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Income Tax Appellate Tribunal, F Bench, Mumbai
Before: Shri Jason P. Boaz & Shri Sandeep Gosain
These five appeals by the assessee are directed against the orders of the CIT(A)-21, Mumbai dated 06.12.2010 for assessment years 2006-07 and 2007- 08; order of the CIT(A)-22, Mumbai dated 19.11.2010 for assessment years 2008-09; and orders of the CIT(A)-21, Mumbai for A.Y. 200910 dated 14.05.2012 and for A.Y. 2010-11 dated 15.05.2013. As these appeals had certain common/interconnected issues, they were heard together and are disposed off by way fo this combined order for the sake of convenience.
The facts of the case, briefly, are as under: - 2.1 The assessee is a company engaged in the business of export of processed meat and also trading/export of garments, vegetables, etc. For A.Y. 2006-07, the assessee filed its return of income on 28.11.1006 declaring total income of `1,10,89,117/-. The return was processed under section 143(1) of the Income Tax Act, 1961 (in short 'the Act') and the case 2 M/s. Fair Exports (India) P. Ltd. was subsequently taken up for scrutiny. The assessment was completed under section 143(3) of the Act vide order dated 15.12.2008 wherein the income under normal provisions was determined at `2,36,60,650/- due to various additions/disallowances and ‘Book Profits’ under section 155JB of the Act were computed at `60,14,740/-. On appeal the learned CIT(A) disposed off the assessee’s appeal vide the impugned order dated 06.12.2010 allowing the assessee partial relief. 2.2. For A.Y. 2007-08, the assessee filed its return of income on 11.11.2007 declaring total income of `1,27,50,940/-. The return was processed under section 143(1) of the Act and the case was subsequently taken up for scrutiny. The assessment was concluded under section 143(3) of the Act vide order dated 22.06.2009, wherein the assessee’s income, under normal provisions, was determined at `2,28,94,930/- in view of certain additions/disallowances and the ‘book profits’ under section 115JB of the Act were computed at `19,55,597/-. On appeal, the learned CIT(A) disposed off the assessee’s appeal vide the impugned order dated 06.12.2010 allowing the assessee partial relief. 2.3 For A.Y. 20009-10, the assessee filed its return of income on 29.09.2009 declaring total income of `2,7874,39,050/-. The return was processed under section 143(1) of the Act and the case was taken up for scrutiny. The assessment was completed under section 143(3) of the Act vide order dated 19.12.2011, wherein the income of the assessee, under normal provisions, was determined at `3,28,91,224/- in view of certain additions/disallowances and the ‘book profits’ under section 115JB were computed at `3,38,22,870/-. On appeal, the learned CIT(A) disposed off the assessee’s appeal vide the impugned order dated 14.05.2012 allowing the assessee partial relief. 2.4 For A.Y. 2008-09, the assessee filed its return of income on 30.09.2008 declaring total income of `1,78,39,410/-. The return was processed under section 143(1) of the Act and the case was subsequently taken up for scrutiny. The assessment was completed under section 143(3) of the Act vide order dated 17.03.2010 wherein the income of the assessee, 3 M/s. Fair Exports (India) P. Ltd. under normal provisions, was determined at `2,63,68,480/- in view of certain additions/disallowances to the returned income and the ‘book profit’ under section 115JB were computed at `2,08,82,194/-. On appeal, the learned CIT(A) disposed off the assessee’s appeal vide the impugned order dated 19.11.2010 allowing the assessee partial relief. 2.5 For A.Y. 2010-11, the assessee filed its return of income on 30.09.2010 declaring total income of `2,61,14,540/-. The return was processed under section 143(1) of the Act and the case was subsequently taken up for scrutiny. The assessment was concluded under section 143(3) of the Act vide order dated 26.04.2012, wherein the income of the assessee, under normal provisions, was determined at `2,73,59,010/- in view of certain additions/disallowances and the ‘book profit’ under section 115JB were computed at `2,25,74,599/-. On appeal, the learned CIT(A) disposed off the assessee’s appeal vide the impugned order dated 15.05.2013 allowing the assessee partial relief.
