TaxTMI 
TaxTMI 
2008 (7) TMI 460
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....ase of CIT vs. South India Corporation Ltd. (1999) 157 CTR (Ker) 422 : (2000) 108 Taxman 322 (Ker). 2 (i) The learned CIT(A) deleted the disallowance of Rs. 4,73,197, as unjustified, on the ground of the mandate of Circular dt. 29th April, 1967 and on appreciation of the case law, relied upon the assessee company as also the contents of the assessment order. The relevant finding of the learned CIT(A), on the issue in question, is reproduced hereunder; "I have considered the submission of the learned counsel vis-a-vis the facts of the case. It is seen from the assessment order that all the payments made towards PF contribution which were held by the AO as delayed payments were made within the grace period of five days allowed by PF authorities. As per the Circular dt. 29th April, 1967, if the employer makes the payment within such period of grace, the appellant is not liable to pay any damage in accordance with the employees PF scheme and the relevant Act and the assessee will also not be treated to be in default under the relevant Act. The various judicial decisions referred to above also support the contention of the learned counsel that payments made within the grace ....
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....e, on the ground that the liability to pay these amounts, had been incurred by them, in the relevant previous year. After the insertion of s. 43B, even if the assessee had regularly adopted the mercantile system of accounting, the amount of tax payable by the assessee could be deducted only in the year, in which the sum was actually paid and not in the year, in which the assessee incurred the liability to pay that tax. However, an assessee, who had collected sales-tax in the last quarter of the accounting year and deposited it in the treasury, within the statutory period, falling in the next accounting year, was not entitled to claim any deduction for it. This was not intended by s. 43B. To obviate this kind of unexpected outcome of s. 43B, the first proviso was added in s. 43B by the Finance Act of 1987. The proviso makes it clear that the section will not apply in relation to any sum, which is actually paid by the assessee, in the next accounting year, if it is paid on or before the due date, for furnishing the return of income, in respect of the previous year, in which the liability to pay such sum was incurred and the evidence of such payment is furnished by the assessee, along....
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....ove omission of the second proviso and the amendment to the first proviso brings into sharp focus the legal effect, that may ensue on all matters, pending assessment, containing the issue of payments in respect of welfare dues, made before the due date of filing the return. The first proviso and the second proviso to s. 43B of the Act contain due dates for various payments, enumerated in sub-cls. (a) to (f) of s. 43B of the Act. Consequently, these provisos contained identical legislative intent, on the issue of due date of payments, covered under s. 43B of the Act. In view of this, the decision of the Hon'ble Supreme Court of India, in the case of Allied Motors (P) Ltd. vs. CIT is squarely applicable to the deleted second proviso and amendment to first proviso to s. 43B of the Act. In the case of Allied Motors (P) Ltd., the apex Court of the land has categorically held, following the rule of reasonable construction of the statutory provisions, that the first proviso to s. 43B of the Act is retrospective in operation. On the same analogy, the decision of the Supreme Court is applicable to the amendment made by the Finance Act, 2003 w.e.f. 1st April, 2004. 4(ii) The above vie....
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....by the Finance Act, 2003, w.e.f. 1st April, 2004, should be read retrospectively and should be understood as if s. 43B would not be applicable to the assessee." 4(v) In this context, it is essential to trace and appreciate the legislative history of the provisions of s. 43B of the Act and subsequent amendments to first proviso and deletion of second proviso thereunder. Thus, the entire section should be read and construed harmoniously, with a view to ascertaining the true legislative intent as to give proper meaning to all the limbs of the provisions of s. 43B of the Act. Further, it is pertinent to contextualise the ratio of the decision of the Hon'ble Supreme Court, in the case of Allied Motors (P) Ltd. vs. CIT rendered in the context of first proviso, with reference to the deletion of the second proviso to s. 43B of the Act. In view of this, the ratio of the decision in the said case is applicable to the due date covered under the deleted second proviso to s. 43B of the Act as held by the jurisdictional Bench of the Tribunal in the decision discussed earlier. In view of the above legal and factual discussions, we do not find any reason to interfere with the finding of ....
