TaxTMI 
TaxTMI 
2016 (6) TMI 21
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....s. 7,20,000/- as discussed in ground no. '1' and '2' the Ld. CIT(A) has failed to consider the facts of the case as brought out by the AO while framing assessment. (iv) That, it is prayed that the order of the Ld. CIT(A) be set aside and that of the Assessing Officer restored." 3. The brief facts of the case as noted in the assessment order are that assessee company is engaged in the business of manufacturing of electrical stamping and allied products. The case of the assessee was selected for scrutiny. During the course of assessment proceedings, the Assessing Officer observed that assessee had made investment in share capital of sister company and had also advanced interest free loans to sister concerns. The Assessing Officer observed that assessee had incurred an expenditure on account of interest on various loans, therefore, the assessee was required to give details of sources of funds from which the investment was made and was also directed to explain as to why the proportionate interest on account of interest expenditure attributable to such investment be not disallowed. In response the assessee filed written submissions and stated that assessee wa....
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.... Year 2009-10, 2010-11 and 2011-12 which are internal accruals and therefore the company had substantial resources of its own to make the investments in share capital or share application or partner capital of its sister/subsidiary companies/concerns and no funds were borrowed to make the said investments/contribution. The Ld. AR of the assessee company also strongly contended with the facts and figures of the working capital loans raised from banks and the companies and with regard to employment of the total funds in the requisite working capital such as stocks/stores, sundry debtors and other current assets. In the opinion of the assessee company investment in the working capital far exceeded the working capital loans taken from the Banks and the said working capital loans were kept deployed for the purposes it was sanctioned and released which were also being regularly monitored by the bankers. It was, therefore, contended that no amount of working capital funds could be assumed or presumed or said to have been deployed/or utilized for making the investments in the sister/subsidiary concerns or utilized for contribution as partner's capital. It was also contended that no dis....
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....n a sister partnership concern on record. The investment in such shares is merely Rs. 2.75 crores in the financial year 2008-09 as against free funds of Rs. 12.38 crores and only Rs. 44.45 lacs as against profit of s. 14/63 crnres in the financial year 2009-10. Apart from this, the contribution as a partner in a sister concern during current year is only 56,81,349/- as against profits of Rs. 17.73 crores in the financial year 2010-11. More so, the working capital limit as raised from Banks and others also remained deployed in working capital requirements of the stocks/stores, sundry debtors and other current assets, investment in which apparently far exceeded such working capital limit availment and the Assessing Officer has only averred on presumed mixed use of funds. 5.5.2 Secondly it is also borne out from the records that no such disallowances/additions have been made under section 14A of the Act in any of the past assessment years under similar circumstances except in A.Y. 2010-11 which also stands deleted. The plea of the Assessing Officer that every year is an independent year and thus disallowance/additions can be made/sustained is also not well founded on the fact....
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.... included expenditure voluntarily incurred for commercial expediency and it was immaterial if a third party also benefitted thereby. It was held that the High Court as well as the Tribunal and other Income Tax Authorities should have approached the question of allowability of interest on the borrowed funds from this angle and they should have inquired as to whether the interest free loan was given to the sister company as a measure of commercial expediency and if it was, it should have been allowed. They further held that the expression "commercial expediency" was an expression of wide import and included such expenditure as a prudent businessman incurred for the purpose of business. The expenditure may not have been incurred under any legal obligation, but it was allowable if it was incurred on ground of commercial expediency. The irisdictional High Court have also, in their decision in the case of CIT vs Marudhar Chemicals & Pharmaceuticals (P) Ltd 319 ITR 75, held that disallowance of interest in respect of interest free advance to sister concern was not warranted where the advance was given as a measure of "commercial expediency". They have held that it was not relevant as to w....
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....taken this view earlier also in ITA No. 504 of2008 (Commissioner of Income Tax Chandigarh II vs .M/s Winsome Textile Industries Limited, Chandigarh) decided on 25.08.2009, wherein it was observed as under: "6. Contention raised on behalf of the revenue is that even if the assessee had made investment in shares out of its own funds, the assessee had taken loans on which interest was paid and all the money available with the assessee was in common kitty, as held by this Court in CIT v. Abhishek Industries Limited (2006) 286 ITR 1 and therefore, disallowance under section 14A was justified. 7. We do not find any merit in this submission, judgment of this Court in Abhishek Industries (supra) was on the issue of allowability of interest paid on loans given to sister concerns, without interest. It was held that deduction for interest was permissible when loan was taken for business purpose and not for diverting the same to sister concern without having nexus with the business. Observations made therein have to be read in that context. In the present case, admittedly, the assessee did not make any claim for exemption. In such a situation, section I4A could have no applic....
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....d.(2014) 101R( Guj) 175, the Honorable Court has held as under: "In the case of an income, like dividend income, which does not form part of the total income, any expenditure incurred by the assessee in relation to such non-taxable income, the claim of deduction of such expenses incurred can not be allowed. The moot question here is as to whether the CIT(A) and the Tribunal were right in setting aside the order of AO, whereby it disallowed the sum of Rs. 91.80 lakhs, applying the provisions of s. 14A on the ground that the assessee had used interest bearing borrowed funds for earning dividend during the assessment year under question. The dividend income earned was of Rs. 9.80 crore and the estimate of expenditure was assessed @10 percent of the total income. Had the Revenue been successful in establishing that the assessee had incurred the expenses to earn the dividend income from the borrowed funds, the entire discussion of application of s. 14A could be understood. However, when both the CIT(A) and the Tribunal have noted that the assessee had sufficient funds available with it, which were more than the amount it invested for earning by the dividend income, both these a....