Aggrieved by the aforesaid orders of the CIT(A) for assessment year 2006-07 to 2010-11, the assessee has preferred these appeals raising the following grounds, which are extracted hereunder and will be disposed off as below. Assessee’s appeal in ITA No. 1880/Mum/2011 - for A.Y. 2006-07 3.1 For A.Y. 2006-07, the assessee has raised the following grounds of appeal: - “1(a) The learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of interest paid of Rs.65,80,910/- on term loan taken from Canara Bank for investment made in acquiring 100% shares of Amroon Foods Private Limited (Subsidiary Company). (b) The learned Commissioner of Income Tax (Appeals) erred in not appreciating the fact properly about the business advantage that was derived by the appellant company from investment made in shares of Amroon Foods Pvt. Ltd. and further erred in considering increase in export turnover of Amroon Foods Pvt. Ltd. in terms of time and not in terms of value. (c) The learned Commissioner of Income Tax (Appeals) erred in not treating the investment made in purchase of 100% shares of Amroon Foods Pvt. Ltd. with regard to commercial expediency.
4 M/s. Fair Exports (India) P. Ltd. (d) The learned Commissioner of Income Tax (Appeals) erred in not allowing interest paid under section 36(1)(iii) / 37(1) of the Act. (e) Without prejudice to the above, the learned Commissioner of Income Tax (Appeals) erred in not appreciating that section 14A of the Act is not applicable to the facts of the case. 2(a) The learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of interest paid of Rs.9,44,776/- out of interest paid as proportionate interest attributable to Capital work in progress and order of the learned Commissioner of Income Tax (Appeals) and learned Deputy Commissioner of Income Tax is based on incorrect findings and facts. (b) Without prejudice to the above, the learned Commissioner of Income Tax (Appeals) erred in not deducting interest paid on the term loans taken for investment in shares, other old term loan and term loans taken for purchase of Motor cars while computing the disallowance. (c) The learned Commissioner of Income Tax (Appeals) erred in not appreciating the fact of the case that interest free funds utilized for purchase of capital assets. 3 That orders of Learned Commissioner of Income Tax (Appeals) and learned Deputy Commissioner of Income Tax and additions made and confirmed therein are not sustainable on various legal and factual grounds.
4. The appellant craves leave to add, alter, modify, amplify, amend and vary the above grounds of appeal.” Assessee’s appeal in ITA No. 1881/Mum/2011 - for A.Y. 2007-08 3.2 In this appeal for A.Y. 2007-08, the assessee has raised the following grounds: - “1(a) The learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of interest paid of Rs.77,15,263/- on term loan taken from Canara Bank for investment made in acquiring 100% shares of Amroon Foods Private Limited (Subsidiary Company). (b) The learned Commissioner of Income Tax (Appeals) erred in not appreciating the fact properly about the business advantage that was derived by the appellant company from investment made in shares of Amroon Foods Pvt. Ltd. and further erred in considering increase in export turnover of Amroon Foods Pvt. Ltd. in terms of time and not in terms of value. (c) The learned Commissioner of Income Tax (Appeals) erred in not treating the investment made in purchase of 100% shares of Amroon Foods Pvt. Ltd. with regard to commercial expediency.
