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Income Tax Appellate Tribunal, MUMBAI BENCH “G”, MUMBAI
Before: SHRI AMIT SHUKLA & SHRI RAMIT KOCHAR
ITA No. : 3315/Mum/2014 (Assessment year: 2010-11) Asst Commissioner of Income Tax Vs GRP Ltd [formerly known as Circle 25(2), Gujarat Reclaim & Rubber Pratyakshkar Bhavan, Bandra Products Ltd., Kurla Complex, Bandra (East), Ashok Silk Mills Compound, Mumbai- 400 051 202, LBS Marg, Ghatkopar (West), Mumbai -400 086 �थयी लेखा सं.:PAN: AAACG 1890 M अपीलाथ� (Appellant) ��यथ� (Respondent) Appellant by Shri Rajesh Ojha : Respondent by : Shri B V Jhaveri सुनवाई क� तार�ख /Date of Hearing : 03-11-2015 घोषणा क� तार�ख /Date of Pronouncement : 23-11-2015 आदेश ORDER अिमत शु�ला, �या. स.: PER AMIT SHUKLA, JM: The aforesaid appeal has been filed by the revenue against impugned order dated 14.02.2014, passed by CIT(A)-21, Mumbai, for the quantum of assessment passed u/s 143(3) for the assessment year 2010-11, on the following grounds :-
“1.1 On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that payment of commission to the non- resident commission agents was not attracting the provisions of section 195 and section 40(a)(ia) of the Act. 1.2 On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that Circular No. 7 of 2009 is not applicable.
2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing the interest expenses of Rs. 1,56, 822/- without appreciating the fact that the assessee did not discharge its onus to prove that the no interest bearing funds were 2 GRP Ltd Formerly known as Gujarat Reclaim & Rubber Products Ltd.]
At the outset, the Ld. Counsel submitted that this issue is squarely covered by the decision of the Tribunal in assessee’s own case for the assessment years 2007-08, 2008-09 & 2009-10. The Ld. DR has also admitted that the issues involved have been adjudicated by the Tribunal.
Facts in brief are that the assessee company is engaged in the business of reclaiming of rubber from waster-rubber; punch and split products from waste rubber. The main disallowance made by the AO was on account of ‘commission payment’ of Rs. 31,20,095/- u/s 40(a)(i) and disallowance of interest expenses of Rs. 1,56,822/-. The assessee had utilized the services of a non- resident agent for getting in orders and effecting sale of goods in foreign market. The NR agent provided services in the foreign countries and do not have any business place in India. On these facts, the assessee while making the payment to N.P. agent did not deduct the tax, as according to the assessee no amount was taxable as per section 9(1)(i). As per the AO the assessee has not submitted any documentary evidence before the AO to substantiate as to how the payments to commission agents are not liable to for TDS except the mere statement made by the assessee that the services are not rendered in India. The AO held that, in view of provisions of section 195, the assessee was required to deduct TDS. He further held that the reliance placed by the assessee on the CBDT Circular No. 23 of 1969 and 786 of 2000 has been withdrawn by the CBDT vide Circular No. 7 of 2009, therefore assessee cannot seek benefit of such circulars. Thus, he disallowed the said payment u/s 40(a)(i).
The Ld. CIT(A) after following the decision of the Tribunal in assessee’s own case for the assessment year 2007-08, allowed the assessee’s ground on this score.
