TaxTMI 
TaxTMI 
2018 (12) TMI 902
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....ng Officer noted that the assessee had given interest free advance of Rs. 3,55,00,000/- to Shivaks Impex Ltd., a sister concern. On the other hand, the assessee had paid interest of Rs. 33,40,780/- on loan raised from banks but had not charged any interest on the loans advanced to M/s Shivaks Impex Ltd. The Assessing Officer asked the assessee as to why interest expenses should not be disallowed u/s 36(l)(iii) of the Income Tax Act, 1961 (in short 'the Act') and added to the taxable income. The assessee filed its reply, which is reproduced in para 2 of the assessment order. Briefly put the assessee contended that the impugned advances were business advances and therefore no disallowance, of interest paid on funds utilized if any for making the advances, was warranted. The assessee also contended alternately that it had utilized its own interest free funds for making the advances and therefore also no disallowance of interest u/s.36(1)(iii) was warranted. After considering the reply filed by the assessee, the AO rejected the same and on the basis of reasons recorded in para 2.1 of the assessment order interest amounting to Rs. 18,44,482/- was disallowed and added to the income of th....
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....appeal is allowed." 5. Aggrieved by the same the Revenue has come up in appeal before us. 6. During the course of hearing before us, the Ld. DR contended that the proposition laid down by the Hon'ble Jurisdictional High Court in the decision relied upon by he CIT(Appeals) while deleting the disallowance was no longer good law. It was pointed out that the Hon'ble Jurisdictional High Court in various decisions had laid down that where the assessee could demonstrate sufficiency of own funds, the presumption that would arise was that it had used its own funds for the purpose of making interest free non business advances, calling for no disallowance of interest u/s. 36(1)(iii) of the Act. The Ld. DR pointed out that this presumption theory had now been overruled by the Hon'ble Apex Court in its decision in group of cases with the lead case being Maxopp Investment Ltd. Vs. CIT (2018) 402 ITR 640 (SC), wherein in the context of section 14A the decision of the Hon'ble Jurisdictional High Court in the case of Avon Cycles Ltd. Vs. CIT in ITA No.277 of 2013 was also under consideration. The Ld. DR pointed out from the order of the Hon'ble Apex Court that in the said ....
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.... of interest free non business advances made by the assessee. In sum and substance, the Ld. DR contended that the mixed funds theory had been confirmed to be the Law of the Land as opposed to the presumption theory laid down by the Hon'ble Jurisdictional High Court. 7. The Ld. counsel for assessee, on the other hand, vehemently opposed this contention of the Ld. DR. The Ld. counsel for assessee pointed out that the decision rendered in the case of Avon Cycles Ltd. (supra) was on a different set of facts and the proposition laid down therein was to be read in the context of the facts relating to it. It was contended that before the Hon'ble Supreme Court the only fact before the Hon'ble Court was that there were mixed funds available with the assessee and in the light of this limited fact, the Hon'ble Supreme Court upheld the disallowance of interest u/s 14A of the Act after holding in the lead case i.e. Maxopp Investment Ltd. (supra) that the apportionment rule was to be applied for the purpose of making disallowance of expenses incurred in relation to earning exempt income,as per section 14A of the Act. The contention of the Ld. counsel for assessee was that it was n....
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....red to before us. The issue to be adjudicated,as narrowed down from the arguments made before us by both the parties, is whether in relation to disallowance of interest made u/s.36(1)(iii) of the Act, the proposition laid down by the Hon'ble Jurisdictional High Court in a number of decisions, that where the assessee had sufficient own interest free funds along with interest bearing funds and had made or advanced sums for non business purposes without charging any interest, the presumption that would arise is that the investment had been made out of interest free funds generated or available with the assessee, is still a good law in the light of the decision of the Hon'ble Apex Court in the case of Hero Cycles Ltd. (supra). 10. We are in agreement with the contention of the Ld. counsel for assessee. Undoubtedly, proposition of law laid down by courts have to be read in the context of the facts before them and the issue dealt with by them. Reliance should not be placed on a decision without discussing how the factual situation fits in with the factual situation of the decision on which reliance is placed. The Hon'ble High Court of Bombay in the case of CIT vs Sudhir, 214 I....
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.... in the case of CIT vs K. Ramakrishnan (1993) 202 ITR 997 held that a precedent is an authority only for what it actually decides and not for what may remotely or even logically follow from it. Having said so we find that in the case of Avon Cycles Ltd. (supra) the issue was relating to disallowance of expenditure u/s 14A of the Act. The Hon'ble Apex Court dealing with the bunch of cases relating to said issue, took up the case of Maxopp Investment Ltd. (supra) as the lead case and proceeded to answer the question which arose under various circumstances before them that whether the investment made in shares and stocks for the purpose of retaining the control over the company or as stock-in-trade and from which exempt income by way of dividend was generated would attract the provisions of section 14A of the Act, calling for disallowance of expenditure incurred in relation to earning the said dividend income and the question arose for the reason that it was the contention of the assessee, which had been upheld by various High Courts, that the dominant purpose for making the investment in the shares not being earning of dividend income, it called for no disallowance of expendit....