5 M/s. Fair Exports (India) P. Ltd. (d) The learned Commissioner of Income Tax (Appeals) erred in not allowing interest paid under section 36(1)(iii) / 37(1) of the Act. (e) Without prejudice to the above, the learned Commissioner of Income Tax (Appeals) erred in not appreciating that section 14A of the Act is not applicable to the facts of the case. 2(a) The learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of interest paid of Rs.15,72,987/- out of interest paid as proportionate interest attributable to Capital work in progress and order of the learned Commissioner of Income Tax (Appeals) and learned Deputy Commissioner of Income Tax is based on incorrect findings and facts. (b) Without prejudice to the above, the learned Commissioner of Income Tax (Appeals) erred in not deducting interest paid on the term loans taken for investment in shares, other old term loan and term loans taken for purchase of Motor cars while computing the disallowance. (c) The learned Commissioner of Income Tax (Appeals) erred in not appreciating the fact of the case that interest free funds utilized for purchase of capital assets. 3 That orders of Learned Commissioner of Income Tax (Appeals) and learned Deputy Commissioner of Income Tax and additions made and confirmed therein are not sustainable on various legal and factual grounds.
4. The appellant craves leave to add, alter, modify, amplify, amend and vary the above grounds of appeal.” Assessee’s appeal in ITA No. 899/Mum/2011 - for A.Y. 2008-08 3.3 In this appeal for A.Y. 2008-09, the assessee has raised the following grounds: - “1(a) The learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of interest paid of Rs.63,52,855/- on term loan taken from Canara Bank for investment made in acquiring 100% shares of Amroon Foods Private Limited (Subsidiary Company). (b) The learned Commissioner of Income Tax (Appeals) erred in not appreciating the fact properly about the business advantage that was derived by the appellant company from investment made in shares of Amroon Foods Pvt. Ltd. and further erred in considering increase in export turnover of Amroon Foods Pvt. Ltd. in terms of time and not in terms of value. (c) The learned Commissioner of Income Tax (Appeals) erred in not treating the investment made in purchase of 100% shares of Amroon Foods Pvt. Ltd. with regard to commercial expediency.
6 M/s. Fair Exports (India) P. Ltd. (d) The learned Commissioner of Income Tax (Appeals) erred in not allowing interest paid under section 36(1)(iii) / 37(1) of the Act. (e) Without prejudice to the above, the learned Commissioner of Income Tax (Appeals) erred in not appreciating that section 14A of the Act is not applicable to the facts of the case. 2(a) The learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of interest paid of Rs.14,97,232/- out of interest paid as proportionate interest attributable to Capital work in progress and order of the learned Commissioner of Income Tax (Appeals) and learned Deputy Commissioner of Income Tax is based on incorrect findings and facts. (b) Without prejudice to the above, the learned Commissioner of Income Tax (Appeals) erred in not deducting interest paid on the term loans taken for investment in shares, other old term loan and term loans taken for purchase of Motor cars while computing the disallowance. (c) The learned Commissioner of Income Tax (Appeals) erred in not appreciating the fact of the case that interest free funds utilized for purchase of capital assets. 3 That orders of Learned Commissioner of Income Tax (Appeals) and learned Deputy Commissioner of Income Tax and additions made and confirmed therein are not sustainable on various legal and factual grounds.
4. The appellant craves leave to add, alter, modify, amplify, amend and vary the above grounds of appeal.” Assessee’s appeal in ITA No. 5378/Mum/2012 - for A.Y. 2009-10 3.4 In this appeal for A.Y. 2009-10, the assessee has raised the following grounds: - “1(a) The learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of interest paid of Rs.30,83,648/- on term loan taken from Canara Bank for investment made in acquiring 100% shares of Amroon Foods Private Limited (Subsidiary Company). (b) The learned Commissioner of Income Tax (Appeals) erred in not appreciating the fact properly about the business advantage that was derived by the appellant company from investment made in shares of Amroon Foods Pvt. Ltd. and further erred in considering increase in export turnover of Amroon Foods Pvt. Ltd. in terms of time and not in terms of value. (c) The learned Commissioner of Income Tax (Appeals) erred in not treating the investment made in purchase of 100% shares of Amroon Foods Pvt. Ltd. with regard to commercial expediency.