3 GRP Ltd Formerly known as Gujarat Reclaim & Rubber Products Ltd.]
After considering the relevant facts, we find that this issue had come up for consideration before the Tribunal in the earlier year 2009-10 also in & ITA No. 4680/Mum/2012 order dated 27.12.2013 wherein, the Tribunal has decided this issue after observing and holding as under :-
“9. Ground No. 1 to 4, learned Authorised Representative submitted that it relate to issue of disallowance of commission payments of Rs. 21,74,723/- u/s. 40(a)(i) of the Income Tax Act. Learned Authorised Representative submitted that similar issue arose in A.Y. 2007-08. Learned CIT(A) confirmed the disallowance made by the Assessing Officer but the Tribunal by its order dated 19.4.2013 deleted said disallowance and to substantiate his submission referred para 4.6 to 4.7 of the Tribunal order (internal pages 6 to 12) and relevant pages 92 to 98 of the paper book. He further submitted that in A.Y. 2008-09 learned CIT(A) has allowed the issue in favour of the assessee by deleting disallowance made by the Assessing Officer and further appeal filed by the Department before the Tribunal was also dismissed. However, when query was raised to learned AR as to why learned CIT(A) taken a different view in assessment year under consideration, learned AR referred pages 6 to 8 of the order of learned CIT(A) and submitted that learned CIT(A) stated that in the preceding year payment was allowed under the agreements, but in assessment year under consideration agreements had expired and new agreements were entered into by the assessee are not filed. Learned Authorised Representative submitted that said observation of learned CIT(A) is not factually correct and the copy of the new agreements entered into by the assessee were also filed before learned CIT(A) and referred pages 127, 134 & 146 of the paper book. He submitted that learned CIT(A) failed to consider said agreements. During the course of hearing attention of learned AR was also drawn to the fact that the Assessing Officer made disallowance of said sum of Rs. 21,74,723/- u/s. 40(a)(i) of the Income Tax Act on the ground that the commission payments were made to non-resident without deducting TDS and whereas learned CIT(A) has held that said payments were not for business purposes and accordingly, confirmed disallowance made by the Assessing Officer. Learned Authorised Representative submitted that learned CIT(A) has not considered facts in proper perspective and requested that the matter could be restored to learned CIT(A) to decide a fresh in the light of the renewed agreements filed before him and considering the facts correctly. Learned Departmental Representative submitted that she has no objection in restoring the matter to learned CIT(A) to decide the issue afresh.
4 GRP Ltd Formerly known as Gujarat Reclaim & Rubber Products Ltd.]
In view of above submissions of the representative of the parties and considering fact that learned CIT(A) has changed the nature of disallowance while adjudicating said issue without issuing any notice to the assessee and also without considering the copies of new agreements entered into, copies of which are placed by the assessee in the paper book along with certificate that copies of renewed agency agreements entered into with the parties were filed before learned CIT(A), [copies of the relevant agreements and correspondences are placed at pages 120 to 148 of the paper book] and on the other hand, learned CIT(A) has stated that the assessee has not filed copies of the renewed agreements before him, we consider it necessary that the matter is to be restored to the file of learned CIT(A) to decide the same afresh after giving due opportunity of hearing to the parties and considering relevant documents as may be placed before him by a speaking order. Therefore we set aside the order of learned CIT(A) on the above issue and restore the same to his file to decide the same afresh after giving due opportunity of hearing to the parties. Hence, ground No. 1 to 4 taken by the assessee are allowed for statistical purposes by restoring the issue to the file of learned CIT(A)”.
It was observed by the ITAT in the above order in & ITA No. 4680/Mum/2012 that assessee has entered into new agreements for payment of commission which was not produced before the authorities below . In the instant case the AO has noted that no documentary evidences has been filed. We also note that the CBDT circular no. 7 of 2009 dated 22.10.2009 has also come into effect withdrawing the circular no 23 of 1969 and 786 of 2000 and thus respectfully following the precedence of earlier year 2009-10 and in the interest of justice, we set aside the order of the CIT(A) and restore it to the CIT(A) to be decide the issue afresh de-novo in the light of ITA No. 4660/Mum/2012 & 4680/Mum/2012 order dated 27th December, 2013 and also CBDT Circular No. 7 of 2009 . We order accordingly. Accordingly, ground raised by the revenue is partly allowed.
