TaxTMI 
TaxTMI 
TaxTMI 
2017 (10) TMI 235
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...., kindly be deleted in full. 3. Rs. 11,57,453/-: The ld. CIT(A) erred in law as well as on the facts of the case in confirming the disallowance of Rs. 11,57,453/- out of interest expenses alleging incurred on capital expenditure. The disallowance so made and confirmed by the ld. CIT (A), is contrary to the provisions of law and facts hence, kindly be deleted in full. 4. Rs. 4,920/-: The ld. CIT(A) erred in law as well as on the facts of the case in confirming the disallowance of Rs. 4,920/- out of interest payment on account of alleged notional interest on interest free advance. The disallowance so made and confirmed by the ld. CIT (A), is contrary to the provisions of law and facts hence, kindly be deleted in full. 5. The ld. AO further erred in law as well as on the facts of the case in charging interest u/s 234A, 234B, 234C & 234D of the Act and as also in withdrawing of interest u/s 244A of the Act. The appellant totally denies its liability of charging and withdrawal of any such interest. The interest so charged/withdrawn, being contrary to the provisions of law and facts, kindly be deleted in full." 2. Firstly, regarding ground No. 1 and ground No. 4, the same were....
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....t borrowed money, because overdraft account is against the assessee own bank FDRs and it is assessee own money taken out of FDR account temporarily. 8. It was further submitted that from the perusal of the balance sheet, it can be noted that the assessee firm has sufficient funds of its own and need not to borrow any funds. The current year profit before allocation between partners is Rs. 41.5 Cr. and investment in Mutual Funds fixed term debt fund scheme was made for just Rs. 3 Cr. The bank overdraft against FDR is just for better utilization of funds of the business. There is no direct nexus between the amount borrowed and investment in the Mutual Funds, as no amount was invested by raising an interest bearing loan. Investment in Mutual Fund was made out of capital and reserves (retained earnings and current year earnings). Therefore no disallowance on account of interest on borrowed money should be made. 9. In support, the assessee relied upon the decision of CIT vs. Dalmia Cement (Bharat) Ltd.(2002) 254 ITR 377 (Del), S.A. Builders ltd. vs. CIT(Appeal) (2007) 288 ITR 1 (SC) , CIT Vs. Prem Heavy Engg. Works Pvt. Ltd. 285 ITR 554 (All) and CIT Vs. Radico Khaitan Ltd. (2005) 142....
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.... the assessee before the Assessing Officer was the bank overdraft facility is not in the nature of borrowing of funds rather it is assessee's own money taken out of FDR account temporarily. It was further contended that all type of payments and receipts are routed through the bank overdraft account and by virtue of that, it cannot be held that every payment made out of the overdraft account is out of the borrowed funds. Thirdly, the assessee contended that it has sufficient internal reserves which far exceed the value of investment which has been made during the year and there are no borrowing and in turn, no direct nexus in terms of any borrowings and investment in the mutual funds. The assessee also contended that it has incurred net interest cost of 0.25%, and if the disallowance has to be made, the same has to be restricted to 0.25% and not the whole of 9.5%. Per contra, the contention of the Assessing officer is that funds withdrawn from the bank overdraft account have been utilised for making the investment in the mutual fund units and accordingly, the borrowed funds have been utilised for making the said investments. It was further held by the Assessing officer that the busi....
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.... as security for taking overdraft would we allow interest expenses against income from house property? The answer is clear no. The Case laws sited by assessee are not relevant as in the case of assessee nexus between borrowed funds and investment was clearly established. The payments were directly made from overdraft account only and also admitted by assessee. Considering the above disallowance of interest of Rs. 20,45,751/- is confirmed. This ground of appeal is, therefore, dismissed." 16. During the course of hearing, the ld AR vehemently argued the matter and raised various contentions as per the written submissions which are reproduced as under. "1. Invoking of sec. 14A without jurisdiction: At the outset, it is submitted that the AO proceeded on complete misconception of law in as much as Sec. 14A can be invoked only when the AO finds that some expenditure has been incurred in relation to some exempted income. In other words, any income which is exempted e.g. u/s 10, is an exempted income. To take an example, the share of profit received by a partner u/s 10(2A), dividend income u/s 10(34) etc., are completely exempted from income tax hence, the expenditure incurre....