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....e in shares by the assessee by utilizing borrowed capital was for strategic business purposes because the companies were promoted as special purpose companies to strengthen and promote its existing business by combining different business segments and, therefore, the claim was fully allowable under s. 36(l)(iii). The Revenue did not adduce any material to show that the borrowed capital was utilized by the assessee for non-business purposes. The appellate authority was correct in allowing the claim of the assessee and deleting the disallowance made by the Assessing Authority - CIT ra Spencers & Co. Ltd (2014) 100 DTR (Mad) 314 followed. 5.8 In view of the above stated facts and in the circumstances of the case and after due examination of the facts as brought out above, the contentions and arguments of the Ld. AR of the assessee company, the law laid down on the issue of disallowance of interest and expenditure by the Honorable Courts and more particularly my own decision in the case of the assessee company itself for the A.Y. 2010-11 on the identical issue, the additions/disallowance of Rs. 30,24,084/- made by the Assessing Officer by invoking the provisions of section 14A....
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....apital. Such expenses are clearly capital in nature and not allowable as a deduction. In view of the findings above, it is clear that the expenses incurred on account of the above mentioned advances are not allowable as a deduction. In view of the fact that the assessee has a mixed kitty offund, wherein both the borrowed funds and the funds out of its internal are deposited and have the same character, the possibility of having advanced bearing funds to the above mentioned person is not ruled out. In view of the above, P ide note sheet noting dated19/12/2013, the assessee was asked to explain as to why proportionate interest, out of the total interest payment, attributable to these advances should not be added back U/s 36(l)(iii) of the Income-tax Act. 5.3) In reply, the assessee filed a written submission dated 26/12/2013 & made the following defense: C) The loan taken is either for the purpose of working capital requirement or for the purpose of acquisition of specific asset. Moreover the investment in stock & debtors are much in excess of the working capital limit raised by the Company & hence no interest payment is attributable to this advance. ....
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....ment of interest advances to the following persons/parties for purportedly alleged non business purposes, is absolutely wrong, unjustified unfounded and contrary to the facts and the legal provisions u/s 36(l)(iii) of the Income Tax Act, as shall be evident from the submissions, facts, legal provisions and reliance on the legal citations as under: (a). M/s Oriel Ventures Advance Rs. 35 Lacs - disallowance of interest Rs. 4,20,000/- The facts are that the said advance was paid for the purposes to arrange finance for expansion plans to meet the working capital requirements by issuing convertible debentures on private placement basis of Rs. 70 crore. A copy of the Agreement was also placed on record with our explanations vide submissions of 21s' Feb., 2013, the nature of the said transaction is very much of Revenue Nature and not for capital nature purposes. The said advance was called back and received on finding their adequacy to render adequate purposes, but as the said cheque, as received was dishonored, the amount was thus pending due recoverable. Whereas contrary to the said facts, the Learned DCIT has observed and misdirected himself that the advances was ....
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....as also an availability of large sundry creditors of Rs. 51.19 crore on which no interest was paid. The aforesaid disallowance/additions in respect of the said person was deleted and due relief was allowed in appeal order for the asstt. Year 2010-11 also. Therefore, in view of the decision of Hon 'able Courts as relied on para 11 (c) supra the said additions/disallowance was absolutely wrong and unjustified and it is prayed that sought for relief be granted by deleting the said additions/disallowances. That the Hon 'able Courts have held that in view of apparent own funds and substantial nal accrual generation and also large sundry creditors outstanding on which no interest is apparently paid by the assessee, there is no justification of disallowance of interest u/s 36(l)(iii) of the Act on purportedly alleged mixed fund use as presumed by the tax authorities. The reliance is also placed by the assessee company on the following decisions: i) CIT vs RPG Transmissions Ltd (2014) 100 DTR338 (Madras) ii) CIT vs Amarjothl Granites India (P) Ltd (2013) 263 CTR (Raj) 621 iii) SA Builders Ltd 288ITR 1 (Supeme Court) ....
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....rangement was for arranging working capital requirements by issuing of convertible debentures on private placement basis of Rs. 70 crore and not for raising and arranging any equity capital of the company, which could be said to be of capital nature. Moreover on the non performance of the said party, the advance was called for, repayment also received by cheque which was subsequently dishonored and amount was thus reflected as outstanding, As the amount was advanced for the purposes of working capital which is of revenue nature and very much for the normal business operations and purposes and therefore, on this ground also and in view of substantial internal accrual generation of the company on the relevant year, the basis of disallowance is not tenable. 6.4 In respect of the advance paid to Shri H.L, Katyal of Rs. 25 lacs and disallowance of interest on the said advance, in view of the facts brought on record and arguments of the assessee, the said advance is clearly related to a business associate. The Assessing Officer also has not brought on record that he is either a relative or related person. The sufficiency and availability of own non- interest bearing funds, of ow....