equal to 0.05 per cent. Of the average amount of value of investment, appearing in the balance-sheet on the first day and the last day of the assessee has to be disallowed. The Assessing Officer has taken the average of total investment which has been upheld by the Learned CIT(Appeals) following the decision of Special Bench of the ITAT in the case of Cam Invest Ltd. vs. CIT-124 TTJ 577 (SB) (Del.). This stand of the authorities below is contrary to the judgment of the Hon'ble jurisdictional High Court of Delhi in the cases of CIT vs. Holcim India (P) Ltd. (supra), ACB India Ltd. Vs. ACIT (supra) and CIT vs. Bharat Hotels Ltd. (supra) holding that only those investments should be allowed to be considered on which assessee has earned income. We agree with the contention of the Learned AR that only average value of total assets is to be taken as per Rule 23 8D(2)(ii). On the contrary, the authorities below have taken average value of total assets as reduced by current liability, which is contrary to the provisions laid down under Rule 8D(2)(ii). We thus find that the working of the disallowance under sec. 14A read with Rule 8D at Rs. 64,11,091 is correct. As per the provisions laid down under sec. 14A and Rule 8D and the decisions relied upon, as discussed above, the assessee has rightly reduced interest with regard to car loan amounting to Rs.4,94,635 and interest paid of term loan amounting to Rs.91,22,827 pertaining to textile division (where no investment was made and no exempt income was earned) out of the total interest expenditure debited in the profit and loss account amounting to Rs.1,77,81,116. As such interest portion amounting to Rs.81,63,654 should have only been taken for working out disallowance under Rule 8D(2)(iii) i.e. the interest portion which cannot be identified whether it had been gone to earn exempt income or taxable income. We also concur with the submission of the Learned AR that for working out average value of investment under Rule 8D(2)(ii)and (iii) only those investments should have been considered which have yielded exempt/tax free income and not the entire investment (as it has been done by the A.O.). Again for working out average value of total assets under Rule 8D(2)(ii), we agree with the submissions of the Learned AR that only total of fixed and current assets should have been taken and not 24 the net of total assets i.e. after subtracting total assets by current liability as done by the Assessing Officer. We thus find that stand taken by the authorities below in working out the disallowance is contrary to the provisions laid down under sec. 14A read with Rule 8D and the ratio laid down by the above cited decisions by the Learned AR. We thus while setting aside orders of the authorities below in this regard direct the Assessing Officer to delete the disallowance upheld by the Learned CIT(Appeals).The ground No.1, 1.1, 1.2 and 1.3 are accordingly allowed.
7. Ground Nos. 2, 2.1 and 2.2: In these grounds, sustaining of disallowance of Rs.26,25,571 out of interest paid and claimed as deduction under sec. 36(1)(iii) of the Act has been questioned.
The relevant facts are that the assessee had advanced various amounts to its subsidiary companies. The authorities below have made and sustained the disallowance in question on the basis that assessee was having a mixed fund and they could not show that the advances made were through only known interest bearing funds. The authorities below were also not satisfied that the loans given to the subsidiaries were for business expediency.
25 9. Before the ITAT, the Learned AR submitted that the amount in question was advanced by the assessee to its subsidiary companies out of its own funds. In support, the assessee has furnished balance sheet of the assessee company showing that the share capital of assessee company was Rs.5,34,00,000 and the result and surplus were Rs.1,51,17,98,030. Thus, the total interest free funds available with the assessee company was Rs.1,56,51,98,030. He submitted that the assessee had also furnished the details of advances given to its subsidiary companies enclosing with account of such company since 01.04.2003. Perusal of the same made it clear that most of the advances were given in the previous years and not in the year under appeal. The Learned AR submitted further that the assessee had also furnished details of loan amounts taken by it to support its explanation that total of Rs.1,47,00,000 loan was raised during the year and total amount of interest paid for the loans paid during the year was only Rs.52,75,000.
The Learned AR submitted that the chart furnished showing year-wise amount receivable from wholly owned subsidiary companies was also enclosed, perusal of which would show that amounts of Rs.26,17,26,062 was receivable as on 31.3.2008. The amounts advanced during the year was Rs.16,71,896 only. He submitted further that no such disallowance was 26 made in any year prior to the year under appeal. He placed reliance on the following decision: i) CIT vs. Dalmia Cement Bharat Ltd. (2009) – 183 Taxman 422 (Del.); ii) CIT vs. South India Corporation (Agencies) Ltd. 209 CTR (Mad.) 233; iii) CIT vs. Stery Sheets Ltd. (2007) – 106 TTJ 460 (Del.).
