TaxTMI 
TaxTMI 
2022 (11) TMI 229
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....)(iii) of the Act as against disallowance of Rs. 25,40,014/- made by ld. AO u/s 14A taking view that the advances made to subsidiaries for non-business purchases and out of interest bearing loans without considering the fact that these advances made in earlier years for business expansion. 2. That Ld. CIT(Appeals) has erred in confirming the addition made by the Ld. AO of Rs. 3,12,118/- in respect of interest on income tax refund despite of the fact that the assessee doesn't have any intimation even no updation in 26AS statement and the more important refunds are lesser then its claim, therefore, interest to the extent of Rs. 3,12,118/- couldn't be taken as income. 3. That the Appellant craves to add, amend, alter any other grounds or grounds of Appeal at the time of hearing of appeal." 3. Brief facts of the case are that the assessee company is engaged in the business of owning, running and managing hotels since 1996. Return of income for the assessment year 2013-14 was filed by the assessee on 31.10.2013 declaring total income of Rs. 52,03,990/-. The case was selected for the scrutiny assessment under CASS and assessment was completed determining total income....
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.... (MBPL for short) in earlier years. The total outstanding amount of all these loans as on 31.03.2012 was to the tune of Rs.12,92,18,600/- and as on 31.03.2013 was to the tune of Rs.14,25,61,600/-(PB-41). The appellant company debited interest expenses amounting to Rs.3,79,32,100/-. During the course of assessment the AO was of the view that the income received by the assessee from investment made in the AOP is exempted and consequently applying sec 14A r.w Rule 8D disallowance of Rs.25,40,014/- was made by the AO. However, during the course of appellate proceeding the CIT(A) took an altogether different view and disallowance u/s 36(1)(iii) was proposed u/s 251(2). It was submitted before the CIT(A) vide submission dated 21.02.2017(PB 73-79)that the investments made by the assessee are for the business purposes and in addition to this the assessee is also having sufficient interest free funds. However, feeling dissatisfied, the CIT(A) made disallowance u/s 36(1)(iii) by holding as under (Extract Only at Pg 23): "Thus, in view of the factual matrix of the case and above referred judicial pronouncements, it is held that the appellant had made investment/adva....
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....as obtaining liquor contract in earlier years and as such, was commercial investment only. Total 12,38,13,000/- 1.1. Investment in CLHPL (PB-41): 1.1.1 The appellant company is in the business of owing, running and managing hotels since 1996 and operating two hotel properties in Jaipur. For further expansion of the business, the group was in search of acquiring new hotel property in Delhi. The Group identified one hotel property in Delhi and completed its due diligence in respect of title, operating licenses, business viability and financials. Having satisfied from various point of view, the Company finalized the deal after negotiation in AY 2004-05 and the Group has acquired this new Hotel situated at prime location in Delhi by way of company transfer and acquired the shares of M/s Comfort Living Hotels Pvt. Ltd. With the acquisition of shares, the Group became owner of the hotel property. Thus, the appellant company became holding company of that Company and shown its acquisition of shares as investment in its financial statements. The investments so made as Holding Company by the appellant company for business expansion, furtherance and purely ....
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....stments are purely business investment and the investment in AOP is to expand its business for obtaining liquor contract in Rajasthan. This investment is also made in earlier years and the AOP was obtaining contracts time to time. 1.3.2The ld. CIT(A) refused to accept the investment in the AOP for the business purpose on the ground that the M/s Naveen Tak AOP is having total capital balance as on 31.03.2013 of Rs.10,40,56,083/- and out of this capital Rs.9,11,75,100/- were invested in another AOP named M/s Ramesh Singh AOP. In this regards it is submitted that the AOPs are created for obtaining liquor licenses to get the liquor at cheaper prices and thereby increasing the margin. If in a particular year the AOP is not successful to get any liquor contract then instead of keeping all the funds idle the Naveen TakAOP decided to invest the capital in some other AOP. The investment in the AOPs is generally made in the month of Feb/March every year, as such, the actual outflow of funds is not for a whole year but for a small period. Further, the share of profit from the AOP represents share of profits from AOP not from partnership firm. As per Section 10(2A) only the s....
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....ted by the Income-tax Appellate Tribunal that the assessee is in the business of owning, running and managing hotels. For the effective control of new hotels acquired by the assessee under its management it had invested in a wholly owned subsidiary, namely, M/s. Tulip Star Hospitality Services Ltd. On this ground, relying upon the judgment of the Supreme Court in the case of S. A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 / 158 Taxman 74 the Tribunal has held that the assessee was entitled to the deduction of interest on the borrowed funds. The observations made by the Supreme Court in S. A. Builders Ltd.'s case (supra) were quoted by the Tribunal as under (page 10) : ". . . where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans." 3. In these circumstances holding it to be expenditure incurred for business the same was allowed under section 36(1)(iii) of the Income-tax Act by the Tribun....