7 M/s. Fair Exports (India) P. Ltd. (d) The learned Commissioner of Income Tax (Appeals) erred in not allowing interest paid under section 36(1)(iii) / 37(1) of the Act. (e) Without prejudice to the above, the learned Commissioner of Income Tax (Appeals) erred in not appreciating that section 14A of the Act is not applicable to the facts of the case. 2(a) The learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of interest paid of Rs.7,02,546/- out of interest paid as proportionate interest attributable to Capital work in progress and order of the learned Commissioner of Income Tax (Appeals) and learned Deputy Commissioner of Income Tax is based on incorrect findings and facts. (b) Without prejudice to the above, the learned Commissioner of Income Tax (Appeals) erred in not deducting interest paid on the term loans taken for investment in shares, other old term loan and term loans taken for purchase of Motor cars while computing the disallowance. (c) The learned Commissioner of Income Tax (Appeals) erred in not appreciating the fact of the case that interest free funds utilized for purchase of capital assets. 3(a) The learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of Rs.5,88,605/- under section 14A of the Act as other expenses. (b) The learned Commissioner of Income Tax (Appeals) erred in confirming the application of section 14A and Rule 8D. (c) Without prejudice to the above, the learned Commissioner of Income Tax (Appeals) erred in not appreciating the fact of the case that for application of section 14A of the Act there must be taxable income and there has to be income which does not form part of the total income under the Act for relevant assessment year.
4. That orders of Learned Commissioner of Income Tax (Appeals) and learned Deputy Commissioner of Income Tax and additions made and confirmed therein are not sustainable on various legal and factual grounds.
5. The appellant craves leave to add, alter, modify, amplify, amend and vary the above grounds of appeal.” Assessee’s appeal in A.Y. 2010-11 3.4 In this appeal for A.Y. 2010-11, the assessee has raised the following grounds: - “1(a) The learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of interest paid of Rs.1,99,123/- on term loan taken from Canara Bank for investment made in acquiring 100% shares of Amroon Foods Private Limited (Subsidiary Company).
8 M/s. Fair Exports (India) P. Ltd. (b) The learned Commissioner of Income Tax (Appeals) erred in not appreciating the fact properly about the business advantage that was derived by the appellant company from investment made in shares of Amroon Foods Pvt. Ltd. and further erred in considering increase in export turnover of Amroon Foods Pvt. Ltd. in terms of time and not in terms of value. (c) The learned Commissioner of Income Tax (Appeals) erred in not treating the investment made in purchase of 100% shares of Amroon Foods Pvt. Ltd. with regard to commercial expediency. (d) The learned Commissioner of Income Tax (Appeals) erred in not allowing interest paid under section 36(1)(iii) / 37(1) of the Act. (e) Without prejudice to the above, the learned Commissioner of Income Tax (Appeals) erred in not appreciating that section 14A of the Act is not applicable to the facts of the case. 2(a) The learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of interest paid of Rs.3,24,762/- out of interest paid as proportionate interest attributable to Capital work in progress and order of the learned Commissioner of Income Tax (Appeals) and learned Deputy Commissioner of Income Tax is based on incorrect findings and facts. (b) Without prejudice to the above, the learned Commissioner of Income Tax (Appeals) erred in not deducting interest paid on the term loans taken for investment in shares, other old term loan and term loans taken for purchase of Motor cars while computing the disallowance. (c) The learned Commissioner of Income Tax (Appeals) erred in not appreciating the fact of the case that interest free funds utilized for purchase of capital assets. 3(a) The learned Commissioner of Income Tax (Appeals) erred in confirming the disallowance of Rs.6,38,605/- under section 14A of the Act as other expenses. (b) The learned Commissioner of Income Tax (Appeals) erred in confirming the application of section 14A and Rule 8D. (c) Without prejudice to the above, the learned Commissioner of Income Tax (Appeals) erred in not appreciating the fact of the case that for application of section 14A of the Act there must be taxable income and there has to be income which does not form part of the total income under the Act for relevant assessment year.
