TaxTMI 
TaxTMI 
2016 (5) TMI 933
X X X X Extracts X X X X
X X X X Extracts X X X X
....i)(iii) of the Act and deleted the disallowance under section 40(a)(ia) of Rs. 64,37,342/- and further directed the AO to verify whether any exempt income had been earned by the assessee or not during the impugned year and if no exempt income was earned the disallowance made under section 14A was also directed to be deleted. 4. Aggrieved by the same both the Assessee and the Revenue filed the present appeal before us. 5. We shall first take up the appeal filed by the assessee in ITA No. 545/Chd/2015. 6. At the outset it may be stated that the appeal was time barred by 10 days. The Ld. AR filed an application dt. 19/04/2016, requesting condonation of delay on behalf of the assessee stating that since the mother of the Manager Finance of the Company had a sudden attack of paralysis, therefore filing of the appeal was delayed by 10 days. Ld. AR requested that the delay be condoned in view of the above application of the assessee. Ld. DR stated that he had no objection to the same. In view of the same we condone the delay and proceed to adjudicate the appeal filed. 7. The assessee has raised the following ground of appeal: "1. That the Ld. Commissioner of Income Tax (Appeals) has....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t regarding disallowance u/s 36(1)(iii) of the Income Tax Act, 1961(hereinafter referred to as 'Act') and the appellant had submitted as under: " The initial objective of the assessee company was to acquire hundred percent equity stake in M/s Vardhman Life Sciences Pvt. Ltd. thereby making it a hundred percent fully owned subsidiary. During the year under consideration the assessee company advanced Rs. 735.45 lacs for the business purpose of the subsidiary. However due to the limitation of The Companies Act, 1956, Section 301 any advance given irrespective of fact whether it is given a subsidiary or non subsidiary or non subsdiary the amount had to be mentioned it is reiterated that it had to be mentioned in para (vi)(iii)(a) & (b) of the audit report. The advance for given i.e. Rs. 735.45 lac is to be a subsidiary and the advance can never be prejudicial to the interest of the company.(sic)" 3.1.1 The Assessing Officer was not satisfied with the explanation of the appellant and disallowed interest @ 12% on this advance. The disallowance worked out to Rs. 33,92,141/-. 3.2 During the course of appellate proceedings, the Ld. Counsel for the appellant has filed a writ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he Ld. AR reiterated the contention made before the Ld. CIT(A) and stated that the advance had been made for business purposes and therefore there was no question of disallowing any interest under section 36(1)(iii) of the Act. Ld. AR drew our attention to the findings of the Ld. CIT(A) at para 3.3 of his order in this regard and stated that the fact that the advance had been made to its 100% subsidiary which was to manufacture the main raw material being used by the assessee company has not been controverted by the lower authorities. Ld. AR stated that the Ld. CIT(A) has held the advance to be for non business purposes merely for the reason that the subsidiary company had not started functioning or manufacturing during the year. The Ld. AR stated that the fact that the subsidiary company was to manufacture the main raw material to be used by the assessee company has not been disputed by the Ld. CIT(A), it therefore cannot be stated that the advance had not made for the purpose of the business of the assessee. Ld. AR relied upon the decision of the Hon'ble Supreme Court in the case of Hero Cycles (P) Ltd. Vs. CIT(Ludhiana) in Civil Appeal No. 514 of 2008 dt. 05/11/2015 and the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....or the assessee company, the advance was clearly given to facilitate the advancement of the business purposes of the assessee company only. Giving of the advance for the business of the subsidiary can be said to be for the purpose of the business of the assessee company only since undeniably the assessee company was to derive benefit from the setting up of the subsidiary company as it would enable it to procure raw material at cheaper cost and also ensure regular supply of the same. The Hon'ble Apex Court has elaborately dealt with the meaning of the expression "commercial expediency" in the context of section 36(1)(iii) in the case of S.A. Builder 288 ITR 1 wherein it has held at para 19, 20, 21, 23, 24, 26, 30, 35, & 36 as follows: "19. We have considered the submissions of the respective parties. The question involved in this case is only about the allowability of the interest on borrowed funds and hence we are dealing only with that question. In our opinion, the approach of the High Court as well as the authorities below on the aforesaid question was not correct. 20. In this connection we may refer to s. 36(1)(iii) of the IT Act, 1961 (hereinafter referred to as the &#....
