TaxTMI 
TaxTMI 
2013 (3) TMI 744
X X X X Extracts X X X X
X X X X Extracts X X X X
....lowance u/s 14A of the Act read with Rule 8D of the Income Tax Rues, 1962 by Rs. 1,72,81,626/- in complete disregard to the fact that such a disallowance resulted in assessing a new source of income in the appellant's hand which was also not the subject matter of appeal before the ld. CIT(A). 2.1) That the Ld. CIT(A) erred in law in computing the disallowance of interest expenses Rs. 1,72,81,626/- under Rule 8D(2)(ii) read with section 14A of the Act without appreciating the fact that the disallowance under Rule 8D had already been computed by the A.O. after reviewing the detailed submissions and records of the assessee and such an enhancement was beyond jurisdiction. 2.2) That the Ld. CIT(A) erred in law in computing Rs. 1,71,81,626/- as the enhanced disallowance under Rule 8D read with section 14A of the Act by adopting a self worked out formula in an adhoc and arbitrary manner. 2.3) That the Ld. CIT(A) erred in law in drawing an adverse presumption that part of the interest bearing borrowed funds were used for purpose of making investments in instruments yielding tax free income, not appreciating that the appellant had sufficient interest free funds fo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ssessee from Pharmax Corporation) on the average of opening and closing loans and advances given to the aforesaid companies, amounting to Rs. 19.45 crores. The AO relied on the decision of the Hon'ble Punjab & Haryana High Court in the case of Abhishek Industries Limited : 286 ITR 1. 3. On further appeal, the Ld. CIT(A), confirmed the disallowance made by the Assessing Officer. 4. The Ld. counsel for the assessee, Sh. Rupesh Jain, Advocate made oral and written arguments and reference was made to the written submissions placed before the Bench, which for the sake of clarity are reproduced as under: "The appellant was engaged in the business of, inter alia, manufacturing and marketing of BOPP films and held controlling interest in various subsidiaries companies, including Neeman Medical International (Asia) Limited, Max Healthstaff International Limited and Max Ateev Limited. The appellant since incorporation, had diversified itself into various businesses, through subsidiary companies. The assessee wanted to expand horizons into various businesses, like clinical research, placement solutions of healthcare resources, software development etc. In order to fulf....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 0.91 2. Max Healthstaff International Limited 410.12 3. Neema Medical International (Asia) Limited 293.49 Total 704.52 5. In the aforesaid factual background, it was specifically argued that there was no nexus between borrowed funds and impugned interest free advances give to subsidiary companies, which were given out of interest free funds and therefore, the interest expenditure having been incurred for other business purposes of the assessee was allowable deduction in its entirety. It was argued that during the relevant year, the assessee had given interest free advances to the subsidiary companies, aggregating to Rs. 7.04 crores. The aforesaid loans to subsidiaries were sourced out of surplus interest free funds i.e. proceeds from fresh issue of share capital amounting to Rs. 1000 crores approximately. The said inflow of interest free funds/loans and subsequent advancement to sister concerns, during the year, is clearly evident from the cash flow statement/statement of inflow of interest free funds of the relevant previous year, as demonstrated below: Inflow of interest free funds and addition to Investment and Loans & Advances : for a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....TR 554 (All.) - CIT vs. Tin Box Co. 260 ITR 637 (Del) - CIT vs. Hotel Savera 239 ITR 795 (Mad) - Herald Advertising Agency vs. ITO 39 TTJ 34 (Delhi) - Malwa Cotton Spinning Mills vs. ACIT 89 ITD 65 (Chd.-TM) 7. Reliance was also placed on the following decisions, where it has been held that in case of mixed pool of funds, in the absence of any nexus between borrowed funds and funds advanced, a presumption can be drawn that non-income earning advances have been made out of the profits/noninterest bearing funds available with the assessee: - East India Pharmaceutical Works Ltd. vs. CIT 224 ITR 627(SC) - Woolcombers of India Ltd. vs. CIT 134 ITR 219(Cal.) - India Explosives Ltd. vs. CIT 147 ITR 329 (Cal.) - Alkali & Chemicals Corpn. of India Ltd. vs. CIT 161 ITR 820 (Cal.) - (impliedly approved in East India Pharmaceuticals 224 ITR 627 (SC) - CIT vs. Radico Khaitan Ltd. 274 ITR 354 (All.) 8. It was further argued that the loans/advances to subsidiary companies in the earlier years were also given out of interest free/surplus funds which was accepted by the Revenue inasmuch as no part of the....