That orders of Learned Commissioner of Income Tax (Appeals) and learned Deputy Commissioner of Income Tax and additions made and confirmed therein are not sustainable on various legal and factual grounds.
The appellant craves leave to add, alter, modify, amplify, amend and vary the above grounds of appeal.”
9 M/s. Fair Exports (India) P. Ltd.
4. Ground Nos. 1(a) to (e) for assessment years 2007-07 to 2010-11 4.1 In these grounds (supra), the assessee assails the action of the learned CIT(A) in confirming the disallowance of total interest paid on term loan taken from Canara Bank for investment made in acquiring 100% shares of a subsidiary M/s. Amroon Foods Pvt. Ltd. for assessment years 2006-07 to 2010-11. It is claimed that this investment was made out of commercial expediency and therefore the learned CIT(A) ought to have allowed the interest paid under section 36(1)(iii) or 37(1) of the Act. 4.2.1 We have heard the rival contentions of the learned A.R. for the assessee and the learned D.R. for Revenue. The learned A.R. for the assessee fairly brought to the notice of the Bench that this very issue was considered by a Coordinate Bench of this Tribunal in the assessee’s own case for A.Y. 2005-06 and in its order in ITA No. 7285/Mum/2008 dated 25.03.2011, the Coordinate Bench decided the issue against the assessee and that the assessee is in appeal before the Hon'ble High Court in the matter. We find, on a perusal thereof, that as submitted, the Coordinate Bench in the aforesaid order in the assessee’s own case for A.Y. 2005-06 (supra) at paras 12 and 13 thereof have held, against the assessee and in favour of the Revenue, as under: - 12. We have heard the rival submissions, perused the orders of the lower authorities and the materials available on record. The facts are not disputed. The borrowed funds have been utilized for acquiring shares of Amroon Foods Pvt. Ltd. The assessee's claim is that, by acquiring the shares of Amroon Foods Pvt. Ltd. it carried on the business more efficiently and, therefore, the entire acquisition of shares was for the purpose of business and the interest paid on the amount borrowed was wholly and exclusively for the purpose of business. We are unable to accept this contention for the simple reason that when a specific provision has been incorporated under the Act, then, the object of investment in shares cannot override the mandate of that provision. Admittedly, the dividend income was exempt under section 10(33) and, therefore, any interest expenditure incurred in connection with earning of dividend income could not be allowed in view of the provisions of section 14A of the Act. Section 14A, deals with expenditure incurred in relation to income not includible in the total income. Admittedly, dividend income is not includible in the total income. Therefore, the expenditure incurred, if any, for earning the dividend income cannot be allowed. We find that 10 M/s. Fair Exports (India) P. Ltd. the reliance placed by the learned CIT(A) on the decision of S.G. Investments and Industries Ltd., also fortify our stand. In this case, it has been held as under: - "11. A closer look at the provisions contained in s. 10(33) and s. 115- O of the Act makes it abundantly clear that income by way of dividend referred to in s. 115-O shall not be included in computing the total income of a previous year of any person. Sec. 115-O, which has been inserted by the Finance Act, 1997 provides the provision relating to tax on distributed profits by way of dividends of domestic companies. Sub-s. (5) of s. 115-O further states that no deduction under any other provisions of the Act shall be allowed to the company or a shareholder in respect of the amount which has been charged to tax under sub-s. (1) of s. 115-O or the tax thereon. The liability to pay additional tax on dividends declared and paid by the domestic company under s. 115-O of the Act is notwithstanding anything contained in any other provisions of the IT Act and is subject to the provisions of s. 115-O. The s. 115-O(1) beginning with the expression "notwithstanding anything contained in any other provisions of this Act" is to give the provisions of s. 115-O(1) in case of conflict, an overriding effect over any other provisions of the IT Act, 1961. It is thus clear that s. 115-O(1) is a specific provision overriding in case of conflict, the general provisions. The sub-s. (5) of s. 115-O has made it clear that no deduction under any other provisions of IT Act shall be allowed to the company or a shareholder in respect of dividend income which has been charged to tax under s. 115-O(1) or the tax thereon. Thus, this sub-section has restricted the allowability of all deductions, which may otherwise be allowable under any other provisions of the Act, against dividend income. It means that the interest paid for borrowings used for purpose of acquiring shares which has resulted in earning of dividend, and all other expenses in relating to the earning of dividend income will not be allowed as deduction under any other provisions of the IT Act.