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....e facts of the case. The AO made the disallowance of Rs. 48,44,030 being commission paid to two parties viz. (i) M/s IPL and M/s GMC. The AO's first contention is that commission has been paid to parties, effecting sales to Government undertakings, i.e., for supplies made to ONGC and Gujarat Petronet Ltd. and it is against the public policy to use intermediary for supplies made to Government. He accordingly applied Explanation to s. 37. It is seen that the AO has been influenced by the order of assessment, for the asst. yr. 2000-01, which has finally been quashed by the Tribunal, vide its order dt. 20th April, 2005, in ITA No. 2309/Del/2004. The AO has also placed reliance on the decision of the Settlement Commission's order dt. 30th July, 2004 in the case of M/s Ahluwalia Contract (India) Ltd. New Delhi, and decision of Delhi High Court, in the case of CIT vs. Orissa Cement Ltd. (2002) 177 CTR (Del) 361 : (2002) 258 ITR 365 (Del). I have gone through the submission of the learned counsel, copy of the agreements and appointment letters, issued to these agents. Confirmations have been filed by the commission recipients. Payments were made through account payee cheques. They ....
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....he competition between the applicant and other big contractors, for securing big works from big parties, the applicant had to resort to pay back to the parties concerned, a substantial amount of the receipts against the works awarded. It has been claimed that while all the receipts, including the receipts, which were agreed to be paid back by the applicant. have been accounted for on the receipt side, the applicant had to generate cash, for paying back to these clients, which he did by drawing bearer or account payee cheques from its regularly maintained bank accounts. It has been claimed that such withdrawals from the banks came back to the applicant and were actually utilized for disbursement of payments to the big clients. It was pleaded by the Authorised Representative that since the contracts, received by the applicant, were on the basis of understanding of paying back certain amounts, the applicant was entitled to claim such amounts, as there was an overriding title of these payments on receipts. The Authorised Representative's plea in the case was that since a part of the, contract receipts had been mentioned as pay back in the diary seized, the total receipts of the app....
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....nder and other related works. Further, the appellant has explained in detail how the appellant and the parties concerned came together for promotion of appellant's business. The explanations given by the appellant, in this regard, are reproduced below; for proper appreciation of the facts....... The learned counsel, when asked for, produced before me various communications exchanged between these parties and the appellant. After going through the same, I found that the entire correspondence of Surat Municipal Corporation (a contract executed by the assessee with the assistance of M/s GMC) was also marked to GMC, as an agent. Further, the correspondences with the other parties, as detailed above, were also routed through GMC. This shows that the party has actively participated in the execution of contracts and has not acted as a person to influence the customer's employees in awarding contract to the appellant. Similarly, in the case of M/s IPL, I found that the party itself is a manufacturing-cum-trading firm of pipes. Initially, it has bought pipes from the appellant for supplies to ONGC, later on executed jointly a contract of ONGC, with the appellant. I....
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....he impugned appellate order and by the Authorized Representative of the assessee company, in the course of current appellate proceedings. It was contended that the parties to whom the payment of commission was paid were identifiable, the payment was made through account payee cheques, for the services rendered by the parties. The Revenue has failed to establish any collusiveness and colourable device, in making the payment of such commission. The quantum of such commission is not in dispute so is the case with the services rendered by the parties. Further, the parties confirmed the receipt of such commission and the same are assessed to tax as observed by the CIT(A). In the instant case, the Revenue is making an assertion of applicability of the provisions of the said Explanation, therefore, the onus to prove the same is cast on it, and the onus remained undischarged by way of cogent and corroborative material. However, the Revenue has failed to bring on record requisite cogent, corroborative and reliable evidences, to justify invocation of the said Explanation, as held by the learned CIT(A) also. 5(ii) The Revenue has not disputed the eligibility of the claim under s. 37(1) of ....
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....to another case is not at all decisive...... Precedent should be followed only so far as it marks the path of justice, but you must cut the dead wood and trim off the side branches, else you will find yourself lose in thickets and branches. My plea is to keep the path to justice clear of obstruction which could impede it." (b) In the case of Union of India vs. Major Bahadur Singh (2006) 1 SSC 368, at pp. 373 and 374, the Hon'ble Supreme Court, while dealing with a similar situation and referring to the principles, in the matter of applying precedents held as under: "The Courts should not place reliance on decisions without discussing, as to how the factual situation fits in with the fact-situation of the decision on which reliance is placed. Observations of the Courts are neither to be read as Ecuclid's theorems nor as provisions of the statute and that too taken out of their context. These observations must be read in the context in which they appear to have been stated. Judgments of the Courts are not to be construed as statutes. To interpret words, phrases and provisions of a statute, it may become necessary for Judges to embark into lengthy di....
