TaxTMI 
TaxTMI 
2017 (11) TMI 1673
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....he Tribunal was legally justified in versing the findings of the CIT(A) and deleting the addition of Rs. 21,96,755/- made on account of interest payment to its sister concerns and other group companies at lover rate than it had to pay to the borrowers? 7. Whether the Tribunal was legally justified in reversing the findings of the CIT(A) and deleting the addition of Rs. 82,67,790/- made u/s.40A(3) on cash payments being not covered under Rule 6DD(g) specifically when the Tribunal has confirmed a disallowance of Rs. 50,000/- in A.Y. 1995-96 assessee's own case? 8. Whether the Tribunal was legally justified in reversing the findings of the CIT(A) and deleting the addition of Rs. 3,02,000/- made on account of repairs and maintenance specifically when the assessee failed to furnish the details of such expenses out of total expenses of Rs. 79.19 lacs debited in the profit and loss account?" 3. Counsel for the respondent has taken us to the order of ITAT wherein it has been observed as under:- "16.3 I have perused the assessment order asas submission of the assessee, the assessee himself admitted that he has not produced the evidences for expenses before the ....
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....iod of incorporation before 17 years. Therefore, the above addition is confirmed. 22.3 I have perused the assessment order as well as submission of the assessee, the assessment order for the AY1995-96 as well as CIT(A) order have been verified, it is found that the assessee gave loan Rs. 4.35 lac to GM Modi Hospital and Research Centre and Medical Science for Rs. 14.85 lac given to Modi ARE Limited. The assessee had admitted that no interest had been charged on both the loans. Therefore, AO disallowed Rs. 3,45,600/- @ 18% out of interest. The loan is remained during the year under consideration. The assessee did not raise this issue in appeal before the CIT(A). The facts are similar. Therefore, the action of the AO is justified. The appeal on this ground is dismissed. 50. We have heard the rival contentions and perused the material available on the record. From the perusal of the records, it is noted that the assessee company has raised interest bearing fresh secured loans to the extent of Rs. 3.2 crores. The details of interest has increased to Rs. 9.84 crores as against 6.06 crores last year and credit of interest has increased to 0.014 crores. As per t....
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....0 crores are blocked to rehabilitate to M/s Modi Cement Ltd. It was submitted that Modi Cement Ltd. is group company and on account of moral responsibility, the company extended all possible support for rehabilitation. However, the explanation given by the assessee company was not found satisfactory by the AO. In this regard reference of the Bench was drawn to the recent decision of Hon'ble Supreme Court in the case of Hero Cycles Pvt. Ltd. 94 CCH 0097 wherein it was held as follows: " Applying the aforesaid ratio (laid down in case of S.A. Builders ltd 288 ITR 1(SC)) to the facts of this case as already noted above, it is manifest that the advance to M/s Hero Fibres limited became imperative as a business expediency in view of the undertaking given to the financial institutions by the assesee to the effect that it would provide additional margin to M/s Hero Fibres Limited to meet the working capital for meeting any cash loses." In light of decision of Hon'ble Supreme court in case of Hero cycles, the bank guarantee for Rs. 5 crores in favour of IDBI by depositing Rs. 5 crores with the bank as FD became imperative as a business expediency 55 ITA 382 & 420/....
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.... cash under unavoidable and exceptional circumstances. Tribunal was justified in deleting disallowance under section 40A(3). 5. Harshila Chordia vs. CIT [2008] 298 ITR 349 (RAJ), wherein it has been observed as under: Where genuineness of transaction and identity of payee were established and explanation of assessee for making cash remittances was acceptable in the light of modus operandi of assessee's business, payments in cash could not be disallowed. 6. Sri Laxmi Satyanarayana Oil Mill v. CIT (2014) 49 taxmann.com 363 (Andhra Pradesh), wherein it has been observed as under: Whether since assessee had placed proof of payment of consideration for its transaction to seller, and later admitted payment and there was no doubt genuineness of payment, no disallowance could be made under section 40A(3). 7. Gurdas Garg v. CIT [2015] 63 taxmann.com 289 (Punjab & Haryana), wherein it has been observed as under: Section 40A(3) of the Income Tax Act 1961, read with rule 6DD of the Income Tax Rules, 1962-Business disallowance-Cash payments exceeding prescribed limits (Genuineness of transactions)-During assessement proceedings Assessing Off....
