TaxTMI 
TaxTMI 
2012 (5) TMI 622
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....009. 2. First we take up ITA No. 488/Kol/2011. This appeal of assessee is against the revision order passed by CIT u/s. 263 of the Act, revising the assessment framed u/s. 143(3) vide assessment order dated 22.12.2008. At the outset, Ld. Counsel for the assessee fairly stated that the AO while passing consequential order i.e. order u/s. 263 r.w.s. 143(3) of the Act dated 14.10.2011 has accepted the total income computed by AO u/s. 143(3)/251/154 dated 24.02.2010 at Rs. 1,35,63,565/- and also verified the foreign exchange reserve created and found the same in accordance with the provisions of section 80HHD of the Act, which has duly been utilised for the specific purpose as envisaged in sub-section (a) to (f) of section 80HHD(4) of the Act. According to Ld. Counsel, now this issue of section 263 of the Act i.e. the revision order is academic only and requires no adjudication. Ld. CIT, DR also fairly conceded the position. In view of the above, we dismiss the appeal of the assessee being infructuous as academic. 3. Now, we are taking ITA No.525/Kol/2011. The first issue in this appeal of assessee is against the order of CIT(A) confirming the disallowance of employees' contribut....
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.... within due date of filing of return of income u/s. 139(1) of the Act, then addition should be deleted in full. We order accordingly. This ground of appeal of the assessee is allowed for statistical purposes. 5. The next issue in this appeal of assessee is against the order of CIT(A) confirming disallowance of prior period expenses on account of interest of Rs. 2,50,930/- and Rs. 2,59,408/- related to F.Y. 2004-05 and 2005-06. For this, assessee has raised following ground no. 2: "2. For that in view of the facts and circumstances of the case the Ld. CIT(A) was wholly wrong and unjustified in confirming the arbitrary disallowance of Rs. 5,10,338/- made in the assessment on a/c of prior period expenses representing the interest expense of Rs. 2,50,930/- and Rs. 2,59,408/- for the F.Ys. 2004-05 & 2005-06 respectively without considering the facts that the said expenditure related to the electricity charge, allowable as a revenue expense and it may kindly be held accordingly." We have heard rival submissions and gone through facts and circumstances of the case. We find that the CIT(A) has confirmed the disallowance by following finding in para 4.1 of his appellate order: "4.1. I....
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....ngly ground no. 6 taken by the appellant is dismissed." We find no infirmity in the order of CIT(A) and even in earlier years the assessee's claim has been allowed @ 10% as per depreciation rules. Accordingly, this issue of assessee's appeal is dismissed. 8. The next issue in this appeal of assessee is against the order of CIT(A) confirming the estimated proportionate disallowance of interest at Rs. 37,86,614/- paid on borrowed funds having advanced interest free to its subsidiary company and sister concern. For this, assessee raised following ground no. 4: "For that in view of the facts and circumstances of the case the Ld. CIT(A) was wholly wrong and unjustified in confirming the estimated proportionate disallowance of interest of Rs. 37,86,614/- paid on borrowed funds on the alleged ground of having advanced interest free loans to its subsidiary company and another sister concern out of borrowed funds without establishing any direct nexus between the borrowed funds and the interest free loans advanced out of it and also without considering the facts on record that the said interest free loans were advanced out of assessee's own capital and reserves and hence it m....
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....ofit i.e. net profit as per P&L Account before making provisions for taxation is Rs. 3,50,51,698/- and if we reduce prior period adjustment of Rs. 5,10,339/-, the resultant net profit will be Rs. 3,45,41,359/-. Even otherwise the non cash expenditure i.e. depreciation the assessee has available cash of Rs. 1,86,44,232/- thereby net profit in the shape of cash available with the assessee during the year is Rs. 5,31,85,591/-, which is more than the amount advanced by the assessee to its subsidiaries. Ld. Counsel stated that once own funds are available and assessee has advanced out of the same as interest free, no disallowance on account of interest be made. He also stated that even otherwise the assessee company has undergone demerger of its Goa unit with HHI Resorts Pvt. Ltd., a hundred per cent subsidiary, by virtue of scheme approved by Hon'ble Calcutta High Court dated 16.03.2007, at a consideration of 2225800 equity shares of Rs. 10/- each fully paid at a premium of Rs. 50/- per share in HHI Resorts Pvt. Ltd. The above scheme consists of transfer of whole of properties of Goa unit of S. P. Jaiswal Pvt. Ltd. as a going concern as on 31.03.2006 and the asset owned by S. P. Ja....