Prior to insertion of ss. 10(33) and 115-O of the Act, any dividend declared, distributed or paid by a company to its shareholder was chargeable to tax under the head "Income from other sources" irrespective of the fact whether shares were held by the assessee as investment or stock- in-trade as provided in s. 56 of the Act. Sec. 57 of the Act provides for certain deductions in computing the income chargeable under the head "Income from other sources". Reading s. 57 and s. 58 of the Act, it is plain that the expenditure, not in the nature of capital expenditure and personal expenses of the assessee, laid out or expended wholly and exclusively for the purpose of making or earning the income during the relevant years are permissible deduction in computing the income chargeable under the head "Income from other sources".
Regarding the claim for deduction of interest paid on monies borrowed for purchase of shares held as investment, we may observe that before insertion of ss. 10(33) and 115-O of the Act, the deduction 11 M/s. Fair Exports (India) P. Ltd. for interest paid on monies borrowed for acquiring the shares held as investments could have been normally claimed under s. 57(iii) of the Act against dividend income. It cannot be claimed so now due to the explicit provisions of sub-s. (5) of s. 115-O r/w s. 14A of the Act inasmuch as such dividend income does not form part of total income chargeable to tax. To find out the answer to the question whether interest paid on borrowed monies for acquiring the shares held as investment can be construed as an expenditure laid out or expended wholly and exclusively for the purpose of making or earning dividend, we may refer to the following decisions (i) CIT vs. Model Mfg. Co. (P) Ltd. (1980) 122 ITR 767 (Cal) wherein it was held : "that though the ultimate or ulterior motive of the assessee might have been to confer controlling interest either to itself or to NK and TK, the immediate purpose for acquisition of the shares was to earn income from the dividends thereof and the Tribunal was, therefore, right in holding that the interest was deductible under s. 57 against its income from other sources. The word "purpose" in s. 57 cannot mean the motive for a transaction; much less can it mean the ulterior motive or ulterior object of the transaction." (ii) CIT vs. Rajendra Prasad Moody 1978 CTR (SC) 141 (1978) 115 ITR 519 (SC) - "The plain natural construction of the language of s. 57(iii) of the IT Act, 1961, irresistibly leads to the conclusion that to bring a case within that section it is not necessary that any income should in fact have been earned as a result of the expenditure. What s. 57(iii) requires is that the expenditure must be laid out or expended wholly and exclusively for the purpose of making or earning income. The section does not require that this purpose must be fulfilled in order to qualify the expenditure for deduction : it does not say that the expenditure shall be deductible only if any income is made or earned. Where the assessee borrowed monies for the purpose of making investment in certain shares and paid interest thereon during the accounting period relevant to the assessment year but did not receive any dividend on the shares purchased with those monies : Held, accordingly, that the interest on monies borrowed for investment in shares which had not yielded any dividend was admissible as a deduction under s. 57(iii) of the IT Act, 1961, in computing its income from dividend under the head 'Income from other sources'." (iii) CIT vs. L.N. Dalmia (1994) 207 ITR 89 (Cal) "Moreover, it has been submitted on behalf of the assessee that the assessee is entitled to submit before this Court that the said deduction should be allowed under the head "Other sources" though against the decision of the Tribunal that such interest was to be capitalised being part of cost of acquisition of shares has not been appealed against. It is well-settled that an allowance for deduction can be upheld on a ground other than that on which it was allowed by the Tribunal. We, accordingly, hold that the interest in question in the present case cannot be part of the cost of acquisition. It is allowable against the income from the investment in question and it can be considered to be set off against the income from other sources. In the circumstances, this issue is answered 12 M/s. Fair Exports (India) P. Ltd. saying that the said sum on account of interest is allowable as deduction under the head 'Other sources'."