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....rguments advanced by the learned counsel for the Revenue and in our view this is also a finding of fact as recorded by the Tribunal as well as CIT(A). It is not disputed that the assessee had an opening capital of Rs. 1.42 crores at the beginning of the year and Rs. 1.88 crores at the end of the year. It is also an admitted fact that the assessee had trade credits to the extent of Rs. 1.57 crores on which no interest was being paid. It is also an admitted fact that the assessee had received more than Rs. 60 lacs as advance from the customers on which no interest was paid. Therefore, when to this magnitude on which no interest was payable, the AO was not justified in disallowing interest. Further apart from it the assessee has been able to prove that the assessee had trade dealings with M/s. Tirupati Pulses (P) Ltd. to whom it is alleged by the AO that the assessee advanced more than Rs. 80 lacs. It is an admitted position that the assessee made purchases to the tune of Rs. 21,24,06,662 from M/s. Tirupati Pules (P) Ltd., which is based on the audit report and advances, if any, were towards the aforesaid purchases made by the respondent/assessee. So there was no occasion for the asse....
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....meets the requirement of commercial expediency, it has to be allowed. However, the Supreme Court held that it is not in every case that interest on borrowed loans would have to be allowed if the assessee advanced the money to a sister concern. Where the amount is advanced to a sister concern, for the personal benefit of its directors, for instance, it would not qualify to be regarded as commercial expediency. However, noted the Supreme Court, where a holding company "has a deep interest in its subsidiary advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would ordinarily be entitled to deduction of interest on its borrowed loans. 11. In the present case, there is a finding of fact by the CIT(A) and by the Tribunal that as a matter of fact, borrowed funds were not used by the assessee for the purposes of investment in the shares of its wholly owned subsidiary Reliance Infocomm Ltd. or VBC 12/15 itxa3155.09-28.3 for making advances to Reliance Industries Ltd. But independent of that, in view of the decision of the Supreme Court in S.A.Builders what is significant is as to whether the investment and....
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....he expectation of making a profit. 4 We are unable to accept that such a distinction will have any legal consequence in so far as the entitlement of the assessee to claim a deduction under Section 36(1)(iii) is concerned. In the present case, when the assessee advanced an amount to RIL that was with a view to furthering the business of the assessee. RIL in turn was to execute counter guarantees in favour of financial institutions for the benefit of the discharge of the EPCG obligations by the assessee. That was a security for the guarantees which those institutions were required to execute under the EPCG Scheme. The funds which were invested in the wholly owned subsidiary were again for the purposes of the business of the assessee. There is evidently a significant interest of the assessee in the business of its subsidiary since both the assessee and the subsidiary are engaged in providing telecommunication services. 13.There fore, the order of the Tribunal was justifiable and deserved to be upheld." 12. Bright Enterprises Pvt. Ltd. v. CIT (2016) 381 ITR 107 (P&H), wherein it has been observed as under: "9. The doubt, if any, is set at rest by the memorand....
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....hat of ITAT, as reproduced above, in paragraphs 3 and 6, we note that the assessee was maintaining a bank account with mixed common funds in which all deposits and withdrawals were made. There was no specific instance noted by the Assessing Officer in respect of any direct nexus between the borrowed fund and the said advances made to the subsidiaries. The Assessing Officer had made general observations without going into the depth of the matter and without pointing out any specific instance where an interest bearing borrowing was advanced to the subsidiaries or establishing that the borrowings made by the appellant were not for business purposes. Both the appellate authorities below were of the view that the assessee had explained the sources of the advances and investments made to the subsidiaries, which could not be linked to the borrowed funds and that the advances were made out of the assessee‟s own capital. At the relevant time the assessee was found to be having an adequate non-interest bearing fund by way of Share Capital and Reserves. Even otherwise, the advances were found to be made to the subsidiaries for business considerations which is nothing but the commercial ....
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....er concern was by way of commercial expediency. It has been repeatedly held by this Court that the expression "for the purpose of business" is wider in scope than the expression " for the purpose of earning profits" vide CIT v. Malayalam Plantations Ltd. , CIT v. Birla Cotton Spinning & Weaving Mills Ltd. etc." 2. Hero Cycles (P) Ltd. vs. Commissioner of Income Tax (Central), Ludhiana (2015) 379 ITR 347 "13. In the process, the Court also agreed that the view taken by the Delhi High Court in 'CIT v. Dalmia Cement (B.) Ltd. : 2002 (254) ITR 377] wherein the High Court had held that once it is established that there is nexus between the expenditure and the purpose of 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. It further held that no businessman can be compelled to maximize his profit and that the income tax authorities must put themselves in the shoes of the Assessee and see how a pruden....