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....siness income of the partner. In view of this change of law, the Tribunal disallowed payment of the interest in the present case for the assessment years 1994-95, 1995-96, 1996-97 and 1997-98. However, the point which has been left out from consideration is that the loans which were given in August/September, 1991 to the sister concerns got wiped out only in the assessment year 1997-98. As stated above, for the assessment year 1992-93 and the assessment year 1993-94, the Tribunal held that the loans given to the sister concerns were out of the firm's funds and that they were advanced for business purposes. Once it is found that the loans granted in August/September, 1991 continued up to the assessment year 1997-98 and that the said loans were advanced for business purposes and that interest paid thereon did not exceed 18/12 per cent per annum, the assessee was entitled to deductions under section 36(1)(iii) read with section 40(b)(iv) of the 1961 Act. One aspect needs to be mentioned during the assessment year 1995-96, apart from the loan given in August/September, 1991, the assessee advanced interest-free loan to its sister concern amounting to Rs. 5 lakhs. According to the T....
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....s whether the amount was advanced as a measure of commercial expediency and not from the point of view whether the amount was advanced for earning profits. Once it is established that there was nexus between the expenditure and purpose of the business the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profits. Hon'ble Apex Court held as under: "We agree with the view taken by the Delhi High Court in CIT v. Dalmia Cement (B.) Ltd. [2002] 254 ITR 377 that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize his profit. The income-tax authoriti....
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....dly attributing the said expense as related to the earning of the exempt dividend income of Rs. 4,25,785/- and without establishing any direct nexus or relationship of such expenditure with dividend earned and as such action of Ld. CIT(A) in confirming action of A.O. is bad in law and it may kindly be held accordingly." 13. We have heard rival contentions and gone through facts and circumstances of the case. We find that Hon'ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra) has already held that applicability of Rule 8D of the Rules is prospective and not retrospective i.e. applicable w.e.f. assessment year 2008-09, wherein Hon'ble High Court has also directed to recompute disallowance in case there is a nexus for expenses with exempt income by laying down the principle as under: "(v) The provisions of rule 8D of the Income-tax Rules which have been notified with effect from March 24, 2008, shall apply with effect from the assessment year 2008-09; (vi) Even prior to the assessment year 2008-09, when rule 8D was not applicable, the Assessing Officer has to enforce the provisions of sub-section (1) of Section 14A. For that purpose, the Asses....
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.... by my learned colleague and have also had the opportunity of discussing the matter with him in detail. Much as I persuade myself to agree with the findings and conclusion arrived at by my learned colleague at para No.10 and 11 of the proposed order which relates to ground no.4 raised by assessee in ITA No.525/Kol/2011. I am unable to concur with him and my learned colleague is also not inclined to yield to my suggestions. Accordingly, to come out of the cul de sac and with the leave and consent of my Brother colleague, I proceed to write this separate and dissenting order. 16. The ground raised by assessee at ground no.4 is as under :- "4. For that in view of the facts and circumstances of the case the ld. CIT(A) was wholly wrong and unjustified in confirming the estimated proportionate disallowance of interest of Rs. 37,86,614/- paid on borrowed funds on the alleged ground of having advanced interest-free loans to its subsidiary company and another sister concern out of borrowed funds without establishing any direct nexus between the borrowed funds and the interest-free loans advanced out of it and also without considering the facts on record that the said interest-free loans ....