Regarding the issue raised in ground no. 2, that is disallowance of interest, the Ld. CIT(A) has relied upon the decision of the Tribunal for the earlier years for giving the relief. The 5 GRP Ltd Formerly known as Gujarat Reclaim & Rubber Products Ltd.] Tribunal in the appeal for AY 2007-08 has dealt and discussed this issue in the following manner :-
“9. Ground No.9 pertain to disallowance of interest expenses of.3,18,600. On perusal of details filed it is seen that assessee has paid interest and financial charges of Rs. 10,104,198/. It is also noticed that assessee has made investment amounting to Rs. 20,05,600/ and gave loan of Rs.6,50,000/ to M/s Alpanso Netsecure Pvt. Ltd being associate company. Assessee was asked as to why the proportionate interest should not be disallowed. In response to such query, assessee has submitted note thereon as under:- « The company has given a loan of Rs. 6,50,000/ to M/s Alphanso Netsecure Pvt. Ltd an associate concern in which company has an equity participation of Rs. 20,05,600/. The company has made investment in this company to increase its presence in the filed of software development. The different types of software are being developed by the said company. The some of the software may be useful for the company in manufacturing and security arrangement in different plants including networking. The investments being in the nature of strategic investments it is in the interest of the company to infuse the funds to get better results in the said company. It may be stated that the appellant company has sufficient interest free funds available to invest and/ or advances the money to the associate concern. The company has reserves and surplus of Rs.14,76,24,043/ in the beginning of the year even the profit of the company was Rs. 15,91,72,009/. Considering the above facts, the loan and investments of Rs.26.55 Lacs is out of the said reserves and surplus and not out of borrowed funds. We would like to invite your attention to the judgment of S.A. Builders Ltd v. CIT (2007) 288 ITR 1 (SC) where it has been held that if the investment is for the commercial expediency , the same can not be disallowed even the same is made in the company under the same management. Similarly CIT v. Reliance Utilities & Power Ltd- 313 ITR 340 (Bom) (2009). it has been held that if the investments are more than interest free funds available with the assessee, no interest can be disallowed. 9.1 AO however, did not agree. He disallowed the proportionate interest of Rs.3,18,600 at 12% of the interest. The learned CIT (A) confirmed the same by stating as under: “7.3 I have gone through the assessment order perused the submissions made by the appellant and also discussed the case with the A/R of the appellant. AO disallowed Rs.3,18,600 out of interest and financial expenses stating that assessee had made investment in its sister concern M/s Alphanso Netsecure Pvt Ltd of `.20,05,600 and also gave loan of Rs.6,50,000 to it. AO noted that loans were used to invest in sister concern without any business consideration. The appellant before me stated that it has invested in the said company to increase 6 GRP Ltd Formerly known as Gujarat Reclaim & Rubber Products Ltd.] its presence in the software development which was the business consideration and commercial expediency and hence interest is allowable as per the decision of the Hon'ble Supreme Court in case of SA Builders (Supra). However, I do not agree with the contention of the appellant since during the year, assessee had paid huge software charges to other concerns. Hence no business expediency is served by advancing loan to the sister concern. The appellant also claimed that it was having sufficient interest free fund to invest or advance to the associate concern. However, on perusal of balance sheet it is noticed that share capital and reserve and surplus in total amounted Rs.1.21 crores as against which the invest in fixed assets is Rs.37.21 crores. Thus, there were no interest free funds available with the appellant to make interest free advance/investment. Apparently these advances are out of the interest bearing funds only. Further, the provision of section 14A are also applicable since the appellant has made investment in shares. In view of these facts, I am of the considered opinion that AO has rightly made the disallowance of interest which is upheld”. 9.2 It was submitted that during the year ending 31.3.2007, the assessee company had given interest free advance of Rs.6,50,000 to M/s Alphanso Netsecure Pvt Ltd, a concern wherein assessee has an equity participation of Rs.20,05,600. A copy of the ledger account of M/s Alphanso Netsecure Pvt Ltd in the books of assessee (Page 97) shows that the loan of Rs.4,50,000 was given on 20th & 28th February, 2007 and further loan of Rs.2,00,000 was given on 27th March, 2007 i.e. at the fag end of the year. AO computed disallowance of interest @ 12% p.a. i.e. Rs.78,000 without taking into account that the loan was given at the fag end of the year. AO also computed disallowance of interest of Rs.2,40,600 in respect of investment in equity shares of M/s Alphanso Netsecure Pvt Ltd of Rs.20,05,600. 