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Liability (net) 1.03 Total 1083.54 2021.24 3819.76 Application of Funds Fixed assets 211.62 138.12 16.54 Investments in Mutual Funds 13.45 - - Sundry Debtors 288.55 47.09 - Cash and Bank Balances 72.80 14.95 0.93 Other current assets 200.46 45.21 12.36 Current Liabilities And provisions (4,33.57) (116.95) (11.55) Misc. Expenditure - 0.55 - Profit & Loss account 730.19 1892.80 3801.48 Total 1083.54 2021.24 3819.76 The aforesaid fact that funds received by the subsidiary companies from the appellant were utilized for business purposes is also evident form cash flow statement of each company attached at pages 27, 38 and 43 of the PB, which too establishes that funds were utilized in the course of business only and no portion of the same was diverted or utilized towards non business purposes. In view of the above, it is established that interest free funds were given to subsidiary companies in order to extent/support the business of such subsidiary companies. The aforesaid c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed in connection with interest free advance given to subsidiary companies, in order to support such companies on grounds of commercial expediency is allowable business deduction: - CIT v. Bharti Televentures Ltd. 331 ITR 502 (supra) - CIT v. Rockman Cycle Industries (P) Ltd. 331 ITR 401 (P&H) - Punjab Stainless Steel Inds. Vs. CIT and Anr. 324 ITR 396 (Del) - CIT vs. Samarth Shahkari Sakhar Karkhana Ltd. 294 ITR 540 (Bom.) - CIT vs. Kandagiri Spinning Mills. Ltd. 216 CTR 180 (Mad.) - CIT v. Sambandham Spinning Mills Ltd. 298 ITR 306 (Chenn.) - DCIT v. Sophisticated Marbles & Granite Industries (201) TIOL 293 ITAT -Del) - Industrial Cables India v. Addl. CIT 127 TTJ 344 (Chd.) - CIT v. Tulip Star Hotels Pvt. Ltd. (2011) 16 Taxman.com, 335 (Del) 15. It was submitted that the ratio of emanating from the aforesaid decisions is squarely applicable to the facts of the assessee's case. In the case of the assessee, interest expenditure has been incurred in order to protect business interest in the wholly owned subsidiary companies, which were facing financial crunch and were in dire need of funds and theref....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd Pharmaceuticals Pvt. Ltd. 319 ITR 75 (P&H) - CIT v. Punjab Tractors Ltd. 41 DTR 169 P&H) - Punjab Stainless Steel Ind. Ltd. vs. CIT 196 Taxman 104 (Del) - CIT vs. Accelerated Free Drawing Co. Ltd. 324 ITR 316 (Ker.) 19. For the aforesaid cumulative reasons, it was argued that the orders of the lower authorities may be reversed and the ground of appeal raised by the assessee may be allowed. 20. The Ld. DR, on the other hand, heavily relied upon the orders of both the authorities below. It was argued that over all cash flow statement of the assessee company is not a correct position to come to the conclusion that interest free advances were given out of surplus funds and not from borrowed funds. As regards the proposition of interest free advances given on account of commercial expediency and the decision of the Hon'ble Supreme Court in the case of S.A. Builders Ltd. (supra), it was argued that there can be no proposition in law nor it has been upheld by the Hon'ble Supreme Court, in the aforesaid decision that if the business purpose of the subsidiary companies in which the assessee holds interest is served, the same would tantamount to have been ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....y interest expenditure cannot be disallowed on the ground of borrowed funds being given to subsidiary companies u/s 36(1)(iii) of the Act, (ii) interest free advances were given out of commercial expediency since the said companies were facing financial crunch and were therefore in dire need of funds of the assessee company due to deep interest in continuance of such companies which were its subsidiaries, gave the aforesaid interest free advances, which had to be regarded as been given for the purposes of business of the assessee company and hence allowable as deduction u/s 36(1)(iii), and (iii) in any case, no disallowance u/s 36(1)(iii) can be made in relation to the opening balance of loans/advances given to subsidiary companies in view of their no finding in earlier years and that the loans/advances were given out of borrowed funds in those years. 