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.... of Government. This land was originally with the assessee-company and was transferred to the subsidiary company under the demerger scheme. Construction on the above mentioned land was not allowable even when the land with the assessee-company. In his explanation A/R could not explain the business expediency in granting the interest free loan to the subsidiary company. It is apparent from Balance Sheet that interest free loan to the subsidiary company was increased from Rs. 10,21.000/- in the previous year to Rs. 3,55,25,833/- in the current year However, there is no increase in the share capital and general reserve of the assessee company during that period. Rather secure loan from banks was increased from Rs. 13,31,88,370/- as on 31.03.2006 to Rs. 24,28,25,324/- as on 31.03.2007. Hence, A/R argument that assessee has substantial interest free fund in the form of share capital and reserve is not true. Further, A/R has quoted the decision of Supreme Court in the case M/s. S.A. Builders Ltd. v. CIT (2007) 288 ITR 1 (SC). Supreme Court has made clear in its decision that it is not their opinion that in every case interest on borrowed loan has to be allowed if the assessee advance....
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....ct can be made in para no.10. 18.1 In para no. 11 the ld. JM by applying the ratio laid down by Hon'ble Supreme Court in the case of S.A. Builders Ltd. (supra) I was of the view that in the present case the amount advanced by assessee-company to its sister concern is for advancement of its objects and falls under commercial expediency as enumerated by Hon'ble Supreme Court in the case of SA Builders Ltd. (supra). 18.2 However, in my view both the propositions laid down by the Hon'ble Apex Court in the cases on which the ld. JM placed reliance are not applicable to the facts of assessee's case. First in respect of the sufficiency of own funds the submissions made by the ld. Counsel which were taken into consideration by the ld. JM is misconceived. Since Assessing Officer as well as CIT(A) has categorically mentioned giving the finding. 18.3 The relevant findings of Assessing Officer are as under :- Findings of Assessing Officer :- "It is apparent from Balance Sheet that interest-free loan to the subsidiary company was increased from Rs. 10,21.000/- in the previous year to Rs. 3,55,25,833/- in the current year. However, there is no increase in the share capital ....
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....aving own funds to give to its sister concern. 18.7 Keeping in view of my above findings I am of the view that the facts of the present case are quite contrary to the facts of Munjal Sales Corporation (supra). Therefore in my opinion the ratio laid down by Hon'ble Apex Court in the case of Munjal Sales Corpn. ( supra) is not applicable to the present facts of the case. 19. As regarding the second observations of the ld. JM regarding the commercial expediency it is observed from the specific observations of the ld. AO which were confirmed by the ld. CIT(A) that Assessing Officer has categorically distinguished the applicability of the Supreme Court in the case of S.A. Builders (supra). The relevant portion of the observations are as under: "A/R has quoted the decision of Supreme Court in the case M/s. S.A. Builders Ltd. v. CIT [2007] 288 ITR 1 (SC). Supreme Court has made clear in its decision that it is not their opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister concerns. It all depends on the facts and circumstances of the case. Supreme Court has decided in the quoted case by relying on the decision of Delhi High....
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....originally came up for hearing, following point of difference has been referred to me by Hon'ble President under section 255(4) of Whether, in the given facts and circumstances of the case, the learned CIT(A) is justified in confirming the disallowance of interest on borrowed funds on the ground that the assessee's own funds are not sufficient to advance the same to the sister concerns and further whether the CIT(A) is justified in confirming the action of the AO by stating that the funds used by the sister concerns are not for commercial expediency ? 2. The assessee before me is a hotelier, and it owns and manages some hotels in Kolkata, Varanasi and Bhubaneshwar. In the course of its scrutiny assessment proceedings for this year, the Assessing Officer, inter alia, noted that while the assessee has not charged any interest on its advance of Rs. 3,55,25,833 to a subsidiary company by the name of HHI Resorts Pvt Ltd and advance of Rs. 3,32,258 to a group company by the name of United Hotel and Property Pvt Ltd., the assessee has paid interest on secured loans taken. When assessee was asked to explain the position, the assessee submitted that the advance was given to "the s....
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....sion was based on Hon'ble Delhi High Court in the case of CIT v. Dalmia Cements (P.) Ltd [2002] 254 ITR 377/ 121 Taxman 706 but then "the facts of Dalmia Cements' case are not identical with the facts of the assessee's case" as "in that case, loan was advanced to a company which was rendering services also to the loan creditors whereas there is no such relationship in assessee's case". With these observations, the Assessing Officer disallowed interest paid by the assessee on its borrowings in proportion of total advances to the subsidiary and group companies. The average interest rate was worked out at Rs. 10.56% and interest on entire interest-free fund of Rs. 3,58,58,091 was computed at Rs. 37,86,614. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. Learned CIT(A) held that as there was no increase in share capital and reserves of the company, it cannot be said that the assessee had sufficient interest-free funds generated during the year out of which interest-free advances were given. Learned CIT(A) further observed that as against interest free funds of Rs. 27.17 crores, the assessee has already invested Rs. 48.03 crore....