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.... the assessee is also an interest on the investments made. Such being a finding of fact, we do not find that any substantial question of law arises for consideration of this Court. After going through the records and applying the principle of apportionment, which is held to be applicable in such cases, we do not find any merit in Civil Appeal No. 1423 of 2015, which is accordingly dismissed." 12. It is evident from the above that the issue before the Hon'ble Apex Court was not whether the presumption theory would apply or not where there are mixed funds and the assessee had demonstrated availability of sufficient own funds for making the investments . No discussion on this aspect has also been done by the Hon'ble Apex Court and merely noting that the assessee had utilized mixed funds, the Hon'ble Apex Court held that the principle of apportionment would apply. Without any discussion or deliberation on the presumption theory, the proposition laid down in the case of Avon Cycles Ltd. (supra) by the Hon'ble Apex Court has to be restricted to the extent of the issue before the Hon'ble Apex Court and facts before it and not beyond that. And on that basis ....
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....ts and the issue before the Hon'ble Apex Court we find that the judgments compliment each other. In the case of Avon Cycles Ltd. (supra) the Hon'ble Apex Court held that in the fact situation where mixed funds are utilized by the assessee, the disallowance of interest to the extent the funds are utilized for the purpose of non business advance is warranted. Going forward from there, the presumption theory would come into operation if in the case of mixed funds, the assessee is able to demonstrate/ establish availability of interest free funds equal to or more than interest free non business advances/investments thus raising the presumption that the same have been made out of the interest free funds of the assessee. 16. In view of the above, we hold that the decision of the Hon'ble Apex Court in the case of Avon Cycles Ltd. (supra) does not displace the presumption theory which has been upheld by the Hon'ble Apex Court in the case of Hero Cycles Pvt. Ltd. (supra) and the same still holds. In view of the above, since the Ld.CIT(Appeals), we find, has allowed the assessee's appeal deleting the disallowance of interest made on finding that it had sufficient own inter....
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....submissions we hold that commercial expediency of the said advance had been adequately established by the assessee. The facts relating to the impugned transaction have not been controverted by the Revenue. That Shivaks Impex Ltd. was a step down subsidiary of the assessee company, has not been disputed by the Revenue. The fact that the assessee, its subsidiary and Shivaks Impex Ltd. were all in the same line of business has also not been disputed by the Revenue. It is also not disputed that the advance made has been utilized for the purpose of making purchases. It is evident that had the said advance not been made it would have seriously affected the business of Shivaks Impex Ltd., which in turn would have affected the assessee also since the value of its investment in its subsidiary would have been affected on account of the poor results shown by Shivaks Impex Ltd.. Therefore, the commercial expediency of the advance has been established and for this reason also, no disallowance u/s 36(1)(iii) of the Act could have been made. 20. In view of the above we hold that on account of the availability of sufficient own funds and on account of the advances having been made for business ....
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....lowed." 26. During the course of hearing before us, Ld. DR, though relied upon the order of the Assessing Officer, was unable to controvert the factual and the legal findings of the Ld. CIT(A), we therefore see no reason to differ with the Ld. CIT(A) deleing the disallowance made u/s.14A in the light of the admitted fact that no exempt income was earned by the assessee during the impugned year from the impugned investments made. Our decision is forfeited by the order of the Hon'ble Apex Court in the case of Commissioner of Income Tax,(Central),1 vs Chettinad Logistics (P) Ltd dated 2nd July 2018,.reported in 257 Taxman 2, in which the Hon'ble apex court has, we find, dismissed on merits the SLP filed by the Revenue against order of the Hon'ble Madras High Court holding that where no exempt income was earned no disallowance u/s 14A was warranted. The Hon'ble High Court had in its order, reported in 248 Taxman 55, held as under: "6.The record shows that during the course of arguments before the Tribunal, the Assessee advanced a submission, to the effect, that in cases, where, investments are made in sister concern(s), out of interest free funds, for strategic purposes,....
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....d the plea of the Revenue advanced in that behalf. 11.2. As a matter of fact, a perusal of the judgment would show that the Revenue had sought to argue that because exempt income could be earned in future years, therefore, recourse could be taken to the provisions of Section 14A of the Act, to disallow expenditure. In other words the stand taken by the Revenue was irrespective of the fact whether or not income was earned in the concerned assessment year expenditure under Section 14A could be disallowed against anticipated income. 11.3. Pertinently, the Division Bench in M/s.Redington (India) Limited case has repelled this precise argument. 12. The Division Bench, in our view, quiet correctly held that, the computation of total income, in terms of Section 5 of the Act, is made qua real income and not, vis-a-vis, notional income. 12.1. The Division Bench went on to hold that Section 4 of the Act brings to tax, that income, which is relatable to the assessment year in issue. The Division Bench, thus, held that where no exempt income is earned in the previous year, relevant to the assessment year in issue, provisions of Section 14 A of the Act, read ....
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....ut apportionment. It was thus that s.14A was inserted providing that no deduction shall be allowable in respect of expenditure incurred in relation to the earning of income exempt from taxation. As observed by the Supreme Court in the judgment in the case of Commissioner of Income Tax vs. Walfort Share and Stock Brokers (P) Ltd (2010) 326 ITR 1 '.... The mandate of s.14A is clear. It desires to curb the practice to claim deduction of expenses incurred in relation to exempt income against taxable income and at the same time avail of the tax incentive by way of an exemption of exempt income without making any apportionment of expenses incurred in relation to exempt income.' 10. The provision this is clearly relatable to the earning of actual income and not notional or anticipated income. The submission of the Department to the effect that s.14A would be attracted even to exempt income 'includable' in total income would entail the assessment of notional income, assumed to be exempt in the future, in the present assessment year. The computation of total income in terms of s.5 of the Act is on real income and there is no sanction in law for the assessme....