TaxTMI 
TaxTMI 
TaxTMI 
2022 (2) TMI 74
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....urn of income declaring income of Rs. 2,17,49,610/- under normal provisions of the I.T. Act, 1961 and at book profit at Rs. 64,93,03,889/- under section 115JB of the I.T. Act, 1961. During the course of assessment proceedings, the A.O. observed that Assessee-company has given interest free loans to its subsidiary company M/s Jagson Airline Ltd. amounting to Rs. 56,64,204/-. He, therefore, asked the assessee to explain as to why proportionate interest should not be disallowed as the assessee-company has incurred financial cost of Rs. 34,84,37,412/-,on secured/unsecured loans. He further noted that similar addition was made in the last assessment year and assessee during the proceedings had stated that advance was given to sister concern M/s Jagsons Airlines with which assessee has close business relation and it holds more than 2/3rd share. Since the assessee could not explain commercial expediency for advancing these interest free loans to this concern the A.O. observed that there is no business exigency for advancing these loans. The A.O. in the absence of any satisfactory reply from the assessee, disallowed the interest of Rs. 6,79,704/- to the total income of the assessee being i....
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....fore, on the basis of the order of his predecessor for the A.Y.2011-12, the A.O. made disallowance of Rs. 8,11,25,986/-. 2.4. During the course of assessment proceedings the A.O. asked the assessee to furnish details on TDS deducted on payment of Rs. 2,14,08,343/- made to M/s Noble Denton Middle East. On being asked by the A.O, it was explained that assessee-company does not have any Permanent Establishment ["PE"] in India and assessed to tax in UAE with whom there is DTAA and so no tax is deductible. However, the A.O. was not satisfied with the explanation given by the assessee. He referred to provision of Section 9 (1) (vii) of the Income Tax Act, 1961 and Explanation thereto and noted that a conjoint reading of the above provisions clearly brings out the amount paid to Noble Denton Middle East, UAE was subject matter of TDS. Since the assessee failed to deduct tax on payment of Rs. 2,14,08,344/- as per provision of Section 195 read with Section 9 (1) (vii) of the I.T. Act, 1961, the A.O. held that the amount so paid is chargeable to tax in India and accordingly disallowed the same as per provision of Section 40 (a) (ia) of the I.T. Act, 1961. 2.5. The A.O. also made addition o....
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....st in such a case would be as to whether a reasonable person stepping into the shoes of the directors/partners of the assessee-firm and working solely in the interest of the assessee-firm/ company, would have extended such interest free advances. Some business objective should be sought to have been achieved by extending such interest free advances when the assessee-firm/company itself is borrowing funds for running its business". 3.2.1. Thus, following three conditions are sine qua non for allowance of a claim for deduction of interest under this provision: (i) The money, that is capital, must have been borrowed by the assessee. (ii) It must have been borrowed for the purpose of business. iii) The assessee must have paid interest on the borrowed amount i.e. he has shown the same as an item of expenditure. 3.2.2. The main argument of the A/R is that the loans and advances are for business activities, the appellant being a major share holder in Jagsun Airlines with long term business relationship. The aircraft belonging to the appellant company were being run by the said airline on lease basis for last many years and advance had been also taken for the airline for business....
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.... decision in the case of Hero Cycles Pvt. Ltd.(Civil Appeal No.514/2008 dated 5.11.2015) the Supreme Court has held that, so long as there is nexus between the expenditure incurred and the purpose of the business of the subsidiary company (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 business man or in the position of the board of directors and assume the role to decide how much is the reasonable expenditure having regard to the circumstances of the case, in the said decision, the Hon'ble Supreme Court approved of the view taken by Delhi High Court in Dalmia Cement Pvt. Ltd. (254 ITR 377) and disapproved of the Punjab & Haryana High Court decision in the case of Abhishek Industries (286 ITR). Incidentally in the case of Hero Cycles, it was found that the interest liability of the assessee towards the bank on borrowings made had no bearings on the issue as otherwise, the assessee had sufficient funds of its own to advance the funds to the sister concern. Under such circumstances it was for the AO to establish such nexus between the borrowings and advances to prove that the expenditu....
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....am Pistons and Rings Ltd. in giving direction to the AO while sustaining the addition made u/s 14A, that the benefit of tonnage tax scheme may be given on the finally determined income. The department, as per the appellant, has not challenged this particular finding of the CIT(A) before ITAT. For the A.Y. 2008-09 also, the disallowance u/s 14A has been upheld. On the other hand the Ld. CIT(A) for the A.Y. 2009-10 to 2011-12 has taken the view that since the appellant gets the benefit of tonnage tax u/s 115VP read with section 115 VR, the disallowance u/s 14A is not warranted. 4.3. Perusal of the financial statement show that while no tax free dividends were received during assessment year 2012-13, a sum of Rs. 1,32,83,957 has been received in A.Y 2013-14. The appellant has made investment in sister companies and carried out activities in mutual fund, income from which is exempt u/s 10(38). These facts has been mentioned by the AO in the impugned assessments and it is noted that no suo-motu disallowance has been offered to tax by the appellant. No proof has been submitted in respect of the contention that no interest bearing funds have been utilized in respect of investment made i....