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....r." 4. The Commissioner of Income Tax-7 vs. Reliance Communications Infrastructure Ltd. (2012) 260 CTR 159 (Bombay) "9. In S.A. Builders, the Assessing Officer had observed that the assessee had transferred a certain amount to its subsidiary out of a cash credit account in which there was a debit balance. The Assessing Officer found that the assessee had diverted its borrowed funds to a sister concern without charging any interest and that consequently, a proportionate part of the interest relating to that amount, out of the total interest paid by the assessee to the Bank, had to be disallowed. The CIT(A) had observed that out of the total amount advanced by the assessee to its subsidiary, only an amount of Rs. 18 lakhs had a nexus with borrowed funds and he had directed the Assessing Officer accordingly to calculate the disallowance. The Tribunal allowed the appeal by the Revenue and dismissed the appeal of the assessee. The order was confirmed by the High Court. The Supreme Court observed that the Income Tax authorities, the Tribunal as well as the High Court had approached the matter from an erroneous perspective. The Supreme Court held that where the assessee ....
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....communication services. The case of the assessee was that those investments were to ensure the utilization of the telecommunications infrastructure of the subsidiary and was a strategic investment for furthering business prospects in the area of providing telecommunication services. As regards the advance which was made by the assessee to Reliance Industries Ltd. (RIL) the assessee pointed out to the CIT(A) that it was required to import equipment under the EPCG Scheme. The obligations under the EPCG Scheme were required to be backed by bank guarantees which in turn demanded security for the issuance of guarantees. The assessee entered into an arrangement with RIL to which it advanced a sum of Rs. 476 crores against which RIL provided counter guarantees to financial institutions equivalent to three times the amount of the margin kept by the assessee with RIL. Now, having regard to this factual background, both the CIT(A) and the Tribunal held that the investments made in the wholly owned subsidiary and the money advanced to RIL were for furthering the business of the assessee. The findings of both the CIT(A) and of the Tribunal are consistent with the judgment of the Supre....
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....and disposed of. There shall be no order as to costs." 5. Bright Enterprises Pvt. Ltd. vs. Commissioner of Income Tax- (1016) 381 ITR 107 (P&H) "9. Whether the amount of Rs. 10.29 crores was debited to the account of the sister concern in respect of the payment made under Clause 3.3(b) of Article 3.1 of the share purchase agreement or whether the amount was actually paid to the sister concern and used by it for the purpose of business, is immaterial. Either way the amount was used for the business of the sister concern. It is not even suggested that the advance was used by the sister concern for any purpose other than for the purposes of its business. Nor was such a case raised before us. The doubt, if any, is set at rest by the memorandum of appeal and the written submissions filed by the appellant before the CIT (Appeals). As Mr. Jain rightly pointed out, in the memorandum of appeal, the appellant expressly stated that it had advanced the amount of about Rs. 10.29 crores to its sister concern as a measure of commercial expediency for the purpose of business. In the written submissions, the appellant inter alia stated that the appellant and the ....
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....efore us is that the interest attributable to interest free advance of funds made to its subsidiaries out of interest bearing funds cannot be allowed as a eduction u/s 36(1) (iii) of the Act in view of the decision of this court in Phaltan Sugar Works Ltd. v. CWT (1994) 208 ITR 989/72 Taxman 325 (Bom.). This reliance upon the decision of this Court in Phaltan Sugar Works Ltd. (Supra) is of no avail as it has been overruled by the Apex Court in S.A. Builders Ltd. v. CIT (2007) 288 ITR 1/158 Taxman 74 holding that the test of commercial expediency is to be applied. (c) Mr. Suresh Kumar, learned Counsel appearing for the Revenue, states that nothing is available on record to indicate any challenge in appeal by the Revenue to the order of the Tribunal for A.Y. 1985-86. The impugned order merely relies upon its order for Assessment Year 1985-86. (d) In the above view, we proceed on the basis that the Revenue has accepted the Tribunal's order for the Assessment Year 1985-86. Further, no distinguishing features in the subject Assessment Year to that existing in the Assessment Year 1985-86 have been pointed out. Therefore, the question as raised herein does not give r....
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....Mills Ltd. [1971]82ITR166(SC) etc." 10. Therefore, the second issue is answered in favour of assessee and against the department. 11. Counsel for the respondent has taken us to the order of CIT(A) wherein it has been observed as under:- "23. The nineteenth ground of appeal is against addition of Rs. 82,67,790/- u/s 40A(3) of IT Act. 23.1 The assessee has made payment freight and cartage exceeding Rs. 10,000/- in each case amounting to Rs. 4,13,38,973/-. The AO disallowed 20% of the same i.e. Rs. 82,67,790/- on the ground that the payment was not covered by Rule 6DD. 23.2 The AR contended that it may be pointed that the Rule 6DD (j) provided an exception to applicability of Section 40A(3) where it was not practicable to make payment by crossed cheque or would have caused genuine difficulty to payee having regard to the nature of transaction and the necessity for expeditious settlement thereof. In case of freight and cartage expenses payment is required to be made by drivers on spot and it is not practicable to make payment by crossed cheque. The said Rule 6DD (j) was substituted w.e.f. 25.07.1995 and simultaneously the limit was increased to Rs. 20,0....