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....ents in Bank in FDR's account and availing overdraft facility on the FDR's. All types of receipts (including fees) and all types of payments (whether capital or revenue) are made through overdraft account. But it does not mean that every payment made out of barrowed money. This is totally a part of the assessee's business financial management planning. Needless to say by not investing in FDRs the assessee of course would not have incurred interest cost but at the same time would not have earned interest. The net result would have been loss to the revenue. Here it should be clear that fixed term debt fund scheme - FMP (Fixed Maturity Plan) of mutual fund is simply an alternative of Bank FDRs. Bank fixed deposits are managed by banks while FMPs are issued and managed by mutual funds. Bank fixed deposits (FDs) are deposits in bank debt instruments, FMPs are also debt instruments managed by mutual funds in Govt. securities, and corporate debt. That means that fixed maturity plans, typically have no equity component. The object behind making investment is getting tax efficient income similar to bank interest. FMP offer better post tax return than Bank FDs due to indexation bene....
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....here the assessee argued that (a) The advance has been made to sister company out of bank account account wherein both its own and borrowed funds were mixed up, so that there was no direct nexus between borrowing and advance: and (b) The loan to a sister company which in this case was a subsidiary company is one which should be treated as promoted by commercial expediency, The Supreme Court upheld the argument of the assessee and interest was not disallowed in the case of S.A. Builders Ltd. Vs. CIT(Appeal) (2007) 288 ITR 1 (SC) Also see CIT vs. Prem Heavy Engg. Works Pvt. Ltd. (2006) 285 ITR 554 (All), CIT vs. Radico Khaitan Ltd. (2005) 142 Taxman 681 (All.). Reliance is also placed on the decision of the Hon'ble Bombay High Court in the case od CIT v. Reliance Utilities and Power Ltd. 313 and Hon'ble Delhi High Court in the case of CIT v. Bharti Televenture Ltd. We are also enclosing herewith the copy of ITAT, Jaipur case of A.C.I.T v. Sh. Ram Kishan Verma Prop. M/s Resonance, Kota. The facts of the above case are identical to the case of assessee." 3.1 In addition to be above, it is submitted that the following decisions strongly supports the contentions raised b....
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....erefore, the deduction claimed on account of the interest on loan even for the purpose of payment of tax is allowance. 3.5 Recently this view has been taken by the Hon'ble ITAT M/s Madhu Silica Pvt. Ltd. v/s ACIT in ITA No. 2230/Ahd/2010 vide order dated 20.09.2013 (DPB 38-43) following the decision in the case of Munjal Sales Corporation v/s CIT (2008) 298 ITR 298 (SC). 3.6 On this aspect also kindly refer decision ACIT v/s Ramkishan Verma (2012) 143 TTJ (Jp) (UO) 1 (DPB 10-22) wherein, para 9.5 the relevant portion is as under: "We have heard both the parties. The assessee is having sufficient capital. If there are mixed funds then non-interest-bearing funds are to be considered s utilized for non-interest-bearing advances. It is the assessee who has to take a business decision. Fees is generally received at the beginning and surplus funds are used for making fixed deposits as receipts are in advances while expenses are spread out throughout the year. Since interest-free advances are less than the capital and the AO has not brought on record any nexus of interest-bearing loans being used the AO could not have disallowed the interest. There is no onus on the assessee to establ....
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....was fully deleted by holding that "10.4 We have heard both the parties. The assessee is having sufficient capital. If there are mixed funds then non-interest-bearing funds are to be considered as utilized for non-interest-bearing advances. It is the assessee who has to take a business decision. Fees is generally received at the beginning and surpluses are used for making fixed deposits as receipts are in advances while expenses are spread out throughout the year. Since interest-free advances are less than the capital and the AO has not brought on record any nexus of interestbearing loans used the AO could not have disallowed the interest. There is no onus on the assessee to establish that interest-free advances are out of interest-bearing advances if non-interest-bearing funds are more. Reliance is placed on the decision of the Hon'ble Bombay High Court in the case of CIT vs. Reliance Utilities & Power Ltd. (2009) 221 CTR (Bom) 435 : (2009) 18 DTR (Bom) 1 : (2009) 313 ITR 340 (Bom) and Hon'ble Delhi High Court in the case of CIT vs. Bharti Televenture Ltd. (2011) 51 DTR (Del) 98 : 2010-TIOL-51-HC-Del. There is no provision in the Act which may compel an assessee to earn income. ....