9.3 It is the case of the assessee company that it has interest free funds in the form of capital and reserves and surplus aggregating to Rs.16,09,57,373 at the beginning of the year. In the year under consideration the assessee company had earned profit after tax but before depreciation allowance of Rs.12,56,30,119. Thus, the assessee company had interest free fund many fold in comparison to interest free advance of Rs.6,50,000 given at the fag end of the year and investment in shares of the group company of Rs.20,05,600. It is therefore, submitted that the aforesaid interest free loan and investment in shares are out of its own funds and not out of the borrowed funds. Hence no portion of the interest paid on borrowing can be disallowed. 9.4 The learned Counsel referred to the decision of the ITAT in the case of DCIT vs. Mohit Diamonds Pvt Ltd in for AY 2007- 08 dated 31.7.2012 and also the decision in the case of Sheetal Manufacturing Co. vs. JCIT in ITA No.7107/M/11 for AY 2008-09 dated 28.09.2012. The learned DR however, relied on the orders of the CIT (A) as far as the facts are 7 GRP Ltd Formerly known as Gujarat Reclaim & Rubber Products Ltd.] concerned. 9.5 We have considered the issue. There is no dispute with reference to the availability of the interest free fund in the form of capital and reserves aggregating to Rs.16.09 crores. In fact the income declared during the year itself was to the tune of Rs.7.29 crores. Further, as seen from the schedule III of the secured loans, assessee has a cash credits, bill discounting, loan for its working capital requirements to an extent of Rs.5.65 crores and term loan for Mumbai Office premises at Panoli Plant and captive power plant at Ankleshwar to the tune of Rs.1.16 crores, the details of which can be referred to Note 2 of the notes forming part of the account for the year ended on 31.03.2007. The interest charges and the finance charges as seen from the record are mostly paid for these loans and working capital requirements including discounting of bills. Therefore, we are of the opinion that no part of the interest could be disallowed on the reason that assessee had advanced interest free advances to its sister concern. It is also a fact that assessee has invested money in a sister concern and if any disallowance is required the same has to be considered under section 14A which is the case not here as assessee has not earned any exempt income. Since assessee’s available capital is more than the borrowed funds, presumption as decided by the Hon'ble jurisdictional High Court in the case of Reliance Utilities and Power Ltd 313 ITR 340 (Bom.) equally apply. This aspect was elaborately discussed by the Coordinate Bench in the case of DCIT vs. Mohit Diamonds Pvt Ltd in for AY 2007-08 dated 31.7.2012 as under:
The Learned AR pointed out that the assessee had Shareholders' funds including Share capital along with Reserve and surplus to the tune of Rs. 72.19 crores at the end of the year and the corresponding figure for the preceding year stood at Rs. 67.85 lacs. The above referred figures are apparent from the copy of balance sheet available on record. When we consider the amount of average loan advanced by the assessee to its sister concern, as taken by the AO, at Rs. 7.41 crores, we observe that such interest free loan is far short of interest free funds available with the assessee in the form of Shareholders' funds. The Hon'ble jurisdictional High Court in the case of CIT vs. Reliance Utilities and Power Limited (2009) 313 ITR 340 (Bom.) has held that if there are interest free funds available to an assessee sufficiently in excess of its investment and at the same time the assessee has also raised a loan, it can be presumed that the investments were from interest free funds available. In view of the fact that the interest free funds advanced by the assessee to its subsidiary company are much less than the interest free funds available with it in the shape of Share capital along with Reserve and surplus, in our considered opinion there can be no question of sustaining any addition in 8 GRP Ltd Formerly known as Gujarat Reclaim & Rubber Products Ltd.] this regard. We, therefore, uphold the impugned order but from a different angle. This ground is not allowed . 9.5 Respectfully following the Coordinate Bench, both on facts and principles we are of the opinion that the amount of Rs.3,18,600 cannot be disallowed as it has no nexus to the other finance charges claimed by assessee as business expenditure. Accordingly the ground is allowed. 9.6 In the result, the appeal is allowed”.
Thus, respectfully following the judicial precedence of the earlier years which is applicable in this year also, the ground no. 2 is also decided against the department.
In the result, appeal of the revenue is partly allowed. Order pronounced in the open court on 23rd November, 2015.