25. We have perused the cash flow statement of the assessee company for the assessment year under consideration and it is observed that during the relevant year the assessee company had received substantial proceeds from preferential issue of shares capital aggregating to Rs. 99999.98 croress and it also received dividend income of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....advances given to the subsidiary companies was made u/s 36(1)(iii) of the Act, in those years, it was not open to the AO to make such disallowance in the succeeding assessment year. We draw support for the aforesaid decision from the judgments of the Hon'ble Karnataka High Court in the case of CIT vs. Sridev Enterprises reported in 192 ITR 165 and the decision of the Hon'ble Delhi High Court in the case of CIT vs. Givo Ltd in ITA No.941/2010 . In that view of the matter, having held that the borrowed funds had no nexus with interest free advances given to the subsidiary companies in earlier years ( on account of no disallowance having been made in the assessment of earlier years) and during the relevant assessment year (on account of positive overall cash flow statement of the relevant year), it is not necessary to go into the issue whether interest free advances given by the assessee company to the subsidiary companies was on account of commercial expediency or not. We are not in agreement with the observations of the ld. CIT(A) that in all cases, it is required to be seen whether loan was given for the business purposes or not and not the source from which the loans is given. We ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d by the assessee as on 1.4.2006 Investments during the period 1.4.2006 to 31.03.2007 (relevant to AY 2007-08 As regard, investments made during the assessment year 2007-08, the same has also been accepted to be made out of interest free funds, and not out of borrowed funds, in as much as, no portion of the interest expenditure attributed towards investment and consequently no disallowed u/s 14A of the Act, in the assessment completed u/s 143(3) of the Act for the assessment year (Refer Annexure A to this chart) It would be pertinent to point out, that, like in the impugned year, in the assessment order for the A.Y. 2007-08, as well, the AO computed disallowance u/s 14A as per the provisions of Rule 8D of the Rules, however, no portion of the interest expenditure was attributed and disallowed in accordance with that Rule. The assessee accepted the disallowance u/s 14A as per Rule 8D and did not file further appeal before the Ld. CIT(A). Reference in this regard is made to the following decisions wherein it has been held that where no portion of the borrowed funds have been attributed to investments made as at the beginning of the relevant previou....
X X X X Extracts X X X X
X X X X Extracts X X X X
....R, Mr. Tarsem Lal, on the other hand, reiterated the arguments made by the Ld. CIT(A), in his order, for making the above disallowance. 32. We have heard the rival contentions and perused the facts of the case. The present ground of appeal is linked to our decision relating to ground No.1, as also the appeal of the assessee company on the issue of disallowance of interest expenditure u/s 14A of the Act for the assessment years 2001-02 to 2006-07 decided by us on 08.03.2013. We have already held in the said assessee's appeals for the assessment years 2001-02 to 2006-07 vide our order dated 08.03.2013 that investments made upto the year ending 31.03.2006 having regard to the overall positive fund flow position of the assessee company for those years, has been made out of interest free funds and therefore, interest expenditure cannot be disallowed u/s 14A of the Act. As regards the investment, if any, made by the assessee during the assessment year 2007-08, the department admitted that there is no nexus of borrowed funds with such investments inasmuch as no disallowance of interest expenditure has been made u/s 14A of the Act in the assessment for that year, even if by applying the....