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....IT(A) for A.Y. 2009-10 in this regard are reproduced herein under: "7.1. I have carefully considered the written submission on behalf of the appellant and finding of the assessing officer in assessment order. I find that section 32 of the Act deals 'with depreciation. There is requirement that the assets should be owned and used for the wholly or partly by the assessee for the purpose of the business or profession. This section 32 was substituted by the Finance (No 2) Act, 1998 w.e.f. 01-04-1999. However, the concept of Block of asset was introduced w.e.f. 01-04-1988. This concept was discussed in detail in the case of CIT \/s Oswal Agro Mills Ltd (Supra) by the Hon'ble Delhi High Court. The use of the asset in the block of assets method the first year of its business is sufficient to allow depreciation from year to year. Once the asset is used by the assessee for the purpose of its business and the asset is owned by the assessee depreciation has to be allowed to it from year to year unless it is sold or discarded and whole of the block cease to exist. The allowance of the depreciation is not dependent upon sale of the asset even once that block of asset exist. The object....
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....imself in AY 2005-06 has found that the asset was used and allowed the depreciation on the direction of the Hon'ble High Court. I do not find any reason for making this disallowance from year to year once the issue has been examined by the AO himself. The subsequent AO should not agitate the issue again and again once their predecessor has decided the issue as per directions of the Hon'ble Delhi High Court. 7.3. In view of the above discussion the AO is directed to allow the entire depreciation on aircraft as claimed by the appellant. In the result this around of appeal stands allowed." 5.2. Keeping in view the jurisdictional High Court decision in the case of Oswal Agro Mills Ltd. (supra) since the asset was used in the earlier years even if subsequent user is not there, the depreciation is to be allowed. I also find that no addition has been made by the AO on this issue for the A.Y. 2013-14 which is under appeal and which is being adjudicated as part of this order. Accordingly, taking into account all these facts and the position in law, ground no. 3 for A.Y. 2012-13 is held to be allowed". 3.4. So far as disallowance of Rs. 8,11,25,986/- on account of unpaid notiona....
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....e the same, it can claim these deductions as an expenditure and so it is required to be allowed as deduction for computing the income. 8.3. In the result ground no 5 is allowed and AO is directed to allow Rs. 4,95,74,440/- claimed as unpaid operational charges." 6.3.1. I also find that the AO has not made any addition on this account in the A.Y. 2013-14. In view of the factual finding that the corresponding operational income relating to unpaid operational charges debited to ONGC account correctly reflects the accounting treatment in respect of income not actually received, the action on the part of the AO in disallowing the unpaid operational charges to ONGC cannot be sustained. Ground no. 4 for A.Y. 2012-13 is thus allowed." 3.5. So far as disallowance of Rs. 2,14,08,344/- under section 40 (a) (ia) of the I.T. Act, 1961 is concerned, the Ld. CIT(A) deleted the same by observing as under : "7.3. I have given careful consideration to the submissions made. At the outset it may be mentioned that the payments in question have been made to a non-resident and hence the provisions of section 40(a)(i) do not apply. Assuming that the AO meant to invoke the provisions of section 40(a....
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.... Contracting State, provide that such activities continue for the same project or connected project for a period or periods aggregating more than 9 months within any twelve-month period. Perusal of the invoices of Noble Denton Middle East revels that the professionals rendered services ranging from period between 10 to 27 days. Accordingly even under sub-article (2)(i) of Article 5, The services rendered by the foreign consultants cannot be said to amount to a permanent establishment or a fixed place for a business through which the foreign enterprise carries out its business in India, wholly and partly. It is also seen that during the appellate proceedings relating to A.Y. 2011- 12 my Ld. Predecessor considered the letter issued by Nobel Denton Middle East Ltd. clarifying that they did not have a permanent establishment in India as per Article 5 of the DTAA and were assessed to tax in the UAE. I also find from the tax audit report for the impugned years placed at pages 28 & 69 of the paper book that the auditors have clarified that no amount is inadmissible u/s 40(a). Keeping in view the above facts it is held that neither the provisions of section 40 (a) (ia) nor 40 (a) (i) are a....