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....ctively since the inception of IT Act, 1961, that any money paid by way of extortion will not qualify for deduction as a business expense." To ascertain the clear legislative intent or the object or purpose, behind the legislation, the Speech made by the Finance Minister, can be taken into consideration, as held by the Hon'ble Supreme Court, in the case of Sole Trustee. Loka Shikshana Trust vs. CIT 1975 CTR (SC) 281 : (1975) 101 ITR 234 (SC). 5(vi) The insertion of Explanation to s. 37 of the Act, has been explained by the CBDT, vide Circular No. 772, dt. 23rd Dec., 1998 [(1999) 151 CTR (St) 9 : (1999) 235 ITR (St) 351. which is in the nature of contemporanea expositio and a statute may be interpreted by reference to this exposition, as made by the CBDT. the highest body in the tax administration. The Explanation to sub-s. (1) was inserted by the Finance (No. 2) Act, 1998, with full retrospective effect from 1st April, 1962. The amendment is explained in the Board circular as under: "20 Disallowance of illegal expenses 20.1 Sec. 37 of the IT Act is amended to provide that any expenditure incurred by an assessee for any purpose which is an offence or w....
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....en placed by the Revenue before the CIT(A) or before the Bench establishing any violation of public policy or provisions of any statute. It is well-settled legal proposition that Revenue cannot decide on an issue without proper facts supporting its decision. A decision based on the foundation of mere assertion or surmises or suspicion is liable to be quashed by higher Court. The decision must be supported by concrete facts and cogent evidences. This is a fundamental rule of justice. The Supreme Court has often frowned upon such tendency of the AO to frame the assessment order, on mere surmises and set aside these cases. This view has been held by the Supreme Court in the cases of Dhirajlal Girdhanlal vs. CIT (1954) 26 ITR 736 (SC), Omar Salay Mohamed Sait vs. CIT (1959) 37 ITR 151 (SC), Dhakeshwari Cotton Mills Ltd. vs. CIT (1954) 26 ITR 775 (SC) and Lalchand Bhagat Ambica Ram vs. CIT (1959) 37 ITR 288 (SC). Thus, in a given fact-situation of the instant case, the Revenue has failed to justify invocation of the said Explanation and consequent addition, as the parties to whom commission was paid, mode of payment through account payee cheques, quantum of commission, for the purpose o....
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....g aforesaid disallowance, the AO has observed that aforesaid allocation of total funds in the ratio of interest-bearing funds and own funds was made by the AO in assessee's own case for asst. yr. 2000-01 for the purposes of disallowing interest in respect of interest free loans, given to subsidiaries and group companies and that the same should be followed. The AO has further observed that it cannot be believed that the entire business operation was conducted with borrowed funds and the amounts advanced allegedly interest free to group companies was out of own funds. The AO also observed that the amount advanced to one of the group companies, M/s Hexa Securities is doubtful of recovery and no interest is being charged from the aforesaid company after 30th June, 2000. The AO has not given any concrete finding based on any material regarding the interest-bearing borrowed funds having been utilized for advancing loans to sister-concern and he has based his conclusion on conjectures and surmises. At the year end appellant was having interest-bearing borrowed funds of Rs. 358.83 crores. The statement gives the entire details of borrowings and the purpose o....
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....) CIT vs. Dhampur Sugar Mills Ltd. (2005) 274 ITR 370 (All). Further, the Supreme Court in the case of S.A. Builders Ltd. vs. CIT (2006) 206 CTR (SC) 631 : (2007) 288 ITR 1 (SC) has held that no disallowance under s. 36(1)(iii) of the Act is to be made if interest-bearing funds are passed to sister-concern on account of commercial expediency i.e., the funds are required for business purposes of the sister concerns for non-business purposes. In the appellant's case the funds have been provided to the subsidiary in which there is huge investment for the purpose of its business and have been utilized in its business and, therefore, following the decision of the Supreme Court in the case of S.A. Builders, the interest paid by the appellant, assuming it is out of funds borrowed by it, is to be allowed deduction. It may also be peretinent to mention that the loan given to the appellant's group company, M/s Hexa Securities & Finance Ltd. was not interest free. However, in view of the precarious financial conditions of that company no interest was charged after 30th June, 2000. It should be noted that out of loan of Rs. 84.76 crores given to Hexa Securiti....