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....in it was held that exceptions contained in Rule 6DD are not exhaustive and the said rule must be interpreted liberally and taking into consideration the business expediency of making cash payment, we hereby delete the disallowance of Rs. 82,67,790/- in the hands of the assessee." 12. Counsel for the respondent further contended that the Tribunal has not committed any error. In view of decision in ITA No.45/2012, Commissioner of Income Tax - Central v. M/s ACE India Abodes Ltd., decided on 11.09.2017, wherein para 6 and 7, reads as under:- "6. Counsel for the respondent has relied upon the following decisions:- 1. Attar Singh Gurmukh Singh vs. ITO - [1991] ITR 667 (SC) observed as under : "The terms of section 40A(3) are not absolute . Consideration of business expediency and other relevant factors are not excluded. Genuine and bona fide transactions are not taken out of the sweep of the section . It is open to the assessee to furnish to the satisfaction of the Assessing Officer the circumstances under which the payment in the manner prescribed in section 40A(3) was not practicable or would have caused genuine difficulty to the payee. ....
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....erved as under: Where genuineness of transaction and identity of payee were established and explanation of assessee for making cash remittances was acceptable in the light of modus operandi of assessee's business, payments in cash could not be disallowed. 7. Sri Laxmi Satyanarayana Oil Mill v. CIT observed as under: "Whether since assessee had placed proof of payment of consideration for its transaction to seller, and later admitted payment and there was no doubt about genuineness of payment, no disallowance could be made under section 40A(3). 8. Gurdas Garg v. CIT [2015] 63 taxman.com 289 (Punjab & Haryana) observed as under: "Section 40A(3) of the Income Tax Act, 1961, read with rule 6DD of the Income Tax Rule, 1962 - Business disallowance - Cash payment exceeding prescribed limits (genuineness of transactions) - During assessment proceedings Assessing Officer noted that assessee, who was engaged in trading in properties, made certain transactions in cash in excess of Rs. 20,000/- and disallowed same under section 40A(3) - Whether since genuineness of said transactions had not been disbelieved by the authorities below, it made....
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....eated as an expenditure. Thus, section 40A(3) could not be said to be attracted to such payment in cash." 7. The transactions which has taken place are stock in trade and villagers paid the amount in cash. Such transaction may not be allowed but nevertheless discussed by the Gujrat High Court (supra) which was followed by Tribunal in case of PACL India Ltd., 38 DTR 1 (JP) in Para 19, reads as under :- "19. Similar view has been expressed by the Tribunal in case of PACL India, Ltd., 38 DTR 1 (JP) also wherein it has been held as under : " Clause (h) of r.6DD takes out of the purview of s. 40A(3) such case payment which is made in a village or town which I snot served by any bank to any person who ordinarily resides or is carrying on any business in such village or town. There is no dispute that the sellers or the land are villagers engaged in farming activities and are residing at places and are carrying on farming activities at places which are not served by any bank and such sellers have no bank accounts anywhere. It has been emphatically argued on behalf of the appellant-company that all payments were made at the villages prior to registration ....
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....at such town. If such a myopic view is taken regarding the interpretation of r.6DD(h), the very object of the legislature would be frustrated. There is no dispute regarding the identity of the payees and the genuineness of the land transactions in respect of which payments have been made. It is notable that r.6DD(k) provides an exception in respect of cash payment which is made on a day on which the banks were closed. This proves that the object of the legislature is to provide exception in respect of such payment which is required to be made in cash or absence of banking facilities. Rule 6DD(h) must be interpreted keeping in view this object and purpose. Therefore, the cash payments recovered under section proviso to s. 40A(3) and r.6DD(h). The AO is directed to delete the addition of Rs. 1,60,69,350/- sustained by the CIT(A)"." While holding so, the Tribunal has taken into consideration cases of M/s P. Pravin & Co. 274 ITR 534 (Guj.), Hasanand Pinjomal, 112 ITR 134 (Guj.), Venkata Satyanarayana Timber Depot, 165 ITR 250 (AP) and Chaudhary & Co., 217 ITR 431 (All.)" 13. Therefore, third issue in answered in favour of assessee and against the department. 14.....