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....gly the AO is directed to exclude the income derived from shipping activities from the computation of book profits for both the years. Ground nos. 8 & 10 for 2012-13 & 2013-14 respectively are allowed". 4. Aggrieved with such order of the Ld. CIT(A), the Revenue is in appeal before the Tribunal by raising the following grounds : 1. That the order of the learned CIT (Appeals) is erroneous & contrary to facts & law. 2. That whether on the facts and in law, the Ld. CIT(A) was right in deleting the disallowance of Rs. 6,79,704/- made by AO on account of that the assessee has given interest free loans to its subsidiary company without substantiating commercial expediency. 3. That whether on the facts and in law, the Ld. CIT(A) was right in deleting the disallowance of Rs. 53,40,288/- made by the AO on account of Section 14A r.w. rule 8Dby ignoring fact that as per the CBDT's Instruction No. 5/2014 dated 11.02.2014 Rule 8D read with section 14A of the Act provides for disallowance of the expenditure even where taxpayer in a particular year has not earned any exempt income. 4. That whether on the facts and in law, the Ld.CIT(A) was right in deleting the disallowance of Rs. 9,51,4....
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..... 2010-11 and 2011-12 wherein the Tribunal decided the issue in favour of the assessee. 6.2. We find the Tribunal in assessee's own case for the A.Y. 2011-12 vide ITA.No.4769/Del./2014 order dated 17.08.2018 has decided the issue in favour of the assessee by observing as under : 12. We have considered the rival submissions and have gone through the entire material available on record and we find that most of the issues involved in this appeal are covered in favour of the assessee by various decisions of Tribunal and Delhi High Court. 13. As far as the first issue regarding disallowance of notional interest on interest free loans given to subsidiary company, we find that this issue has been settled by the Tribunal in assessee's own case for the assessment year 2010-11 vide order dated 11th May, 2018. The relevant observations of the Tribunal read as under : "12. Ground No. 1 by the Revenue reads as under :- "Whether on the facts and circumstances of the case, the learned CIT (Appeals) erred in deleting proportionate disallowance of interest of Rs. 2,53,61,633/- on account of advancing of interest free loans to sister concern ?" 12.1 Facts of the case, in brief, are that d....
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....ad already advanced Rs. 21,17,41,988.5 to the Jagson Airlines Ltd. In support of his contention the appellant has enclosed Annexure 'A' in its paper book showing last 10 years transaction between the two companies. From the chart it is also clear that M/s Jagson International Ltd has also taken advance from Jagson Airlines Ltd for the business purposes whenever required. M/s. Jagson Airlines Ltd has never charged any interest on such advances. Further, it is also not in dispute that the assessee has incurred financial charges of Rs. 2,53,61,633/- during the year under consideration. It is also seen from the Annexure 'B' that more than 69% shares in Jagson Airlines Ltd belong to the assessee company and assessee company also given its Aircrafts to M/s Jagson Airlines Ltd on lease. 3.4 I find that the Assessing Officer has disallowed the interest on loans without recording Ist any finding to the effect that the loans on which interest was paid by the assessee was diverted by the assessee for providing interest free advances to its sister concerns. It is not the case that the interest free funds available with the assessee were not sufficient to advance interest free money in questi....
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....he order of the learned CIT (Appeals). He submitted that the Hon'ble Supreme Court in the case of Addl. CIT Vs. M/s. Tulip Star Hotels Ltd. vide order dated 30th April, 2012 has held that the decision in the case of S.A. Builders Ltd. Vs. CIT reported in 288 ITR 1 needs reconsideration. Referring to the decision of Hon'ble Delhi High Court in the case of Punjab Stainless Steel Ltd. Vs. CIT reported in 324 ITR 396 (Del.) he submitted that the onus is on the assessee to establish the commercial expediency. He submitted that the learned CIT (Appeals) in para 4.4 of his order has shifted this onus to the Assessing Officer regarding the establishment of nexus between interest free funds and amount of advance which is not correct. Without prejudice to the above he submitted that the profit accrues on the last day of the financial year and cannot be a source of loan advanced during the year. He accordingly submitted that the order of the learned CIT (Appeals) not being in consonance with law should be reversed. 12.6 The learned counsel for the assessee, on the other hand, strongly supported the order of the learned CIT (Appeals). He submitted that when the interest free funds available ....
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....ed fact that no exempt income has been received by the assessee during the year. Therefore, in view of the decision of the Hon'ble Delhi High Court in the case of Cheminvest Limited vs., CIT [2009] 317 ITR 86 (Del.) the order of the Ld. CIT(A) does not suffer from any infirmity. Accordingly, the grounds of appeal number.3 raised by the Revenue on this issue is dismissed. 8. Grounds of appeal number.4 of the Revenue relates to disallowance of Rs. 9,51,432/- made by the A.O. on account of depreciation claimed being 40% on Aircraft which was not in use. 8.1. After hearing both the sides, we find an identical issue had come-up before the Tribunal in assessee's own case for the A.Y. 2009-10 in ITA.No.5916/ Del./2013 order dated 11.05.2018. We find the Tribunal vide ITA.No.5916/ Del./2013 order dated 11.05.2018 has decided the issue by observing as under : "10.4. After hearing both the sides we do not find any infirmity in the order of the learned CIT (Appeals). We find that on the basis of the direction of the Hon'ble Delhi High Court the issue was examined by the Assessing Officer during the assessment year 2005-06, who after examining the issue allowed the claim of depreciatio....