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....udicial Member was in error in applying the ratio of Hon'ble Supreme Court's judgment in the case of Munjal Sales Corpn.(supra) on the facts of this case, and that learned Accountant Member's finding, to the effect that the availability of interest-free funds by way of share capital, reserves and surplus and current profits is more than interest-free advance to sister concern, is 'misconceived'. He referred to the cash flow statement filed by the assessee and noted that "it is clearly evident that the cash flow generated by assessee on account of operating activities as well as investing activities has been set off against the cash flow from financing activities and resultantly there is a decrease of opening cash balance to the extent of Rs. 34,70,000" and that "under these circumstances, in my considered opinion, neither the profits of the assessee during the year, nor the surplus and reserves, will serve any purpose to contend that the assessee is having own funds to give to the sister concern". As regards the learned Judicial Member's reliance on Hon'ble Supreme Court's judgment in the case of S A Builders Ltd.(supra), learned Accountant Member wa....
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.... free funds available to the assessee were not sufficient to advance interest free advances to the sister concerns. 8. In my considered view, the impugned disallowance is unsustainable in law for the short reason that the interest free funds available with the assessee are far more than the interest free advances to the subsidiary companies, and that, in such a situation, as held by Hon'ble Bombay High Court in the case of CIT v. Reliance Utilities & Power Ltd. [2009] 313 ITR 340 / 178 Taxman 135 , the presumption has to be that the interest free advances are given out of the interest free funds available to the assessee. In support of this approach, I rely upon Hon'ble Bombay High Court's observations, in the case of Reliance Utilities & Power Ltd. (supra), as follows: If there be interest-free funds available to an assessee sufficient to meet its investments and at the same time the assessee had raised a loan it can be presumed that the investments were from the interest-free funds available. In our opinion the Supreme Court in East India Pharmaceutical Works Ltd.'s case (supra) had the occasion to consider the decision of the Calcutta High Court in Woolcombers....
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....on jurisdictional High Court constitutes binding precedent for this Tribunal. Hon'ble jurisdictional High Court has, in the case of J K Industries Ltd. v. CIT [1999] 238 ITR 820 (Cal.), has also adopted the same approach inasmuch as Their Lordships were in seisin of a situation in which the interest-free advance granted by the assessee to the subsidiary company was less than cash profit generated by the assessee, and, on these facts, Their Lordships held that "it should be presumed that the subsidiaries were paid out of the profit of the assessee which is far in excess of the amount paid to the subsidiaries". Viewed thus, on the facts of this case, no part of the borrowed funds can be said to have been diverted as non-interest bearing advances to the subsidiary companies. For this short reason alone, there is no room for any disallowance of interest paid on borrowings, on account of grant of interest free advances to the subsidiary companies, on the facts of this case. In my considered view, the CIT(A) was indeed in error in holding that the assessee did not have sufficient own funds to advance the interest free advances to the sister concerns. 10. As regards the second limb o....
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....ons regarding interest free advances having been made out of commercial expediency has simply brushed them aside. The approach adopted by the Assessing Officer, however, overlooks the factual aspect that the restrictions on constructions were placed by the directions of Goa Coastal Zone Management Authority which were under legal challenge by the assessee, and thus these restrictions had not achieved finality. When this fact was pointed out to the learned Departmental Representative, all he had to say was that at the relevant point of time construction was not possible and, therefore, the subsidiary company could not be said to be in the hotel related business. In my understanding, it is wholly irrelevant whether or not the assessee was actually in the hotel business or not. What is material is that the assessee, being one hundred per cent holding company of HHI Resorts Pvt Ltd, had a deep interest in the subsidiary and that the advances given to the subsidiary company were for the purposes of business. When an assessee gives an interest free advance to a one hundred per cent owned subsidiary for its business purposes, it cannot but ordinarily be said to be commercially expedient. ....