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....45 ITR 492 (Del); (iv) CIT vs. Girish Mohan Ganeriwala (2003) 260 ITR 417 (P&H). The CIT(A) appreciating the aforesaid submissions has deleted the disallowance of interest expenditure of Rs. 6.3 crores allegedly relating to interest free loans given to group companies and the order of the CIT(A) needs to be upheld. Without prejudice, the average percentage of interest relatable to borrowed funds has been wrongly computed by the AO at 12.54 per cent instead of 9.96 per cent and even if it is assumed that during the relevant previous year funds were advanced to the subsidiary partly out of borrowed funds, the disallowance of interest cannot exceed by Rs. 56.70 lacs (i.e. 62.5 per cent of Rs. 9.11 crores of 9.96 per cent). The assessee has invested a sum of Rs. 69.46 crores in shares and Government securities out of which Rs. 67.36 crores related to investment in subsidiaries and group companies of the appellant. Out of the aforesaid amount Rs. 67.36 crores, the income from investment in overseas companies to the extent of Rs. 11.04 crores, was not exempt from tax. The appellant received sum of Rs. 42.02 lacs as dividend from investment mad....
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.... earning of exempt income, disallowance cannot be made under s. 14A of the Act: (i) Asstt. CIT vs. Eicher Ltd. (2006) 101 TTJ (Del) 369; (ii) Maruti Udyog Ltd. vs. Dy. CIT (2005) 92 TTJ (Del) 987 : (2005) 92 ITD 119 (Del); (iii) Punjab National Bank vs. Dy. CIT (2006) 103 TTJ 908 (Del); (iv) Vidyut Investment Ltd. vs. ITO (2006) 10 SOT 284 (Del); (v) D.J. Mehta vs. ITD (2007) 107 TTJ (Mumbai) 12 : (2007) 290 ITR 238 (Mumbai)(AT); (vi) Wimco Seedlings Ltd. vs. Dy. CIT (2007) 109 TTJ (Del)(TM) 462 : (2007) 107 ITD 267 (Del)(TM). There is no finding in the earlier assessment years that the investments made in the earlier year in the group companies have come out of borrowed funds. In fact, in the asst. yr. 2000-01, it was held by the Tribunal in the appellant's own case that the investment has been made out of own interest free funds available with the appellant. It is pertinent to note that AO conducted detailed enquiry on that aspect in the immediately preceding assessment year, i.e., for asst. yr. 2001-02 and after examination accepted the appellant's plea that own funds have been used for making invest....
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....s well as its own funds is being diverted to the subsidiaries and group companies by way of investment in their shares and loans and advances to them. By adding Rs. 366.54 and Rs. 220.33 crores, as mentioned above, the AO worked out total funds of the assessee at Rs. 587 crores against which, according to the AO, on the asset side the assessee had investments in shares aggregating to Rs. 64 crores, loans and advances to group companies and subsidiaries aggregating to Rs. 84 crores, fixed assets aggregating to Rs. 180 crores and bank balances of Rs. 87 crores, etc. (totalling to Rs. 587 crores). The AO, therefore, drew an inference that investments in the shares of group companies and advance to group companies were made partly by own funds and partly by borrowed funds in the ratio of 37.5 per cent and 62.5 per cent respectively. He, accordingly, held that out of Rs. 64 crores investment in shares, Rs. 40 crores were out of borrowed funds (62.5 per cent of 64 crores) and similarly, out of Rs. 84 crores of loans and advances to M/s Hexa Securities Rs. 52.5 crores were made out of borrowed funds. After setting off interest received and paid, the AO applied 12 per cent interest attribu....
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....eing paid by the appellant on its borrowed funds. No doubt, the appellant has not maintained two separate accounts-one for the borrowed funds and the other for its own funds. It deposited the profits and other accruals also in the same account and loans and advances were also made out of the same account. The specific claim of the appellant was that the loans/advances to its subsidiary group companies were given out of the funds available to it in the shape of profits, share capital, etc. and not out of borrowed funds. The AO admitted in the order itself that appellant's interest free fund was to the extent of Rs. 220.33 crores. The appellant's contention is that this was after depreciation of different years and if own fund were computed before depreciation the same will be Rs. 383.56 crores as on 31st March, 2002. The learned counsel's contention is that allowance of depreciation from year-to-year is to recoup the cost of the assets, as this is a non-cash expenditure, therefore the accumulated depreciation is also part of own funds which the appellant could use for any purpose. As regards the interest-bearing borrowed funds to the extent of Rs. 358.83 crores standing ....