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.... Subsidiaries: 3.1.1For Business Purpose only: The assessee extended loans and advances to its subsidiary companies CLHPL and MBPL in earlier years and the outstanding amount as on 31.03.2013 was to the tune of Rs.14,25,61,600/-(PB- 41).These advances were admittedly made to the subsidiaries in earlier years. As already discussed, these subsidiaries are assessee's wholly owned subsidiaries therefore, the assessee was having deep interest therein therefore, advances were made for the purpose of business only. 3.1.2 Commercial Expediency proved: The facts are not rebutted that the assessee is having a deep interest in its subsidiaries and AOP in terms of strong business connection and ownership rights. The ld.CIT(A) completely failed to bring on the record that these funds were not utilized by the CLHPL and MBPL for the purpose of business. The ld. CIT(A) confined his understating of commercial expediency on the amount of yearly profits only. He completely overlooked the multifold capital appreciation achieved by the assessee in form of increase in value of properties and brand value of the group. 3.1.3 Supporting Case Laws: 3.1.3.1 DCIT vs Enron I....
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....oans were given are continuing this year also. In the past also though the assessee has been making similar claim of interest paid however, no disallowance was ever made and the claim stood allowed. The facts and circumstances being same, there appears no special reason to take a departure. Similarly, in the later years also the appellant continues making payment of interest but no disallowances is reported. Kindly refer CIT v/s Sridev Enterprises (1991) 192 ITR 165 (Kar) /(1991) 59 Taxmann 439 ( KAR) and CIT v/s Excel Industries (2013) 93 DTR 457/ 358 ITR 295 (SC)/ ( 2013) 38 taxmann.com 100(SC) (DPB 15-21) 5. Not whole amount represent the loans &advances: The appellant company had advanced interest free funds to the subsidiaries, as and when required by them which has been subjected by the ld. CIT(A) to disallowance u/s 36(1)(iii) by alleging that the interest bearing funds were given by way of interest free loans and advances to them. Assuming for a moment his allegation was correct yet however, alternatively, he has wrongly considered not only figures of such alleged interest free loans & advances to the subsidiaries but also the interest element, in as much as in som....
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....surplus 5,22,59,600/- 4,62,95,500 Interest free loans from relatives 3,06,78,200/- 1,43,17,300 Accumulated Depreciation* 6,88,50,800/- 6,57,29,900 Total 17,67,88,600/- 15,13,42,700 As against the availability of funds as above, the subjected amounts given to Company/AOP were of Rs.14.25 Cr. only(PB 41). 6.1.1Loans & Advances are given out of interest free funds:as discussed in forgoing paras the assessee was having total interest free funds to the extent of Rs.17.67 Crores whereas total loans given to subsidiaries were Rs. 14.25 Crores only and if amount of interest charged is further reduced from this amount (as discussed in para 3.3) it comes to Rs. 7.37 Cr. (14.25 Cr. -6.88 Cr. ) only. Hence the impugned disallowance deserves a complete allowance on this ground alone. 6.1.2Depreciation is also Interest Free Fund:The availability of these interest free funds have been admitted by the ld.CIT(A) and AO both.However, the ld.CIT(A) refused to admit the amount of accumulated depreciation as a part of interest free funds or funds available with the assessee. This is misconception on the part of the ld.CIT(A) that the amount of....
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.... "It was also noted that in the current year itself, the assessee has earned a profit of Rs. 3,50,51,698, and when amounts of Rs. 5,10,399 towards prior period expenses as also of Rs. 1,86,44,232 towards non-cash expenses in the nature of depreciation is added thereto, the total cash profitsaggregate to Rs. 5,31,85,591. This amount is far more than the total advances of Rs. 3,55,25,833. On this factual matrix, and applying the presumption as laid down by the High Court in Reliance Utilities & Powers Ltd. (supra) one has to proceed on the basis that the entire interest free advances were given out of the interest bearing funds available to the assessee. No part of the borrowed funds could be said to have been diverted as non-interest bearing advances to the subsidiary companies. For this short reason alone, there is no room for any disallowance of interest paid on borrowings, on account of grant of interest free advances to the subsidiary companies, on the facts of this case. The Commissioner (Appeals) was indeed in error in holding that the assessee did not have sufficient own funds to advance the interest free advances to the sister concerns. [Para 9] " 6.3.4CIT v/s Ram K....
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....(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:- x---------------x----------------x----------------x-------------------x---------x 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." 6.3.5 Also refer CIT v/s Radico Khaitan Ltd. (2005) 194 CTR 451/274 ITR 354 (All) (HC) held that: "Business expenditure - Interest on borrowed capital - Interest free advances to sister-concern - Tribunal having found on facts that assessee had sufficient funds in the form of capital reserve and surplus other than the borrowed funds, assessee was entitled to full allowance of interest on borrowed money." 6.3.6 Godrej & Boyce Manufacturing Co. Ltd. v/s DCIT & Anr. (2017) 151 DTR 0089 (SC) /[2017] 81 taxmann.com 111 (SC) (DPB 44-46) 6.3.7 CIT v/s Reliance Utilities & Power Ltd. (2009) 313 ITR 340 (Mum)/ [2009] 178 Taxman 135 (Bombay)(DPB 34-35), ....
