2016 (4) TMI 1382 - AT - Income Tax

Tribunal Upholds CIT(A) Decisions on Disallowance & Capitalization

The A.C.I.T. And D.C.I.T., Versus M/s Vardhman Polytex Ltd.

The Tribunal upheld the CIT(A)'s decisions in the case, dismissing the Revenue's appeals on disallowance under Section 14A, interest disallowance under ... Disallowance under section 14A - HELD THAT:- We observe that the assessee has more than sufficient owned funds to make investments. Since it is having huge owned funds and in comparison to that investments are of a very lesser amount, in view of the judgment of the Jurisdictional High Court in the case of Kapsons Associates Investment P. Ltd. [2015 (8) TMI 1277 - PUNJAB AND HARYANA HIGH COURT], we can safely infer that the investments have been made out of owned funds and not from borrowed funds. no disallowance under sect ion 14A of the Act with respect to interest expenditure can be made. As regards the administrative expenditure, we are in agreement with the submissions of the learned counsel for the assessee that in the case of CIT Vs. Deepak Mittal [2013 (9) TMI 764 - PUNJAB & HARYANA HIGH COURT] has held that in the absence of any satisfaction recorded by the Assessing Officer as to the claim of the assessee, the disallowance made by him on account of administrative expenses under Rule 8D of the Income Tax Rules is not as per law. In view of the above, the act ion of the learned CIT (Appeals) in deleting the disallowance made by the Assessing Officer under sect ion 14A of the Act is confirmed. Disallowance of interest u/s 36(l)(iii) on investment in shares - shares were actually allocated much later and the money was not actually used by assessee for business purpose - HELD THAT:- From the perusal of record and submissions given by the learned counsel for the assessee, there is no dispute to the fact that the assessee is having more than sufficient owned funds much larger than the total investments made in the share capital of the subsidiary companies. Therefore, we are in agreement with the arguments of the learned counsel for the assessee in view of the judgment of the Jurisdictional High Court in the case of Bright Enterprises [2015 (11) TMI 342 - PUNJAB & HARYANA HIGH COURT] and Kapsons Associates Investments P. Ltd. [2015 (8) TMI 1277 - PUNJAB AND HARYANA HIGH COURT] we can very easily presumed that the investments have been made out of the non interest bearing funds. Therefore, no disallowance under sect ion 36(1) (iii) of the Act can be made. Since it is held that the investments were made out of non interest bearing funds, it is automatically presumed that with regard to these investments the assessee had not made any claim of interest under sect ion 36(1) (ii) - there is no need for the assessee to prove that the funds were lent for business purposes or not. In view of this, we do not find any need to interfere in the order of the learned CIT (Appeals) in this respect Addition on account of capitalization of capital advance by holding that these were for 'purchase of spares' - before AO the assessee claimed these to be for 'machinery' and hence filed different facts before Ld. CIT(A) - HELD THAT:- We do not find any infirmity in the order of the learned CIT (Appeals) since he has been fair enough to confirm the disallowance made by the Assessing Officer on account of interest of advance meant for purchase of generator, which is a capital asset to be acquired. However, with regard to two other advances, no capital asset is expected to come into existence. Therefore, the interest on these advances cannot be disallowed by the Assessing Officer. The grounds of appeal raised by the Revenue are dismissed. CIT(A) powers u/s 251(1)(a) to remand back the issue to AO - CIT(A) erred in directing A.O. to pass a speaking order on the issue of adjudication of provision of Wealth Tax from the statement of taxable income prepared u/s 115JB - HELD THAT:- On perusal of the provisions of sect ion 115JB of the Act and the Explanation appended thereto, we are in agreement with the argument of the assessee that the only amount to be added back for calculating the book prof it under sect ion 115JB is that of income tax. Since the assessee had omitted to exclude wealth tax out of computation of book prof it, the Assessing Officer also did not do the same and had discussed the weal tax provision, we are also in agreement with the content ion of the Department that the CIT (Appeals) having no powers to set aside the issue to the file of the AO. However, in the interest of justice, we would like to send this issue back to the Assessing Officer and direct him to re-compute the book prof it under sect ion 115JB of the Act after excluding wealth tax provision on the same. The ground raised by the Revenue is allowed for statistical purposes. Issues Involved:1. Disallowance under Section 14A read with Rule 8D.2. Disallowance of interest under Section 36(1)(iii) on investment in shares.3. Capitalization of capital advances and related interest disallowance.4. Reduction of provision of Wealth Tax from the statement of taxable income under Section 115JB.Issue-wise Detailed Analysis:1. Disallowance under Section 14A read with Rule 8D:The Revenue challenged the deletion of disallowance of Rs. 1,87,19,975/- under Section 14A read with Rule 8D by the CIT(A). The CIT(A) relied on the judgment in CIT Vs. Winsome Textile Industries Ltd., holding that Rule 8D cannot be applied automatically without establishing a direct connection between the expenditure and tax-free income. The Tribunal upheld the CIT(A)'s decision, noting that the assessee had sufficient owned funds for investments, and no borrowed funds were used. Additionally, the Tribunal referenced the jurisdictional High Court's rulings in Kapsons Associates Investment P. Ltd. and Bright Enterprises P. Ltd., which support the presumption that investments are made from owned funds when sufficient owned funds are available.2. Disallowance of interest under Section 36(1)(iii) on investment in shares:The Revenue contested the deletion of Rs. 4,47,46,076/- disallowance under Section 36(1)(iii) for investments in subsidiary companies. The CIT(A) found that the investments were made from non-borrowed funds, aligning with the business objectives of the assessee. The Tribunal confirmed this, citing the sufficient owned funds of the assessee and the business purpose of the investments. The Tribunal referenced the Supreme Court's judgment in S.A. Builders Ltd. and the jurisdictional High Court's rulings in Bright Enterprises P. Ltd. and Kapsons Associates Investment P. Ltd., supporting the presumption of investments made from owned funds.3. Capitalization of capital advances and related interest disallowance:The Revenue appealed against the deletion of disallowance for interest on capital advances to Fongs National Engg. Co. Ltd. and Surjit Singh & Sons. The CIT(A) allowed the deletion, noting that these advances were made from internal resources and not borrowed funds. The Tribunal upheld the CIT(A)'s decision, confirming that no capital asset was expected to come into existence from these advances, and thus, interest disallowance was not warranted. However, the CIT(A) confirmed the disallowance for the advance to Rana Oil Mills for the purchase of a generator, as it was a capital asset.4. Reduction of provision of Wealth Tax from the statement of taxable income under Section 115JB:The Revenue challenged the CIT(A)'s direction to the AO to pass a speaking order on the issue of reducing the provision of Wealth Tax from the statement of taxable income under Section 115JB. The Tribunal agreed with the Department that the CIT(A) does not have the power to remand the issue to the AO. However, in the interest of justice, the Tribunal directed the AO to re-compute the book profit under Section 115JB after excluding the wealth tax provision.Consolidated Findings:The Tribunal dismissed the appeals of the Revenue, confirming the CIT(A)'s decisions on the disallowance under Section 14A, interest disallowance under Section 36(1)(iii), and capitalization of capital advances. The Tribunal directed the AO to re-compute the book profit under Section 115JB, excluding the wealth tax provision. The judgments in ITA No.372/Chd/2015 were applied mutatis mutandis to ITA Nos. 396/Chd/2015 and 397/Chd/2015.