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....A. Builders Ltd. V/s CIT (2007) 288 ITR 0001 (SC); (b) Munjal Sales Corporation v/s CIT (2008) 298 ITR 298 (SC) ; (c) CIT V/s Radico Khaitan Ltd. (2005) 274 ITR 354; (d) CIT v/s Dalmia Cement (Pvt.) Ltd. (2002) 254 ITR 377; (e) CIT v/s Britannia Industries Ltd. (2006) 280 ITR 525; and (f) CIT v/s Motors Sales Ltd. (2008) 304 ITR 123 (Allahabad), held as under:- 14. Therefore, the finding reached by the Tribunal is essentially a finding of fact based on the appreciation of the evidence, and we find no perversity or infirmity in the order impugned, and no question of law arises out of the order of ITAT." 7. It was further submitted that the ld. CIT(A) proceeded on misconception & misreading of the judicial guidelines provided through various decisions which were in the context that where there are borrowed funds and also interest free funds both, discretion lies with the assessee for the utilization of the funds in whatever manner it wants. What has been held is that where there are funds available both interest-free and overdraft and/or loans taken, then a presumption would arise that interest free loans & advances would be out of interest free fund generated or available with ....
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....DR." 20. Drawing support from the said certificate, the ld AR has contended that it was a normal Overdraft A/c which was against the FDRs of the assessee pledged with the bank and the assessee was entitled to withdraw only up to 90% of the FDR. In other words, there was a margin of 10%. The assessee was not entitled to withdraw more than 90%. Also it was not a CC A/c. Thus, there was no possibility for the assessee to have borrowed funds more than the FDR amounts. Thus, effectively it was nothing but assessee's own money which was put into the FDRs to earn handsome amount of interest thereon and at the time of need of funds, the same could be made available by paying a marginally extra amount of interest thereon being 0.25 and was a part of its financial management. 21. On review of the above certificate and contentions so advanced by the ld. AR, we find that the ld AR has tried to make a distinction between a bank overdraft account against pledge of the FDRs and cash credit account and it has been contended that in case of former, it is assessee's own money while the latter results in borrowing of bank funds. We have given a careful consideration and are unable to accept the sa....
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....come". The said treatment in the financial statements doesn't merely show the accounting treatment and reflection thereof but also underscore the basic essence and character of both the transactions being independent of each other. Therefore, we are unable to accept the contention of the ld AR that the assessee has incurred net interest cost of 0.25% and not 9.5% at which overdraft facility was availed from the bank. 23. In light of above discussions, we are of the considered view that the bank overdraft account, out of which the funds have been withdrawn and invested in the mutual fund units during the year, is clearly in the nature of loan account and certificate issued by the Central Bank of India supports the case of the Revenue. Accordingly, we are unable to accede to the contention of the ld AR that it is assessee's own money which has been taken out of the FDR account temporarily and invested in the mutual fund units. 24. Regarding second issue as to whether the transactions in the bank overdraft account are limited to the borrowings and subsequent withdrawal for meeting expenditure and making the investments or it also includes other transactions in form of deposit of var....
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....he contention of the ld.CIT(A) that provisions of section 14A are applicable as income from the Mutual Funds are exempt, we find that the said finding is contrary to the facts on record. The appellant has invested in the fixed maturity plans of the various Mutual Funds which are basically fixed term debt funds schemes. Where the amount is invested in such funds for less than a year, the maturity proceeds are taxable as short term capital gain @ 30% and where the amount is invested in such funds for the period exceeding one year, the maturity proceeds are taxable @ 10% with the indexation benefit and @ 20% without indexation benefits. In other words the investment in Mutual Funds schemes are not tax free investments. In support of its contentions, the ld. AR has also submitted a copy of the computation of income for the subsequent assessment year 2010-11 wherein the maturity proceeds amounting to Rs. 3,32,35,500 of all these Mutual Funds units wherein the assessee has invested Rs. 3,00,00,000 during the impunged assessment year have been offered to tax as long term capital gains. In light of the same, we do not think that the ld. CIT(A) was correct in invoking provisions of section ....
