M/S METALMAN AUTO PVT. LTD.,LUDHIANA vs. ADDL. CIT, LUDHIANA

IN THE INCOME TAX APPELLATE TRIBUNAL DIVISION BENCH ‘B ’, CHANDIGARH

BEFORE SHRI SANJAY GARG, JUDICIAL MEMBER AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER ITA No.935/Chd/2017 (Assessment Year : 2008-09) M/s Metalman Auto Pvt. Ltd., Vs. The Addl.C.I.T., E-127, Phase-V, Range-1, Focal Point, Ludhiana. Ludhiana. PAN: AABCM5441M (Appellant) (Respondent)

Appellant by : Shri Amarjit Kamboj, CA Respondent by : Shri Gulshan Raj, CIT(DR) Date of hearing : 16.05.2018 Date of Pronouncement : 14.08.2018

ORDER PER ANNAPURNA GUPTA, AM:

The present appeal has been preferred by the assessee

against the order of learned Commissioner of Income Tax

(Appeals)-1, Ludhiana (hereinafter referred to as

CIT(Appeals)) dated 27.4.2017 relating to assessment year

2008-09.

“1. Commissioner of Income Tax (Appeals)-l, Ludhiana has erred in law and on facts of the case:- a) By arbitrarily and wrongly confirmed the disallowance of interest Rs.35131/- made u/s 36(1) (iii) of the Income Tax Act, 1961 w.r.t. the amount of capital work in progress and advance given for purchase of machinery.” 3. Brief facts relating to the issue raised in the above

ground regarding disallowance of interest amounting to

Rs.35,131/- u/s 36(l)(iii) of the IT Act, is that during the

course of assessment proceedings, the Assessing Officer

noticed that the assessee had made the following capital

advances:-

(a) Capital work in progress amounting to Rs.31,22,096/- (b) Advance for purchase of machinery to M/s Chakan Engineering Pvt. Ltd. amounting to Rs.6,25,000/-. 4. The assessee was asked to show whether interest

pertaining to the same had been capitalized or not and if not

why the said interest be not disallowed and capitalized. In

response, the assessee submitted that the capital work in

progress pertained to payments/ expenses on installation of

Enterprises Resource Planning (ERP) Navision, for which the

assessee had not availed any term loan in any year. As for

the advance of Rs.6,25,000/- given to Chakan Engineering

Co. Pvt. Ltd., it was submitted that the same had been given

for purchase of Boarding Machine which was received in the

next year, on 17.05.2008, and that the said advances had

been made out of current account of the Waluj Unit of the

assessee at Aurangabad, where no interest was paid on any

working capital facility or for making the said advance. The

Assessing Officer was not satisfied with the reply of the

assessee and held that since the entire funds are from

common kitty, the assessee had incurred interest

expenditure on the funds which had been invested in capital

work in progress and advances for machinery, relying upon

various case laws especially, the decision of the Hon'ble

Punjab & Haryana High Court in the case of M/s Abhishek

Industries Ltd. 286 ITR 1.He therefore computed interest

pertaining to the said investments at Rs.35,131/- and

disallowed the same u/s 36(l)(iii) of the Income Tax Act,

1961 (in short ‘the Act’).

assessee raised various contentions which included the

sufficiency of funds available with it by way of profits for

the year being Rs.4.85 crores, share capital of Rs.1.30

crores and reserves & surplus of Rs.20.39 crores, which

were sufficient for making investment in the capital work-

in-progress amounting to Rs.31,22,096/- and for the

advance given for purchase of boring machine amounting to

Rs.6,25,000/-. The submissions of the assessee did not find

favour with the CIT(Appeals) who upheld the disallowances

made by holding at para 2.3 of his order as under:

“2.3 The appellant has justified the claim of interest as revenue expense on the ground that it is to be allowed as deduction. The appellant has placed reliance on a number of judicial decisions with regard to the issue of disallowance u/s 36(l)(iii) of the IT Act. Having considered the material placed on record, I find that appellant has failed to appreciate the fact that funds have been advanced for purchase of capital asset and therefore proportionate interest on those funds has to be capitalized. This is mandatory in view of the specific provisions as enunciated in Proviso to sec 36(l)(iii) of the IT Act. The judicial decisions relied upon by the appellant are distinguishable on facts as are found to be not on this specific issue of interest expense to be capitalized or to be allowed as revenue. Accordingly, I confirm the disallowance of Rs.35,131/- made by the Assessing Officer under this head.” 6. Before us, the Ld. counsel for assessee reiterated his

contentions made before the CIT(Appeals) that in view of the

sufficiency of funds available with him for making impugned

investment no disallowance of interest was warranted as per

the provisions of section 36(1)(iii) of the Act. Reliance was

placed on the decision of the Hon'ble Punjab & Haryana

High Court in support of this proposition in the case of

Gurudas Garg Vs. CIT(A), Bathinda (2015) 63 Taxman 289

and CIT Vs. Kapsons Associates (2016) 381 ITR 204.

of the CIT(Appeals).

the order of the Ld.CIT(Appeals) we find merit in the

contentions raised by Ld. counsel for assessee. The fact of

availability of own interest free funds in the form of profits

for the year amounting to Rs.4.85 crores, share capital

amounting to Rs.1.3 crores and reserves & surplus

amounting to Rs.20.39 crores, has remained undisputed

and uncontroverted by the Revenue. The investment in

capital work-in-progress and advance for machinery on

account of which interest has been disallowed applying the

provisions of section 36(1(iii) on account of diversion of

interest bearing funds for the purpose of making these

investments amounts to Rs.37.5 lacs (Rs.31.22 lacs +

Rs.6.25 lacs) respectively. Clearly therefore, there were

enough own funds available with the assessee for making

impugned investment. Further the proposition laid down by

the Hon'ble Jurisdictional High Court in the case of

Gurudas Garg and M/s Kapsons Associates (supra), as

pointed out by the lower authorities, is that where

sufficient own interest free advances are available, it is to

be presumed that the same have been used for making

interest free advances or non-business advances. The Ld.

DR has not brought to our notice any contrary decision of

the Hon'ble Jurisdictional High Court or the Hon'ble Apex

Court in this regard. In view of the same, we agree with the

Ld. counsel for assessee that no interest bearing funds can

be attributed to have been used for the purpose of making

impugned investment in capital work-in-progress and

advance for purchase of machinery. The Revenue,we find,

has not pointed out any nexus between the interest

bearing funds of the assessee and the investment in the

same and the disallowance has been made by giving a

vague/ general statement that the funds have been found to

have been advanced for the purchase of capital asset

without specifying whether /which interest bearing funds

have been so used. In the absence of the same and

considering the totality of the facts and circumstances of

the present case, we hold that no disallowance of interest is

warranted in the present case as per the provisions of

section 36(1)(iii) of the Act. The disallowance so made

amounting to Rs.35,131/- is, therefore, directed to be

deleted. Ground No.1(a) raised by the assessee is allowed.

“b) By arbitrarily and wrongly confirmed the disallowance of expenses Rs.3,98,008/- u/s 14A of the Income tax Act, 1961.”

disallowance of Rs.3,98,008/- u/s 14A of the Act. During the

course of assessment proceedings, the Assessing Officer

noticed that the assessee company had made investment in

mutual funds from which exempt income was being earned.

The assessee was asked to provide details of the expenses

incurred on making these investments and whether they had

been added back u/s 14A. In response, it was submitted that

the assessee had voluntarily disallowed the amount of

Rs.1,36,000/- on account of section 14A disallowance.

Thereafter, not satisfied with the reply of the assessee, the

Assessing Officer calculated the disallowance u/s 14A

amounting to Rs.5,34,008/- and after giving credit for the

amount already disallowed by the assessee of Rs.1,36,000/-,

the balance amount of Rs.3,98,008/- was disallowed and

added to the income of the assessee.

contentions, as reproduced in para 3.1 of the order, which

briefly put were to the effect that the assessee had suomoto

disallowed administrative expenses of Rs.1,36,000/-,being

part of salary and telephone expenses of one of its employee

for maintaining portfolio of its investments, that no interest

expense was disallowable since net interest had been

earned by the assessee, the interest paid in any case

related to term loans and specific purpose loans and no

part of borrowed funds were used for making the

investment, that the investment had been made out of sale

of mutual funds and that the assessee had sufficient own

funds in the form of profits for the year for making the

impugned investments . The submissions of the assessee

did not find favour with the Ld.CIT(Appeals) who held that

the requisite conditions for invoking the provisions of

section 14A were found applicable in the facts of the case

and, therefore, the disallowance was rightly worked out by

invoking the machinery provisions given in Rule 8D of the

Income Tax Rules. The relevant findings of the CIT(A) at

para 3.3 of the order is as under:

“3.3 Having considered the submissions made in this regard, I find that requisite conditions for invoking the provisions of sec 14A of the IT Act are found to be applicable in the facts of this case. The appellant has also not denied the same and the only difference of opinion is with regard to the computation of the amount of disallowance to be made u/s 14A of the IT Act. I find that for this purpose, machinery provision has been given in Rule 8D of the IT Rules. As regards the contention of recording the satisfaction of Assessing Officer is concerned, I find that it has been clearly complied with by the Assessing Officer on page 9-11 of the order. I do not find any infirmity in the computation made by the Assessing Officer and accordingly confirm the disallowance of Rs.3,98,008/- made u/s 14A of the IT Act.” 12. Before us, the Ld. AR reiterated the contentions made

before the CIT(Appeals) regarding sufficiency of own surplus

funds available with the assessee for the purpose of making

investment warranting no disallowance of interest u/s 14A

of the Act. Reliance was placed on the decision of the

Hon'ble Punjab & Haryana High Court in the case of CIT vs

Max India Ltd. in ITA no.186 0f 2013 dt.06-09-16 and the

decision of the Hon’ble Gujarat High Court in the case of

Principal Commissioner of Income Tax-4 vs Sintex

Industries Ltd. (2017) 82 taxmann.com 171 (Guj).It was

pointed out that the SLP filed against the order of the

Hon’ble Gujarat High Court was dismissed by the Apex

court in its judgement reported in (2018) 93 taxmann.com

24.

of the CIT(Appeals).

the orders of the authorities below. We find merit in the

contentions of the Ld. counsel for assessee. The fact that

the investment in relation to which disallowance u/s 14A

was made amounted to Rs.2,60,75,051/- while the own

funds available with the assessee as stated in the earlier

part of our order amounted in all to Rs.26.54 crores, in the

form of profits of Rs. 4.85 crores, share capital of Rs. 1.30

crores and Reserves & Surplus of Rs 20.39 crores, is not

disputed, nor has the same been controverted by the

Revenue. Further we find that the Hon'ble Jurisdictional

High Court in the case of Max Industries (supra) and the

Hon’ble Gujarat High Court in the case of Sintex

Industries(supra) has held that where sufficient own funds

are available, no disallowance on account of interest is

warranted u/s 14A of the Act. We have also noted that SLP

against the order of the Hon’ble Gujrat High Court has been

dismissed by the apex court. In view of the same, we find

merit in the contention of the assessee that no disallowance

of interest, in the present case, was warranted on account

of sufficient own funds available with the assessee which

could be attributed to the making of impugned investments

in the present case. Further, we find that the assessee had

contended that the investment had been made out of sale of

mutual funds held in the preceding year. It was pointed out

by the Ld. counsel for assessee that mutual funds held in

the preceding year amounted to Rs.8.50 crores which had

been sold and invested in mutual funds in the impugned

year to the extent of Rs.2.60 crores. The same was

demonstrated through the schedule of investment forming

part of the balance sheet showing none of the old

investments of Rs. 8.5 crores appearing in the investments

of the current year which show new investments of Rs.2.60

crores. Thus we find that the assessee had clearly

demonstrated the attribution of the source of the

investment in the mutual funds to be out of non interest

bearing sources. In view of the same, there was no occasion

at all to invoke the provisions of section 14A of the Act and

made disallowance of interest under the same. The

disallowance, therefore, made of Rs.3,98,008/- is directed

to be deleted. Ground No.1(b) raised by the assessee is,

therefore, allowed for statistical purposes.