We, Accordingly, confirm the order of the learned CIT(A) on this issue.” 4.2.2 Following the aforesaid decision of the Coordinate Bench of this Tribunal in assessee’s own case for A.Y. 2005-06 in ITA No. 7285/Mum/2008 dated 25.03.2011 (supra), we uphold the impugned order of the CIT(A) for assessment years 2006-07 to 2010-11 and consequently dismiss the assessee’s grounds raised
at S.Nos. 1(a) to (e) for these years.
5. Grounds 2(a) to (c) for assessment years 2006-07 to 2010-11 5.1 In these grounds, the assessee, inter alia, assailed the impugned order of the learned CIT(A) for assessment years 2006-07 to 2010-11 in upholding the disallowance of proportionate interest attributable to capital work-in-progress out of the total interest paid, since the facts of the case are that interest free funds were utilised for purchase of capital assets. 5.2.1 We have heard the rival contentions of both the learned A.R. for the assessee and the learned D.R. for Revenue. The facts of the matter that emanates from the records for assessment years 2006-07 to 2010-11 are that in all these years the AO in the course of assessment proceedings observed the opening capital work-in-progress, additions thereto and closing capital work-in-progress. On an examination thereof, the AO noted that the said capital work-in-progress represented the cost incurred in respect of projects which had not yet commenced or assets not put to use, and came to the view that not only was the source of financing capital work-in-progress not explained or substantiated by the assessee but also that the assessee had failed to establish that interest bearing borrowed funds used for the purposes of business had not been diverted towards capital work-in-progress. On a consideration of the explanations put forth by the assessee, that the assessee had utilized only its own interest free funds for investment in capital work-in- progress, the AO was of the view that the assessee had failed to establish that it utilized its borrowed interest bearing funds solely for the purposes 13 M/s. Fair Exports (India) P. Ltd. of business since he found that the assessee’s funds were a mixture of own funds and borrowed capital and since the assessee failed to fulfil the onus to establish its claim under section 36(1)(iii) of the Act, the AO proceeded to disallow the proportionate interest claim in the concerned assessment years 2006-07 to 2010-11. On appeal, the learned CIT(A) considering the identical submissions of the assessee, as put forth before the AO in assessment proceedings, and on examination of the assessee’s Balance Sheets for the relevant period found that no interest free funds were available to the assessee for being utilized in investment in capital work-in-progress and accordingly upheld the disallowances of proportionate interest attributable to capital work-in-progress for assessment years 2006-07 to 2010-11. 5.2.2 Before us also, the learned A.R. for the assessee for the assessee reiterated the submissions put forth before the authorities below and in the grounds of appeal (supra), that for all the assessment years in appeal the assessee had only utilized its own interest free funds for investment in capital work-in-progress and had not diverted the interest bearing funds which were wholly utilized for business purposes. On an appreciation of the records before us, the orders of the authorities below vis-a-vis the averments of the assessee, we find that except for raising the grounds (supra) and reiterating the submissions made before the authorities below, before us, the assessee has failed to controvert the findings of fact rendered by the learned CIT(A) in the impugned orders. We concur with the findings of the learned CIT(A) in the impugned orders that an examination of the financial statements for the year under consideration evidence that funds (i.e. own interest free funds and borrowed interest bearing funds for business) are mixed and the share capital and reserves which is claimed to be interest free funds is much less than the fixed assets and current assets and therefore no interest free funds were available to the assessee for being utilized in capital work-in-progress. In this factual matrix of the case, we find no reason for interference in the impugned orders of the learned CIT(A) on this issue of proportionate disallowance of interest attributable to 14 M/s. Fair Exports (India) P. Ltd. capital work-in-progress and therefore uphold the impugned orders for assessment years 2006-07 to 2010-11. Consequently, the assessee’s grounds 2(a) to (c) for assessment years 2006-07 to 2010-11 are dismissed.