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....s. 5,77,808/-, Rs. 1,94,863/- and Rs. 3,84,782/- calculated @ 9.5% per annum on the borrowed funds used for paying advance of Rs. 4.00 Crore for purchase of land, construction work-in-progress and construction of shed in CP-14 be not disallowed in view of proviso to section 36(1)(iii) since while land and construction work-in-progress were not put to use during the year, the shed was put to use only at the fag end of the year. In response, the assessee contended as under:- "Section 36(1)(iii) reads as under: "the amount of the interest paid in respect of capital borrowed for the purpose of the business or profession: Provided that any amount of the interest paid, in respect of capital borrowed for acquisition of an asset for extension of existing business or profession (whether capitalised in the books of account or not); for any period beginning from the date on which the capital was borrowed for acquisition of the asset till the date on which such asset was first put to use, shall not be allowed as deduction" Section 36(1)(iii) is applicable only in case of capital borrowed. As explained in earlier para, there was no borrowed money in the case of the assessee. Simpl....
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.... Assessee had borrowed Rs. 43.62 crores by way of issue of debentures and the said amount was utilised as capital expenditure and inter-corporate deposit. It was the Assessee's submission that no part of the interest bearing funds (viz. Issue of debentures) had gone into making investments in the said two companies. It was pointed out that the income from the operations of the Assessee was Rs. 313.53 crores and with the availability of other interest free funds with the Assessee the amount available for investments out of its own funds were to the tune of Rs. 398.19 crores. In view thereof, it was submitted that from the analysis of the balancesheet, the Assessee had enough interest free funds at its disposal for making the investments. The CIT (Appeals) on examining the said material, agreed with the contention of the Assessee and accordingly deleted the addition made by the Assessing Officer and directed him to allow the same under the provisions of the Income Tax Act, 1961. The Revenue being aggrieved by the order preferred an Appeal before the ITAT who upheld the order of the CIT (Appeals) and dismissed the Appeal of the Revenue. From the order of the ITAT, the Revenue appr....
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.... makes no difference but at both the places, the common contentions of the assessee are that there were no borrowing made as such in as much as the assessee was already having sufficient interest free funds at its disposal therefore, such investment/outgoing on capital account should be treated to have gone out of the availability of interest free funds but not from the interest bearing funds, if any. This way, there was no occasion for the assessee to make a claim of deduction nor for the AO to have made disallowance u/s 36(1)(iii) of the Act. 33. In the case of CIT vs. HDFC Bank LTD. (2016) 284 CTR 0409 (Bom), it was held that "Where assessee's capital, profit reserves, surplus and current account deposits were higher than the investment in tax-free securities, it would have to be presumed that investment made by the Assessee would be out of the interest-free funds available with Assessee and no disallowance was warranted u/s 14A." 34. It is further submitted that a comparatively recent decision in the case of Hero Cycle P. Ltd vs CIT (2015) 128 DTR 0001 / 379 ITR 347 (SC) also directly supports the case of the assessee. In that case, the company had given Loans & Advan....
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.... coaching, and partly in the mutual funds but income from both were duly taxed. It was not the case of AO that assessee diverted the funds to relatives etc. for personal purposes. In the case of SA Builders also, the decision was rendered in the context of diversion of the interest bearing funds to the interest free advances. The Hon'ble Rajasthan High Court in Ram Kishan Verma (Supra) has also taken a note and interpreted the decision of SA Builder (Supra) in the same manner and therefore, held that to the conclusion that to the extent of his own capital the assessee could advance money without interest for business expediency or/and relatives, and none can be forced to charge interest. 37. In DCIT v/s Gujarat Narmada Valley Fertilizers Co. Ltd. (2014) 31 ITR Trib) 668 (Ahd) at page 671, it is held that ".............., the decision of the Supreme Court in the case of S.A. Builders Ltd. v. CIT(Appeals) [2007] 288 ITR 1 (SC) would not be applicable to the facts of the present case......." 38. Further the case of Abhishek Industries has already been impliedly overruled in Munjal sales (supra) and was also so considered in the case of Ram Kishan Verma by ITAT Jaipur. The AO wro....