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....as not furnished any bill-wise reconciliation statement clarifying as to for how much amount the bills were raised and how much was actually received by the assessee from ONGC. It was also not explained, if there was any agreement with ONGC for payments lesser than the bill amounts. All these facts were to be examined by the ld. CIT(A) before deleting the addition, which has not been done. Accordingly, we think it appropriate to restore the issue to the file of AO for deciding the same afresh after ascertaining and verifying the above facts, mentioned in earlier part of this order. The assessee is also directed to furnish all the necessary evidence in support of its claim and as required by the AO. Needless to say, the assessee shall be given reasonable opportunity of being hears. Accordingly, this ground of appeal deserves to be allowed for statistical purposes ." 9.2. It is the submission of the Learned Counsel for the Assessee that the Tribunal has set aside the matter to the file of the A.O. because neither the A.O. nor the Ld. CIT(A) had verified the details. However, during the set aside proceedings the A.O. examined and allowed the claim of the assessee, copy of which is pl....
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....iven relief to the assessee. Under these circumstances and in view of the detailed discussion made by the Ld. CIT(A) on this issue, we do not find any infirmity in his order and the same is, therefore, upheld. Grounds of appeal number.6 raised by the Revenue is dismissed. 11. Grounds of appeal number.7 (a) (b) and (c) relates to the order of the Ld. CIT(A) in deleting the disallowance of Rs. 62,55,82,919/- made by the A.O. by disallowing the claim of exemption in tonnage tax system. 11.1. After hearing both the sides, we find that identical issue had come-up before the Tribunal in assessee's own case in A.Y. 2008-09. We find the Tribunal vide ITA.No.4392/Del./2011 order dated 11.05.2018 has decided the issue by observing as under : "2.6. We have considered the rival arguments made by both the sides and perused the material available on record. We find that the issue has been decided in favour of the assessee by the Hon'ble Jurisdictional High Court in assessee's own case vide ITA No.1395/2010 and ITA No.1289/2011 order dated 08.11.2012 by observing as under :- "7. In the facts of this case the vessels were consistently registered under Section 407 of the Merchant Ship....
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....e under section 115JB of the I.T. Act, 1961. 12.1. Since we have already upheld the order of the Ld. CIT(A) in deleting the disallowance of Rs. 62,55,82,919/- made by the A.O. and since the provisions of Section 115JB of the I.T. Act, 1961 clearly provides that the profit derived by the tonnage tax company shall be excluded from the book profits of the company for the purpose of Section 115JB of the I.T. Act, 1961, therefore, we do not find any infirmity in the order of the Ld. CIT(A) in directing the A.O. to exclude the income derived from shipping activities from the computation of book profits. Accordingly, grounds of appeal number.8 raised by the Revenue on this issue is dismissed. 13. In the result, ITA.No.1001/Del./2016 of the Revenue is dismissed. ITA.No.1002/Del./2016 - A.Y. 2013-14 : 14. Grounds raised by the Revenue are as under : 1. "That the order of the learned CIT (Appeals) is erroneous & contrary to facts & law. 2. That whether on the facts and in law, the Ld. CIT(A) was right in deleting the disallowance of Rs. 2,02,875/- made by AO on account of that the assessee has given interest free loans to its subsidiary company without substantiating commercial exped....
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....8. Grounds of appeal numbers. 4 (a) (b) (c) relates to the order of the Ld. CIT(A) in deleting the disallowance of Rs. 81,49,94,195/- made by the A.O. by disallowing the claim of exemption in tonnage tax system. 18.1. After hearing both the sides, we find the issue is identical to Grounds of appeal numbers. 7 (a) (b) and (c) in ITA.No.1001/Del./2016 for the A.Y. 2012-13. We have already decided the issue and the ground raised by the Revenue on this issue has been dismissed. Following the similar reasonings, the grounds of appeal numbers. 4 (a) (b) (c) of the Revenue are dismissed. 19. Grounds of appeal number.5 by the Revenue relates to order of the Ld. CIT(A) in deleting the disallowance of Rs. 81,49,94,195/- made in computation of income under section 115JB of the I.T. Act, 1961. 19.1. After hearing both the sides, we find the issue is identical to Grounds of appeal number.8 in ITA.No.1001/ Del./2016 for the A.Y. 2012-13. We have already decided the issue and the ground raised by the Revenue on this issue has been dismissed. Following the similar reasonings, the grounds of appeal number.5 of the Revenue is dismissed. 20. In the result, ITA.No.1002/Del./2016 of the Revenue is ....