6. Grounds 3(a) to (c) - For A.Y. 2009-10 and A.Y. 2010-11 - Disallowance under section 14A r.w. Rule 8D 6.1 In these grounds, the assessee assails the action of the learned CIT(A) in confirming the disallowance under section 14A r.w. Rule 8D, without appreciating the fact that application of the provisions of section 14A of the Act is applicable only when there is exempt income and since the assessee had admittedly not received any exempt income in these two years, no disallowances under section 14A of the Act could have been made in these years. In support of the proposition, the learned A.R. for the assessee placed reliance on the decision of the Hon'ble Delhi High Court in the case of Cheminvest India Ltd. [(2015) 94 CCH 002] dated 02.09.2015. 6.2 Per contra, the learned D.R. supported the orders of the authorities below in confirming the disallowance under section 14A of the Act. 6.3.1 We have heard the rival contentions of both the parties and perused and carefully considered the material on record. It is a matter of record that the assessee had not earned any exempt income in the two years under consideration and this fact is admitted by the learned CIT(A) in the impugned orders. The applicability of the provisions of section 14A of the Act is in respect of expenditure incurred in relation to the earning of income not includible in total income. A plain reading of the provisions of section 14A of the Act envisages that there should be an actual receipt of income which is not includible in the total income. Therefore, the provisions of section 14A of the Act will not apply where no exempt income is received or receivable by the assessee during the relevant previous year. This proposition was upheld by the Hon'ble Delhi High Court in the case of Cheminvest Ltd. vs. CIT [(2015) 94 CCH 002] (Del) vide order dated 02.09.2015; wherein at para 23 thereof their Lordships have held as under: - 15 M/s. Fair Exports (India) P. Ltd. “23. In the context of the facts enumerated hereinbefore the Court answers the question framed by holding that the expression ‘does not form part of the total income’ in Section 14A of the envisages that there should be an actual receipt of income, which is not includible in the total income, during the relevant previous year of the purpose of disallowing any expenditure incurred in relation to the said income. In other words, Section 14A will not apply if no exempt income is received or receivable during the relevant previous year.” 6.3.2 In the case on hand admittedly, the factual position was that the assessee had not earned or received any exempt income in the previous years relevant to assessment years 2009-10 and 2010-11. In these circumstances, in our considered view, the ratio of the decision of the Hon'ble Delhi High Court in the case of Cheminvest Ltd. (supra) would apply squarely in the case on hand. The Hon'ble High Court in the aforesaid judgement held that no disallowance under section 14A of the Act could be made in a year in which no exempt income had been earned or received by the assessee. It was held that the expression ‘does not form part of the total income’ in section 14A of the Act envisages that there should be an actual receipt of income which is not includible in the total income during the relevant previous years for the purpose of disallowing any expenditure incurred in relation to the said exempt income. Therefore, in the factual matrix of the case on hand, as discussed above, we, respectfully following the decision of the Hon'ble Delhi High Court in the case Chemivest Ltd. (supra), hold that no disallowance under section 14A of the Act can be made in the case on hand for the assessment years 2009- 10 and 2010-11 since the assessee had not earned or received any exempt income in these years and therefore direct the AO to delete the disallowances of expenditure made under section 14A of the Act in these years. Consequently, the assessee’s grounds at 3(a) to (c) for both the assessment years 2009-10 and 2010-11 are allowed.
7. Grounds 3 & 4 for assessment year s 2006-07 to 2008-09 and grounds 4 & 5 for assessment years 2009-10 and 2010-11 7.1 These grounds being general in nature, no adjudication is called for thereon and they are consequently dismissed as infructuous.