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.... directors and even that still there was a credit balance of Rs.4.95 lacs left. The ld. CIT(A) therefore, held that such loan was not given out of the borrowed funds and the interest liability in relation to the banks borrowing, had no bearing because the assessee had its own sufficient funds, which the assessee could advance and the AO should have established a nexus between the borrowing and the advancing for non-business purposes however, the AO failed to do so. Further appeal of the revenue was dismissed by the Hon'ble ITAT also. In further appeal, the High Court merely quoted its earlier judgement in CIT v/s Abhishek Industries ltd dated 04.08.16. In this factual background, it was held: "Insofar as the loans to Directors are concerned, it could not be disputed by the Revenue that the assessee had a credit balance in the Bank account when the said advance of Rs. 34 lakhs was given. Remarkably, as observed by the CIT (Appeal) in his order, the company had reserve/surplus to the tune of almost 15 crores and, therefore, the appellant company could in any case, utilise those funds for giving advance to its Directors." 6.3.9 CIT v/s M/s. Vijay Solvex Ltd. (2015) 2....
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....8.56 Cr. wrongly as against the correct figure current year of Rs. 10.79 cr. Thus, as per the ld. CIT(A)'s own version and theory (though disputed and not admitted) heworked out the excessive disallowance of interest on the amount of Rs. 2,23,25,000/- by giving a short credit to this extent on account of the interest free funds.The audited balance sheet of the Comfort for the year ended as on 31.03.2013 (A.Y. 13-14) clearly shows the total turnover of Rs. 6.22 Cr. (PB-98). Similarly, the company declared net income of Rs. 21.72 Lac and Rs. 51.10 Lac in AY 13-14 and 12-13 respectively.Accordingly, the amount of interest disallowance of Rs. 1.95 Cr. in A.Y. 2013-14 should be reduced. 9. Enhancement by CIT (A) u/s 251(2) is without his jurisdiction (board): At the outset it is submitted that the so called enhancement made by the ld. CIT (A) by making disallowance u/s 36(1)(iii) of the Act in relation to the claimed interestis completely without jurisdiction in as much as law is well settled that the CIT (A) cannot find new sources of income. The facts are evident and admitted that where the AO proceeded and applied his mind only on the disallowance made under the specific pro....
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....the case for reconsideration of the whole matter including the evasion by the assessee, is not applicable in the facts of the present case because the matter arising in that case was one which arose out of the proceedings before the ITO. The question was not about new and fresh material for the purposes of enhancement. On the contrary, the case is clearly covered by the decisions of the Supreme Court, CIT vs. Shapoorji Pallonji Mistry(supra) wherein it has been heldthat, "In an appeal filed by the assessee the AAC has no power to enhance the assessment by discovering new sources of income not mentioned in the return of the assessee or considered by the ITO in the order appealed against", and the case reported in CIT vs. Rai Bahadur Hardutroy Motilal Chamaria (supra) wherein it has been held that, "It is not, therefore, open to the AAC to travel outside the record, i.e., the return made by the assessee or the assessment order of the ITO, with a view to finding out new sources of income and the power of enhancement under s. 31(3) is restricted to the sources of income which have been the subject-matter of consideration by the ITO from the point of view of taxability". Their Lordships....
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....able that whenever the question of taxability of income from a new source of income is concerned which had not been considered by the Assessing Officer, the jurisdiction to deal with the same in appropriate cases may be dealt with under section 147/148 and section 263, if requisite conditions are fulfilled. It is inconceivable that in the presence of such specific provisions a similar power is available to the first appellate authority. Accordingly, the matter was disposed of." 10.5 Hari Mohan Sharma Vs. ACIT (2019) 71 ITR 18 /[2019] 110 taxmann.com ( Delhi - Trib.) (DPB 50-52) wherein it was held: "The present case only issue considered and discussed by the assessing officer is with respect to claim of the assessee u/s 54F of the act which was rejected after inquiry and further claim alternatively made u/s 54 of the act was also rejected relying up on the decision of the Honorable Supreme court. The issue of verification of capital gain was not the issue which was at all dealt with by the assessing officer, or even a question of verification made by ld AO. There was no inquiry made by the ld AO on the issue of capital gain shown by the assessee. The ld AO has not....
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....o. 1 of the assessee for the assessment year 2012-13, we have heard both the parties and perused the materials available on record. It is noted from the record that the assessee company is engaged in the business of Hotel Industries and Toll Tax Collection. During the course of assessment proceedings, the AO noted that the assessee company had debited the interest expenses amounting to Rs.4,23,15,400/-. During the course of assessment, the AO was of the view that the income received by the assessee from investments made in AOP is exempted and consequently he applied the Section 14A r.w.rule 8D made disallowance of Rs.16,67,662/-. In first appeal, the ld. CIT(A) taking into consideration the assessment and submissions of the assessee enhanced the income of the assessee amounting to Rs.1,74,18,626/- (Rs.1,90,86l,288 minus Rs.16,67,662 vide para (xiv) of his order by observing as under:- (xiv) It is noted that the appellant was paying interest at the average rate of 13% per annum on its secured/unsecured loans, therefore it would be appropriate to compute disallowance out of interest expenses claimed by the appellant @ 13% of Rs. 14,68,17,600/- which amount to Rs. 1,90,86,288/-. Th....