The Learned Senior DR on the other hand tried to justify the orders of the authorities below.
Having gone through the above cited decisions, we fully concur with the contention of the Learned AR that in case of availability of interest free funds with an assessee, the nature of user of funds is the absolute option of the assessee. As discussed above, the assessee had furnished sufficient evidence before the authorities below that it was having interest free funds of Rs.1,56,51,98,030 out of which it had made advance of Rs.2,626.66 lacs to its subsidiary companies. The contention of the assessee in this regard remained that no such disallowance was made in earlier assessment years right from 2003-04 and such advances made by the assessee have been accepted by the Assessing Officer as meant for business purposes. In this regard, the Learned AR has referred page Nos. 70, 80, 139, 275 and 301 of 27 the paper book which are copies of submissions made before the authorities below. In these submissions made before the authorities below, the assessee has filed its balance sheet showing that it was having its own funds of more than Rs.156 crores out of which loans of slightly more than Rs.40 crores were advanced including loans to subsidiary companies. It was contended that no fresh loan was advanced by the assessee to RTC Restaurant India Ltd. during the year under consideration. 12.1 Regarding two major advances given to (i) Shri Ashwin Chandok for Rs.1,20,00,000 and No.(ii) Aggarwal Developers for Rs.1,33,00,000 for the business purposes, the Assessing Officer was thus not justified in making disallowance of Rs.4,69,225 against such advances made interest free by the assessee to different persons except its subsidiary companies. The submission of the Learned AR remained that before authorities below, the assessee had submitted the reasons for making such interest free advances by the assessee made available at Pages Nos. 276 and 277 of the Act. In this regard, it was submitted that Shri Aswin Chandok had made a representation about real estate opportunities in the state of Goa and more particularly around the city of Panjim for commercial and residential complexes. He suggested that assessee could advance in a sum of Rs.1.25 crores so that he could utilize the same on behalf of the assessee company for providing 28 security deposit, earnest money, advances etc. It was also decided that Mr. Chandok would keep the company posted on a monthly basis on such opportunity and in case of finalization of any proposition, immediate contact would be established to discuss and evaluate the same. Likewise, Mr. Aggarwal Developers were advanced money with the objective that they were to identify tracts of land, negotiate with the farmers, investigate title of land, sign MOU for purchase of land from farmers, consolidate all such purchases and resale the said land to prospective builders in that area. It was submitted that as a normal trade practice in purchase of land, certain sum of money is given as advance on signing of MOU, with the seller agreeing to recover the balance payment within a period of three to six months. It was submitted that due poor and uncertain market condition in the trade, it was decided to go slow on this arrangement and the company received back a sum of Rs.78 lacs vide cheque No. 048517 dated 18.6.2010 drawn on Standard Chartered Bank. The Learned AR has referred page Nos. 237 to 241, 271, 276 to 280 of the paper book.
Having gone through the decisions relied upon by the Learned AR, we concur with the contention of the Learned AR that in case of availability of sufficient interest free fund with an assessee, such assessee is at liberty to 29 make advances of such available fund without charging interest in the manner the assessee deems fit in the interest of its business. Without verifying the above explanation of the assessee filed in detail before the authorities below, the Assessing Officer was not justified in making disallowances questioned in ground Nos. 2 to 3.2 of the appeal i.e. Rs.26,25,571 towards the advances made to its subsidiary companies and Rs.4,59,225 towards the advances given to others under sec. 36(1)(iii) of the Act. Such disallowances cannot be sustained in absence of the finding of the Assessing Officer that the claimed interest free funds were not available with the assessee and the very stated purpose for which the said interest free advance was made by the assessee to its subsidiary companies and others found false. The disallowances in question are thus directed to be deleted. Ground Nos. 2 to 2.2 are accordingly allowed.
Ground No.4 has not been pressed by the Learned AR, hence, the same is rejected as such.
Ground No.5: In this ground, the action of the Learned CIT(Appeals) in not deleting the adjustment made to the book profit under sec. 115JB of the Act on account of disallowance of Rs.1,22,48,177 under sec. 14A of the 30 Act read with Rule 8D of the Rules. The contention of the assessee remained that such enhancement of book profit from Rs.50.14 lacs to Rs.172.62 lacs is entirely illegal. Since we have deleted the disallowance made under sec. 14A read with Rule 8D questioned in ground Nos. 1, 1.1, 1.2 and 1.3 hereinabove, the issue raised in ground No.5 has become infructuous. This ground is disposed off accordingly.