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....of s. 14A. Here again, there was no finding by the AO that interest-bearing funds were utilized for investment in shares of group companies or others for earning dividend which is exempt under s. 10(33). In the asst. yr. 2000-01 on the same issue, CIT, Delhi-III, passed an order under s. 263 referring to the very same issue. While disposing of the appeal against, the said order, the Tribunal made the following observations: 'On merit in the first issue of disallowance on dividend received involving provisions of s. 14A, the learned CIT had issued a show-cause notice on the contention that no disallowance has been made out of dividend income keeping in view the provisions of s. 14A of the Act. The learned CIT has mentioned that there has been a significant change in the composition of investment in shares of appellant during the year inasmuch as shares of Jindal Steel & Power were acquired for Rs. 5.44 crores and shares of Jindal Strips Ltd. were reduced from 8,71,793 shares to 5,23,076 shares. This finding of the learned CIT when compared with the schedule of investment given in the balance sheet itself shows that these shares have increased and decreased due to busine....
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....is also pertinent to note that in the immediately succeeding year i.e. in asst. yr. 2001-02, AO has specifically looked into the applicability of s. 14A and has made no disallowance. Further, in the preceding years also, there has been no disallowance of interest against dividend income. Applying the rule of consistency, no disallowance was called for unless there has been material change in the facts. The CIT in his order has not brought out any change in the facts and thus on this plea also no disallowance was called for. We also agree with the plea of the learned Authorised Representative that dividend is a dormant income and no efforts or expenses are required to earn the same. This view is also supported by the decision of Calcutta Bench of the Tribunal in the case of Usha Martin Industries Ltd. vs. Dy. CIT (2003) 79 TTJ (Kol) 23 : (2003) 86 ITD 261 (Kol). We therefore do not agree with the learned CIT that the AO committed any error in not applying provisions of s. 14A in the present case'." 6(ii) The learned CIT(A) comprehensively dealt with the factual and legal issue of the ground of appeal in question from p. 12 to p. 23 of the impugned appellate order. On a perusa....
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.... total income. The newly inserted section can be understood to mean that expenditure in relation to such exempt income will not be allowable. Sec. 14A of the Act has codified well-settled legal principle that expenditure in relation to earning tax-free income is not an allowable item. Therefore, even in the absence of a new s. 14A, the law was well-settled on the issue. It may be important to know that Explanatory Memorandum clearly states that this new provision was only clarificatory in nature. The newly inserted s. 14A has used the phrase "expenditure incurred in relation to income not includible in total income", which implies that even the statute contemplates some kind of single, 'nexus' between expenses which may be disallowed and the exempted income. From a plain reading of s. 14A and the Explanatory Memorandum thereto, it would be clear that only the direct expenses incurred for earning an income which is exempt from tax will not (sic) be covered by the new section. 6 (v) The appellant in support of its contention placed reliance on the decision of the jurisdictional Tribunal in the case of Asstt. CIT vs. Eicher Ltd. (2006) 101 TTJ (Del) 369. For the purpose of ....
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....ust have been actually incurred, not notionally. Reading both the abovementioned expressions together, the conclusion seems inescapable that the expenditure which the AO seeks to disallow under s. 14A should be actually incurred and so incurred with a view to producing non-taxable income. If this much is clear from the section, it follows that it is the duty of the AO to pinpoint such expenditure on the basis of the material on record. Sec. 14A only removes the disability on the part of the AO to disallow such expenditure, a disability to which he was subjected by the three judgments of the Supreme Court. The mere removal of the disability statutorily, however, does not ipso facto authorize him to assume that a part of the expenditure has been incurred by the assessee in relation to the exempted income and to proceed to disallow the same on estimate. The section does not relieve the AO of the burden of proving, on the basis of evidence or material on record that the assessee has in fact incurred expenditure which has relation to the exempted income. There is no dispute that the entire dividend of Rs. 83,02,635 which is exempt under s. 10(33) was received from EM Ltd. by a single di....
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....wed funds obtained by the appellant were for specific business purposes and the Revenue failed to give clear findings that such funds were not used for the purposes of the business, for which the same were borrowed but used for making investment in shares or for giving loans to group companies. The total assets of the company as on 31st March, 2002, as per balance sheet stood at Rs. 605.33 crores, as highlighted in the impugned appellate order. The investment/interest free loans and advances out of it stood at Rs. 141.33 crores. If this is reduced from the total assets, the business assets/investments as on 31st March, 2002 would be Rs. 464 crores, which is more than interest-bearing funds of Rs. 358.83 crores. The AO applied the ratio of funds, i.e., interest free funds and borrowed funds to the total funds available and worked out the interest on this presumption that interest-bearing funds might have also been used for such investment and loans to group companies. The Revenue failed to substantiate such contention by way of corroborative factual findings. It is further added that interest free advances to subsidiary and other companies and investment in shares of group/subsidiar....