“c) By arbitrarily and wrongly confirmed the disallowance of expenses for Rs.5,79,063/- paid for purchase of diesel u/s 40A(3) of the Income Tax Act, 1961.” 16. This ground relates to the disallowance of expenses of

Rs.5,79,063/- u/s 40A(3) of the Act, on account of payment

made in cash exceeding the specified limit. The facts

leading to the same are that during assessment

proceedings, the Assessing Officer noticed that the assessee

had made payments in cash exceeding Rs.20,000/- for

purchase of diesel amounting to Rs.5,79,063/-. The

assessee was asked to show cause as to why this

expenditure be not disallowed in view of the provisions of

section 40A(3). In response, the assessee submitted that the

company was purchasing diesel from a regular retail outlet,

which was accepting payments by cheque. However, it was

only in the event of non availability of diesel at the said out

let that it purchased diesel from other outlet to whom

payment had to be made in cash only. The Assessing Officer

was not satisfied with the reply of the assessee stating that

the situation cited by the assessee did not fall within any of

the situations referred to in Rule 6DD of the Income Tax

Rules, 1962. Therefore, disallowance was made of the

amount paid in cash exceeding the limits specified u/s

40A(3) of the Act of Rs.5,79,063/- and added back to the

income of the assessee.

contentions made before the AO stating that the cash

payments were unavoidable due to urgent need of diesel for

running the unit in case of power cuts. Copy of account of

both the parties from whom diesel was regularly purchased

and from whom purchases were made due to urgency and

payment made in cash thereof, was filed. It was stated that

the payments in cash had been made due to urgency in

business and the genuineness and identity of the parties not

being doubted ,no disallowance u/s 40A(3) was warranted.

Reliance was placed on a number of judicial decisions in

this regard. Ld.CIT(A) was not convinced with the contention

of the assessee and therefore upheld the disallowance made

stating that the assessee had failed to substantiate the

expenditure and the relevant clause of Rule 6DD whereunder

the same was permissible. The relevant findings of the CIT(A)

at para 4.2 of the order is as under:

“4.2 I have carefully considered the facts of the case, the basis of the disallowance made by the Assessing Officer and arguments of the AR and find that a disallowance of Rs.5,79,063/- has been made by the Assessing Officer u/s 40A(3) of the IT Act. The disallowance was made on the ground that cash payments have been made exceeding Rs.20,000/- in contravention to the provisions of sec 40A(3) of the IT Act. The appellant has failed to furnish any evidence to prove that payments made are covered under which clause of Rule 6DD of the IT Rules. The appellant has reiterated the submissions filed before the Assessing Officer and stated that payments were made for purchase of diesel from a dealer other than the regular dealer from whom purchases were made by cheque. The appellant has also cited a number of judicial decisions to support its contentions but the same were found to be distinguishable on facts. Further, I find that appellant has failed to bring on record any evidence even in the course of present proceedings to substantiate the expenditure incurred and the relevant clause of Rule 6DD where under the same is permissible Thus, considering all these facts, I hold that the Assessing Officer was justified in making a disallowance of Rs.5,79,063/- u/s 40A(3) of the IT Act and accordingly confirm the same.” 18. Before us Ld.Counsel for the assessee reiterated the

contentions made before the lower authorities that the

genuineness of the expenditure had not been doubted and

the urgency also had been established for making the

payment in cash, therefore, no disallowance was permissible

u/s 40A(3) of the Act. Reliance was placed on the following

case laws in support of its contention:

• Gurdas Garg vs CIT(A),Bhatinda (2015) 63 taxmann.com 289 (P&H) • Dhuri Wine vs DCIT,Circle-IV,Ludhiana(2017) 83 taxmann.com 20(Chd) 19. Ld.DR on the other hand relied on the order of the

CIT(A) stating that the assessees situation did not fall in any

of the conditions prescribed u/r 6DD of the Income Tax

Rules, 1962 and therefore the disallowance had been rightly

made.

the order of the authorities below. We find merit in the

contention of the Ld.Counsel for the assessee. No

disallowance u/s 40A(3) is warranted if the genuineness of

the expenditure is not doubted and the business expediency

for making the same in cash is duly demonstrated, even if it

does not qualify under any of the situations enumerated in

Rule 6DD of the Income Tax Rules, 1962, for the said

purpose. The jurisdictional High Court in the case of

Gurudas Garg (supra) has laid down this proposition, which

has been followed by the coordinate bench of the ITAT in the

case of Dhuri Wines (supra).It has been held that the

situations listed in Rule 6DD are not exhaustive but are only

illustrative and any situation bringing out business exigency

for making the payment in cash will therefore not be

excluded for the purpose of grant of immunity from the

rigours of disallowance u/s 40A(3),merely because it finds

no place in the list in Rule 6DD of the Income Tax

Rules,1962.