X X X X Extracts X X X X
X X X X Extracts X X X X
....2002) 254 ITR 377 (Del) 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 armchair 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 its profit. The IT authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own viewpoint but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister-concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits. 36. We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister-concern. It all depends on the facts and circumstances of the respective case. For instance, if ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....it cannot in the facts of the present case, be said that it was not made for the purpose of business of the assessee. Moreover the Apex Court has also categorically stated that where the holding company has deep interest in its subsidiary, which uses the money advanced for some business purposes, the assessee would be entitled to claim deduction under section 36(1)(iii) of the Act. Undeniably in the present case the assessee is the holding company of Vardhman Life Sciences (P) Ltd. holding 100% interest in it and further it is an admitted fact that the advance has been used by the assessee for setting up its business, clearly therefore, the advance given by the assessee satisfied the test of commercial expediency. In view of the above, we unhesitatingly hold that the amount advanced by the assessee to its subsidiary i.e; Vardhman Life Science (P) Ltd., was for the purpose of business. We therefore hold that no disallowance under section 36(1)(iii) us warranted in this case. The case laws relied upon by the Ld. DR, we find, are of distinguishable, since in both the cases there was a clear finding of fact that the advance was not given for business purpose. Ld. AR has alternative....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n of the Calcutta High Court in Woolcombers of India Ltd. (1982) 134 ITR 219 where a similar issue had arisen. Before the Supreme Court it was argued that it should have been presumed that in essence and true character the taxes were paid out of the profits of the relevant year and not out of the overdraft account for the running of the business and in these circumstances the appellant was entitled to claim the deductions. The Supreme Court noted that the argument had considerable force, but considering the fact that the contention had not been advanced earlier it did not require to be answered. It then noted that in Woolcomber's of India Ltd.'s case [1982] 134 ITR 219 the Calcutta High Court had come to the conclusion that the profits were sufficient to meet the advance tax liability and the profits were deposited in the overdraft account of the assessee and in such a case it should be presumed that the taxes were paid out of the profits of the year and not out of the overdraft account for the running of the business. It noted that to raise the presumption, there was sufficient material and the assessee had urged the contention before the High Court. The principle therefor....
X X X X Extracts X X X X
X X X X Extracts X X X X
....per section 14A read with Rule 8D be not made in the present case since the income earned from the investment in the nature of dividend would be exempt from tax. The assessee submitted that it had not earned any income from the impugned investment and hence no disallowance under section 14A was warranted. Ld. AO rejected the contention of the assessee and computed the disallowance under section 14A read with Rule 8D at Rs. 40,28,526/- and added the same to the income of the assessee. 19. Before the Ld. CIT(A) the assessee pleaded that since it had not earned any exempt income on the investment made, no disallowance under section 14A was to be made, in view of the judgment of Jurisdictional High Court in the case of CIT Vs. Lakhani Marketing in ITA No. 970 of 2008. Ld. CIT(A) agreed with the contention of the assessee and directed the AO to verify whether any exempt income had been earned during the year and if no such income was earned no disallowance under section 14A was to be made. 20. Before us the Ld. DR argued that in view of the CBDT Circular No. 5/2014 wherein it has been clarified by the Board that disallowance of expenditure under section 14A read with Rule 8D has to be....
X X X X Extracts X X X X
X X X X Extracts X X X X
....para 6 of its order as follows: "Circulars and instruction issued by the Board are not doubt binding in law on the authorities under the respective statutes, but when the Supreme Court of the High Court declares the law on the question arising for consideration, it would not be appropriate for the Court to direct that the circular should be given effect to and not the view expressed in a decision of this Court or the High Court. So far as the clarifications / circulars issued by the Central Government and of the State Government are concerned they represent merely their understanding of the statutory provisions. They are not binding upon the court. It is for the Court to declare what the particular provision of statute says and it is not for the Executive. Looked at from another angel, a circular which is contrary to the statutory provisions has really no existence in law. In view of the above, we reject the contention of the Ld. DR in this regard. Further the reliance placed by the Ld. DR on the decision of the Apex Court in Walfort Share & Stock Pvt. Ltd. (supra), we find is misplaced. The Hon'ble Apex Court, had in that case laid down the basic principles governing sect....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ore us the Ld. DR relied upon the order of the AO and stated that the assessee having failed to deducted TDS on Letter of Credit opening charges, it was a violation of the provisions of section 40(a)(ia), and the same was required to be disallowed. 29. Ld. AR on the other hand relied upon the order of the Ld. CIT(A). 30. We have heard the rival submission and order of the authorities below and also the documents placed before us. 31. We do not find any infirmity in the order of the Ld. CIT(A) deleting the disallowance by holding that the impugned payment was not liable to tax deduction at source in view of section 194A(3) and thus could not be a subject matter of disallowance under section 40(a)(ia) of the Act. Undeniably the impugned payment of Rs. 64,37,342/- made by the assessee to scheduled banks for opening letters of credit was in the nature of interest as per the provisions of section 2(28A) of the Act but since the amount had been paid to scheduled banks no tax was required to be deducted at source on the same in view of the provisions of section 194A (3)(iii) which categorically exclude interest paid to banks from the perview of tax deduction at source Section 194A(3)(i....