assessee has filed evidence to establish the genuineness of

the expenditure and also the business expediency for making

the payment in cash, by filing copies of accounts of both the

parties one from whom diesel was purchased in regular

course and the other in urgent situations only making

payment to him in cash on demand. The Revenue has not

controverted the said facts. Therefore the genuineness of the

expenditure and also the business expediency for making the

payment in cash stands established. In this factual

background and in view of the proposition of law laid down

by courts as above, no disallowance u/s 40A(3) was

warranted ,merely for the reason that the assessees

situation did not fall in that listed in Rule 6DD of the

Income Tax Rules,1962. The disallowance so made of

Rs.5,79,063/- is therefore deleted. Ground of appeal No1©

is allowed.

d) By arbitrarily and wrongly restricted the disallowance of foreign travelling expenses at Rs.87,000/-out of Rs.174966/- made by the Ld. A.O on adhoc basis.” 23. The above ground relates to disallowance of

Rs.1,74,966/- out of foreign travel expenses. During the

course of assessment proceedings, the Assessing Officer

noticed that the assessee had debited an amount of

Rs.8,74,832/- on account of foreign travel expenses. The

assessee was asked to provide the complete details of

foreign travel expenses with vouchers. In response, the

assessee produced date wise details of foreign traveling

expenses and also stated that the tour were undertaken to

explore new markets for exports, new manufacturing

machines, to attend international auto expo's and to study

new products, designs etc. The Assessing Officer was not

totally satisfied with the reply of the assessee because the

assessee did not have proper evidence to establish the claim

and relevance of these expenses being incurred for business

purpose. Therefore, the Assessing Officer disallowed 20% of

these expenses, which worked out at Rs.1,74,966/- and

added back to the income of the assessee.

personal usage could be attributed to the said expense since

all expenses were incurred on directors of the assessee

company only. Further it was contended that the tours were

undertaken to explore new markets, new manufacturing

machines and to attend auto expo and that the assessee had

exported goods worth Rs.32 lacs & 1.42 crores in the

succeeding years on account of the same. The Ld. CIT(A)

found some merit in the contention of the assessee and

further restricted the disallowance to Rs.87,000/-since

complete nexus could not be established between the

expenses incurred and the business purpose of the travel.

contention made before the CIT(A) and stated that the

disallowance was purely adhoc which was not permissible in

law. Reliance was placed on the following case law in

support of its contention:

• M/s Vallabh Yarns Pvt. Ltd. vs JCIT ITA No.1250/Chd/2017 dated 28-03-18 26. Ld.DR on the other hand strongly supported the order

of the CIT(A) stating that the restriction of disallowance to

Rs.87,000/- out of total expense incurred of Rs.8,74,832/-

was reasonable considering the fact that the assessee had

failed to establish nexus between the expenditure incurred

and business purpose of travel undertaken.

the contention of the Ld.Counsel for the assessee. The fact

that the travelling was undertaken by the directors of the

assessee company was established by the assessee filing

details and copy of account of travelling expenses. The

revenue has not controverted the said fact. Further the fact

that the assessee has made considerable export sales in the

immediately succeeding years of Rs.32 lacs and Rs.1.42

crores has also remained uncontroverted. Therefore there is

no reason for attributing any personal/non business usage

in the said expenses when the entire travel has been

undertaken by the directors of the company resulting in

visible increase in sales in the succeeding year. The

disallowance upheld by the CIT(A) to the extent of

Rs.87,000/- is purely adhoc without any basis, and is

therefore deleted. Ground of appeal No.1(d) therefore stands

allowed.

Order pronounced in the Open Court.

Sd/- Sd/- (SANJAY GARG) (ANNAPURNA GUPTA) JUDICIAL MEMBER ACCOUNTANT MEMBER Dated : 14th August, 2018 *Rati* Copy to: 1. The Appellant 2. The Respondent 3. The CIT(A) 4. The CIT 5. The DR

Assistant Registrar, ITAT, Chandigarh